Stochastic Dominance in Mutual Fund Returns

44 Pages Posted: 12 Mar 2020 Last revised: 10 Jul 2023

See all articles by Lei Jiang

Lei Jiang

Tsinghua University

Quan Wen

McDonough School of Business, Georgetown University

Ke Wu

Renmin University of China

Mengfan Yin

Fudan University - Fanhai International School of Finance (FISF)

Date Written: February 19, 2020

Abstract

We examine the performance of actively managed mutual funds compared to the stock market portfolio. Using the concept of almost second-order stochastic dominance, we identify a small subset of funds that dominate the market portfolio, while more than half of funds are dominated in the short-term investment horizons. Compared to the traditional performance measure such as the Sharpe ratio, decision-making under the stochastic dominance framework results in different preference orders. Both fund investors and managers reveal their preference for the funds that dominate the market, which also significantly outperform their peers in the future.

Keywords: mutual fund returns, stochastic dominance, revealed preference

JEL Classification: G11, G23

Suggested Citation

Jiang, Lei and Wen, Quan and Wu, Ke and Yin, Mengfan, Stochastic Dominance in Mutual Fund Returns (February 19, 2020). Georgetown McDonough School of Business Research Paper No. 3541062, Available at SSRN: https://ssrn.com/abstract=3541062 or http://dx.doi.org/10.2139/ssrn.3541062

Lei Jiang (Contact Author)

Tsinghua University ( email )

Beijing, 100084
China

Quan Wen

McDonough School of Business, Georgetown University ( email )

37th and O Street, NW
Washington D.C., DC 20057
United States

HOME PAGE: http://quan-wen.facultysite.georgetown.edu/home

Ke Wu

Renmin University of China ( email )

59 Zhongguancun Street
Beijing, 100872
China

HOME PAGE: http://sf.ruc.edu.cn/info/1412/9666.htm

Mengfan Yin

Fudan University - Fanhai International School of Finance (FISF) ( email )

220 Handan Road
Shanghai, 200433
China

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