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

New York University (NYU) - Department of Finance; Yale School of Management; BlackRock, Inc

Eric Zitzewitz

Dartmouth College; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: January 21, 2010

Abstract

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: https://ssrn.com/abstract=1108856 or http://dx.doi.org/10.2139/ssrn.1108856

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
Belgium

Antti Petajisto (Contact Author)

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

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0378 (Phone)

HOME PAGE: http://www.petajisto.net/

Yale School of Management ( email )

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

HOME PAGE: http://www.petajisto.net/

BlackRock, Inc ( email )

400 Howard St
San Francisco, CA 94105
United States
415-670-7911 (Phone)

Eric W. Zitzewitz

Dartmouth College ( email )

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

HOME PAGE: http://www.dartmouth.edu/~ericz

NBER ( email )

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Cambridge, MA 02138
United States

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