False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas
Olivier Scaillet,
Laurent Barras and
Russell R. Wermers
No 05-014.RS, Working Papers CEB from ULB -- Universite Libre de Bruxelles
Abstract:
Standard tests designed to identify mutual funds with non-zero alphas are problematic, in that they do not adequately account for the presence of lucky funds. Lucky funds have significant estimated alphas, while their true alphas are equal to zero. To address this issue, this paper quantifies the impact of luck with new measures built on the False Discovery Rate (FDR). These FDR measures provide a simple way to compute the proportion of funds with genuine positive or negative performance as well as their location in the cross-sectional alpha distribution. Using a large cross-section of U.S. domestic-equity funds, we find that about one fifth of the funds in the population truly yield negative alphas. These funds are dispersed in the left tail of the alpha distribution. We also find a small proportion of funds with truly positive performance, which are concentrated in the extreme right tail of the alpha distribution.
Keywords: Mutual Fund Per formance; False Discovery Rate; Multiple Testing. (search for similar items in EconPapers)
JEL-codes: C12 G11 G23 (search for similar items in EconPapers)
Pages: 53 p.
Date: 2005
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)
Published by:
Downloads: (external link)
https://dipot.ulb.ac.be/dspace/bitstream/2013/5390 ... ol_wpaper_05-014.pdf RePEc_sol_wpaper_05-014 (application/pdf)
Related works:
Journal Article: False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas (2010) 
Working Paper: False discoveries in mutual fund performance: Measuring luck in estimated alphas (2009) 
Working Paper: False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas (2008) 
Working Paper: False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas (2005) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:sol:wpaper:05-014
Ordering information: This working paper can be ordered from
http://hdl.handle.ne ... ulb.ac.be:2013/53909
Access Statistics for this paper
More papers in Working Papers CEB from ULB -- Universite Libre de Bruxelles Contact information at EDIRC.
Bibliographic data for series maintained by Benoit Pauwels ().