Reverse Survivorship Bias
- Author(s): JUHANI T. LINNAINMAA
- Published: May 20, 2013
- Pages: 789-813
- DOI: 10.1111/jofi.12030
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.