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The performance of enhanced-return index funds: evidence from bootstrap analysis

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  • An-Sing Chen
  • Yeh-Chung Chu
  • Mark T. Leung

Abstract

We apply the bootstrap technique proposed by Kosowski et al . [ J. Finance , 2006, 61 , 2551--2595] in conjunction with Carhart's [ J. Finance , 1997, 52 , 57--82] unconditional and Ferson and Schadt's [ J. Finance , 1996, 51 , 425--461] conditional four-factor models of performance to examine whether the performances of enhanced-return index funds over the 1996 to 2007 period are based on luck or superior ‘enhancing’ skills. The advantages of using the bootstrap to rank fund performance are many. It eliminates the need to specify the exact shape of the distribution from which returns are drawn and does not require estimating correlations between portfolio returns. It also eliminates the need to explicitly control for potential ‘data snooping’ biases that arise from an ex-post sort. Our results show evidence of enhanced-return index funds with positive and significant alphas after controlling for luck and sampling variability. The results are robust to both stock-only and derivative-enhanced index funds, although the spread of cross-sectional alphas for derivative-enhanced funds is slightly more pronounced. The study also examines various sub-periods within the sample horizon.

Suggested Citation

  • An-Sing Chen & Yeh-Chung Chu & Mark T. Leung, 2012. "The performance of enhanced-return index funds: evidence from bootstrap analysis," Quantitative Finance, Taylor & Francis Journals, vol. 12(3), pages 383-395, December.
    • Handle: RePEc:taf:quantf:v:12:y:2012:i:3:p:383-395
    DOI: 10.1080/14697688.2010.547513
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