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
Date Written: December 7, 2020
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: Suggested Citation