Abstract

http://ssrn.com/abstract=869748
 
 

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False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas


Laurent Barras


McGill University - Desautels Faculty of Management

O. Scaillet


University of Geneva - HEC; Swiss Finance Institute

Russ Wermers


University of Maryland - Robert H. Smith School of Business

April 20, 2009

Journal of Finance, Forthcoming
Swiss Finance Institute Research Paper No. 08-18
Robert H. Smith School Research Paper No. RHS 06-043

Abstract:     
This paper develops a simple technique that controls for “false discoveries,” or mutual funds that exhibit significant alphas by luck alone. Our approach precisely separates funds into (1) unskilled, (2) zero-alpha, and (3) skilled funds, even with dependencies in cross-fund estimated alphas. We find that 75% of funds exhibit a zero alpha (net of expenses), consistent with the Berk and Green (2004) equilibrium. Further, we find a significant proportion of skilled (positive alpha) funds prior to 1996, but almost none by 2006. We also show that controlling for false discoveries substantially improves the ability to find funds with persistent performance.

Number of Pages in PDF File: 53

Keywords: Mutual Fund Performance, Multiple-Hypothesis Test, Luck, False Discovery Rate

JEL Classification: G11, G23, C12

Accepted Paper Series


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Date posted: March 5, 2008 ; Last revised: February 3, 2011

Suggested Citation

Barras, Laurent and Scaillet , O. and Wermers, Russ, False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas (April 20, 2009). Journal of Finance, Forthcoming; Swiss Finance Institute Research Paper No. 08-18; Robert H. Smith School Research Paper No. RHS 06-043. Available at SSRN: http://ssrn.com/abstract=869748

Contact Information

Laurent Barras (Contact Author)
McGill University - Desautels Faculty of Management ( email )
1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
+15143988862 (Phone)
Olivier Scaillet
University of Geneva - HEC ( email )
40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
Swiss Finance Institute
40, Boulevard du Pont-d'Arve
Case Postale 3
1211 Geneva 4, CH-6900
Switzerland
Russell R. Wermers
University of Maryland - Robert H. Smith School of Business ( email )
Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)
HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/
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