Stochastic Dominance in Mutual Fund Returns

52 Pages Posted: 12 Mar 2020 Last revised: 20 May 2020

See all articles by Lei Jiang

Lei Jiang

Tsinghua University

Quan Wen

Georgetown University - Department of Finance

Ke Wu

Renmin University of China

Mengfan Yin

Tsinghua University - School of Economics & Management

Date Written: February 19, 2020

Abstract

We find that a large portion of U.S. equity mutual funds almost second-order stochastically dominates the market portfolio. Consistent with the canonical definition of second-order stochastic dominance, both fund investors and managers reveal their preference for funds with a higher degree of almost second-order stochastic dominance through higher inflows and higher manager ownership. Funds with a higher degree of stochastic dominance over the market portfolio significantly outperform their peers, after controlling for common performance predictors and the Sharpe ratio. Inference based on stochastic dominance is more consistent with the Manipulation-Proof Performance Measure (MPPM) than with the Sharpe ratio.

Keywords: stochastic dominance, Sharpe ratio, mutual fund performance

JEL Classification: G11, G23

Suggested Citation

Jiang, Lei and Wen, Quan and Wu, Ke and Yin, Mengfan, Stochastic Dominance in Mutual Fund Returns (February 19, 2020). Georgetown McDonough School of Business Research Paper No. 3541062, Available at SSRN: https://ssrn.com/abstract=3541062 or http://dx.doi.org/10.2139/ssrn.3541062

Lei Jiang (Contact Author)

Tsinghua University ( email )

Beijing, 100084
China

Quan Wen

Georgetown University - Department of Finance ( email )

37th and O Street, NW
Washington D.C., DC 20057
United States

HOME PAGE: http://faculty.georgetown.edu/qw50

Ke Wu

Renmin University of China ( email )

59 Zhongguancun Street
Beijing, 100872
China

Mengfan Yin

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

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