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Jensen Alpha and Market Climate

34 Pages Posted: 23 Dec 2013 Last revised: 18 Mar 2014

Bernhard Breloer

Friedrich-Alexander-University (FAU) Erlangen-Nürnberg

Hendrik Scholz

Friedrich-Alexander-Universität (FAU) Erlangen-Nürnberg

Date Written: March 17, 2014


This paper studies the impact of market climate on the classic Jensen alpha (JA) of funds. We show analytically that the one-factor JA of a fund consists of i) the fund’s alpha based on the assumed multi-factor model and ii) further components that are subject to market phases of factor realization. To account for this impact of market phases in the performance evaluation of funds, we apply a time period-adjusted JA. In our empirical study, we analyze JAs and respective fund rankings for a survivorship bias-free data set of 3.102 US equity mutual funds. Our results show that factor realizations during the specific lifetime of a fund clearly affect its rank position. This impact is particularly strong for funds with shorter lifetimes. Using the time period-adjusted JA clearly reduces this impact. Our main results are robust when applying alternative multi-factor models as a return generating process.

Keywords: Equity mutual funds; Jensen alpha; Fund ranking; Market conditions

JEL Classification: G11

Suggested Citation

Breloer, Bernhard and Scholz, Hendrik, Jensen Alpha and Market Climate (March 17, 2014). Available at SSRN: or

Bernhard Breloer (Contact Author)

Friedrich-Alexander-University (FAU) Erlangen-Nürnberg ( email )

Finance and Banking
Lange Gasse 20
Nuernberg, Bavaria 90403
+49 911 5302429 (Phone)


Hendrik Scholz

Friedrich-Alexander-Universität (FAU) Erlangen-Nürnberg ( email )

Finance and Banking
Lange Gasse 20
Nürnberg, Bavaria 90403
0049-911-5302649 (Phone)
0049-911-5302466 (Fax)


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