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Reverse Survivorship Bias
Author(s) -
LINNAINMAA JUHANI T.
Publication year - 2013
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/jofi.12030
Subject(s) - mutual fund , survivorship curve , econometrics , economics , actuarial science , demographic economics , finance , demography , population , sociology
ABSTRACT Mutual funds often disappear following poor performance. When this poor performance is partly attributable to negative idiosyncratic shocks, funds' estimated alphas understate their true alphas. This paper estimates a structural model to correct for this bias. Although most funds still have negative alphas, they are not nearly as low as those suggested by the fund‐by‐fund regressions. Approximately 12% of funds have net four‐factor model alphas greater than 2% per year. All studies that run fund‐by‐fund regressions to draw inferences about the prevalence of skill among mutual fund managers are subject to reverse survivorship bias.