Should Benchmark Indices Have Alpha? Revisiting Performance Evaluation

42 Pages Posted: 5 May 2012

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame

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: May 2012

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 arise primarily 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 propose small methodological changes to the Fama-French factors to eliminate the nonzero alphas, and we also propose factor models based on common and tradable benchmark indices. Both kinds of alternative models improve performance evaluation of actively managed portfolios, with the index-based models exhibiting the best performance.

Suggested Citation

Cremers, K. J. Martijn and Petajisto, Antti and Zitzewitz, Eric W., Should Benchmark Indices Have Alpha? Revisiting Performance Evaluation (May 2012). NBER Working Paper No. w18050. Available at SSRN: https://ssrn.com/abstract=2051337

K. J. Martijn Cremers (Contact Author)

University of Notre Dame ( email )

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

Antti Petajisto

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 )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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