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Reverse Survivorship Bias

Juhani T. Linnainmaa

USC Marshall School of Business; National Bureau of Economic Research (NBER)

November 7, 2011

Journal of Finance, Forthcoming
Western Finance Association 2010 Conference
CRSP Working Paper
Chicago Booth Research Paper No. 10-17

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.

Number of Pages in PDF File: 49

Keywords: Mutual Funds, Performance Evaluation, Reverse Survivorship Bias

JEL Classification: C11, G11, G12

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Date posted: April 12, 2010 ; Last revised: November 17, 2011

Suggested Citation

Linnainmaa, Juhani T., Reverse Survivorship Bias (November 7, 2011). Journal of Finance, Forthcoming; Western Finance Association 2010 Conference; CRSP Working Paper; Chicago Booth Research Paper No. 10-17. Available at SSRN: https://ssrn.com/abstract=1588146

Contact Information

Juhani T. Linnainmaa (Contact Author)
USC Marshall School of Business ( email )
Marshall School of Business
Los Angeles, CA 90089
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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