Scientific article
OA Policy
English

False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas

Published inThe Journal of finance, vol. 65, no. 1, p. 179-216
Publication date2010
Abstract

This paper develops a simple technique that controls for “false discoveries,” or mutual funds that exhibit significant alphas by luck alone. Our approach precisely separates funds into (1) unskilled, (2) zero-alpha, and (3) skilled funds, even with dependencies in cross-fund estimated alphas. We find that 75% of funds exhibit zero alpha (net of expenses), consistent with the Berk and Green equilibrium. Further, we find a significant proportion of skilled (positive alpha) funds prior to 1996, but almost none by 2006. We also show that controlling for false discoveries substantially improves the ability to find the few funds with persistent performance.

Citation (ISO format)
BARRAS, Laurent, SCAILLET, Olivier, WERMERS, Russ. False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas. In: The Journal of finance, 2010, vol. 65, n° 1, p. 179–216. doi: 10.1111/j.1540-6261.2009.01527.x
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Identifiers
Journal ISSN0022-1082
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