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False Discoveries: Winners and Losers in Mutual Fund PerformanceKeith CuthbertsonCity University London - Sir John Cass Business School Dirk NitzscheCity University London - Sir John Cass Business School Niall O'SullivanUniversity College Cork, Ireland. January 2008 Abstract: We use a multiple hypothesis testing framework to estimate the false discovery rate (FDR) amongst UK equity mutual funds. For all funds, we find a relatively high FDR for the best funds of 67% (at a 10% significance level), which indicates that only around 2% of all funds truly outperform their benchmarks. For the worst funds the FDR (at a 10% significance level), is relatively small at 15.9% which results in 20% of funds which truly underperform their benchmarks. For different investment styles, this pattern of very few genuine winner funds is repeated for all companies, small companies and equity income funds. However, forming portfolios of funds based on a set of funds for which the FDR is relatively low, produces positive alphas.
Number of Pages in PDF File: 36 Keywords: Mutual fund performance, false discovery rate JEL Classification: C15, G11, C14 working papers seriesDate posted: February 15, 2008Suggested CitationContact Information
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