The Cross-Section of Investing Skill
63 Pages Posted: 29 May 2013 Last revised: 28 Sep 2013
Date Written: September 27, 2013
Building on insights from the economics of superstars, I develop an efficient method for estimating the skill of mutual fund managers. “Outliers” are helpful for distinguishing skill from luck in this framework — informative rather than spurious. Forecasted performance is dramatically improved relative to standard regression estimates: an investor selecting (avoiding) the best (worst) decile of funds would improve risk-adjusted performance by 2% (3%) annually. The cross-sectional distribution of skill is found to be fat-tailed and positively skewed; its shape helps to explain the convexity of fund flows.
Keywords: mutual fund, performance evaluation, superstars, Bayesian analysis
JEL Classification: G23, G11, C11
Suggested Citation: Suggested Citation