Luck Bias and Skill Performance of Individual Mutual Funds
57 Pages Posted: 10 Dec 2013 Last revised: 19 Jun 2017
Date Written: June 18, 7
We present an approach to estimating luck and skill of individual funds. While finding no relevant luck bias on the market level, we report that the standard alphas of many funds are significantly biased. We discover differences in rank and changes in the shape of the alpha distribution which we correct with our measure. Moreover, skill alpha predicts future performance better than standard alpha, generating a significant “skill premium” up to 0.62% p.a. The approach is consistent with and adds to other recent developments in fund research regarding time-variation of skill, individual manager skill, and the skill-activity relation.
Keywords: Mutual fund performance, luck versus skill, reverse survivorship bias, survivorship bias, performance persistence, individual fund managers, management activity
JEL Classification: G11, G12
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