Reverse Survivorship Bias
Western Finance Association 2010 Conference
49 Pages Posted: 12 Apr 2010 Last revised: 17 Nov 2011
Date Written: November 7, 2011
Mutual funds often disappear following poor performance. When this poor performance is partly attributable to negative idiosyncratic shocks, funds' estimated alphas understate their true alphas. This paper estimates a structural model to correct for this bias. Although most funds still have negative alphas, they are not nearly as low as those suggested by the fund-by-fund regressions. Approximately 12% of funds have net four-factor model alphas greater than 2% per year. All studies that run fund-by-fund regressions to draw inferences about the prevalence of skill among mutual fund managers are subject to reverse survivorship bias.
Keywords: Mutual Funds, Performance Evaluation, Reverse Survivorship Bias
JEL Classification: C11, G11, G12
Suggested Citation: Suggested Citation