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False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas
Author(s) -
BARRAS LAURENT,
SCAILLET OLIVIER,
WERMERS RUSS
Publication year - 2010
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2009.01527.x
Subject(s) - luck , alpha (finance) , mutual fund , beta (programming language) , econometrics , economics , monetary economics , mathematics , statistics , finance , computer science , philosophy , theology , programming language , construct validity , psychometrics
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.