Should Benchmark Indices Have Alpha? Revisiting Performance Evaluation

54 Pages Posted: 26 Mar 2008 Last revised: 26 Jan 2010

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame; ECGI

Antti Petajisto

Brooklyn Investment Group; New York University (NYU) - Department of Finance; Yale School of Management

Eric Zitzewitz

Dartmouth College; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: January 21, 2010


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 historically 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. The index-based models outperform the standard models in common applications such as performance evaluation of mutual fund managers.

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

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

Suggested Citation

Cremers, K. J. Martijn and Petajisto, Antti and Zitzewitz, Eric W., Should Benchmark Indices Have Alpha? Revisiting Performance Evaluation (January 21, 2010). EFA 2009 Bergen Meetings Paper, AFA 2010 Atlanta Meetings Paper, Available at SSRN: or

K. J. Martijn Cremers

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Antti Petajisto (Contact Author)

Brooklyn Investment Group ( email )

Brooklyn, NY 11201
United States


New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States
212-998-0378 (Phone)


Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States


Eric W. Zitzewitz

Dartmouth College ( email )

Hanover, NH 03755
United States
603-646-2891 (Phone)
603-646-2122 (Fax)


NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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