Luck versus Skill in the Cross-Section of Mutual Fund Returns: Reexamining the Evidence

93 Pages Posted: 2 Jul 2020 Last revised: 7 Dec 2020

See all articles by Campbell R. Harvey

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Yan Liu

Purdue University

Date Written: December 7, 2020

Abstract

Both Kosowski et al. (2006) and Fama and French (2010) evaluate whether mutual funds outperform, but their conclusions are very different. We reconcile their findings. We show that the Fama and French method suffers from an undersampling problem that leads to a failure to reject the null hypothesis of zero alpha, even when some funds generate economically large risk-adjusted returns. In contrast, Kosowski et al. substantially over reject the null hypothesis, even when all funds have a zero alpha. We present a novel bootstrapping approach that should be useful to future researchers who are choosing between the two approaches.

The Internet Appendix follows the main text of the paper.

Keywords: Performance evaluation, alpha, active management, bootstrapping, market efficiency, fund management, oversampling, undersampling, Type I errors, Type II errors

JEL Classification: G11, G12, G23, C58

Suggested Citation

Harvey, Campbell R. and Liu, Yan, Luck versus Skill in the Cross-Section of Mutual Fund Returns: Reexamining the Evidence (December 7, 2020). Available at SSRN: https://ssrn.com/abstract=3623537 or http://dx.doi.org/10.2139/ssrn.3623537

Campbell R. Harvey

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yan Liu (Contact Author)

Purdue University ( email )

West Lafayette, IN 47907-1310
United States

HOME PAGE: http://yliu1.com

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
357
Abstract Views
1,247
rank
100,200
PlumX Metrics