The Cross-Section of Investing Skill

63 Pages Posted: 29 May 2013 Last revised: 28 Sep 2013

See all articles by Ravi Sastry

Ravi Sastry

University of Melbourne - Department of Finance

Date Written: September 27, 2013

Abstract

Building on insights from the economics of superstars, I develop an efficient method for estimating the skill of mutual fund managers. “Outliers” are helpful for distinguishing skill from luck in this framework — informative rather than spurious. Forecasted performance is dramatically improved relative to standard regression estimates: an investor selecting (avoiding) the best (worst) decile of funds would improve risk-adjusted performance by 2% (3%) annually. The cross-sectional distribution of skill is found to be fat-tailed and positively skewed; its shape helps to explain the convexity of fund flows.

Keywords: mutual fund, performance evaluation, superstars, Bayesian analysis

JEL Classification: G23, G11, C11

Suggested Citation

Sastry, Ravi, The Cross-Section of Investing Skill (September 27, 2013). Available at SSRN: https://ssrn.com/abstract=2271360 or http://dx.doi.org/10.2139/ssrn.2271360

Ravi Sastry (Contact Author)

University of Melbourne - Department of Finance ( email )

Level 12
198 Berkeley Street
Victoria 3010
Australia

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