Reverse Survivorship Bias
Juhani T. Linnainmaa
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
November 7, 2011
Journal of Finance, Forthcoming
Western Finance Association 2010 Conference
CRSP Working Paper
Chicago Booth Research Paper No. 10-17
Mutual funds often disappear following poor performance. When this poor performance is partly attributable to negative idiosyncratic shocks, funds' estimated alphas understate their true alphas. This paper estimates a structural model to correct for this bias. Although most funds still have negative alphas, they are not nearly as low as those suggested by the fund-by-fund regressions. Approximately 12% of funds have net four-factor model alphas greater than 2% per year. All studies that run fund-by-fund regressions to draw inferences about the prevalence of skill among mutual fund managers are subject to reverse survivorship bias.
Number of Pages in PDF File: 49
Keywords: Mutual Funds, Performance Evaluation, Reverse Survivorship Bias
JEL Classification: C11, G11, G12
Date posted: April 12, 2010 ; Last revised: November 17, 2011
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.390 seconds