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Alpha and Performance Measurement: The Effects of Investor Disagreement and Heterogeneity
Author(s) -
FERSON WAYNE,
LIN JERCHERN
Publication year - 2014
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.12165
Subject(s) - attractiveness , alpha (finance) , economics , econometrics , financial economics , function (biology) , business , monetary economics , actuarial science , psychology , economy , cronbach's alpha , psychoanalysis , service (business) , evolutionary biology , biology
The literature has not established that a positive alpha, as traditionally measured, means that an investor would want to buy a fund. When alpha is defined using the client's utility function, a positive alpha generally means the client would want to buy. When markets are incomplete, investors will disagree about the attractiveness of a fund. We provide bounds on the expected disagreement with a traditional alpha and study the cross‐sectional relation of disagreement and investor heterogeneity with the flow response to past fund alphas. The effects are both economically and statistically significant.