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Should Benchmark Indices Have Alpha? Revisiting Performance Evaluation

Martijn Cremers
Yale School of Management

Antti Petajisto
Yale School of Management

Eric Zitzewitz
Dartmouth College


December 31, 2008

EFA 2009 Bergen Meetings Paper
AFA 2010 Atlanta Meetings Paper

Abstract:     
Standard Fama-French and Carhart models produce economically and statistically significant nonzero alphas even for passive benchmark indices such as the S&P 500 and Russell 2000. We find that these alphas primarily arise from the disproportionate weight the Fama-French factors place on small value stocks which have performed well, and from the CRSP value-weighted market index which is a downward-biased benchmark for U.S. stocks. We explore alternative ways to construct these factors and propose alternative models constructed from common and easily tradable benchmark indices. Such index-based models outperform the standard models both in terms of asset pricing tests and performance evaluation of mutual fund managers.

Keywords: performance evaluation, benchmark index, factor model, Fama-French, Carhart

JEL Classifications: G10, G12, G14, G20, G23

Working Paper Series

Date posted: March 26, 2008 ; Last revised: October 16, 2009

Suggested Citation

Cremers, Martijn , Petajisto, Antti and Zitzewitz, Eric, Should Benchmark Indices Have Alpha? Revisiting Performance Evaluation (December 31, 2008). ; AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1108856


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Contact Information

Antti Petajisto (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-436-0666 (Phone)
203-436-0630 (Fax)
HOME PAGE: http://www.som.yale.edu/Faculty/petajisto/
K.J. Martijn Cremers
Yale School of Management ( email )
135 Prospect Street
New Haven, CT 06520
United States
203-436-0649 (Phone)
203-436-0630 (Fax)
HOME PAGE: http://mba.yale.edu/faculty/profiles/cremers.shtml
Eric W. Zitzewitz
Dartmouth College ( email )
Hanover, NH 03755
United States
603-646-2891 (Phone)
603-646-2122 (Fax)
HOME PAGE: http://www.dartmouth.edu/~ericz
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