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The J-Shape Of Performance Persistence Given Survivorship Bias

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  • Darryll Hendricks
  • Jayendu Patel
  • Richard Zeckhauser

Abstract

Performance may enhance survival probability. When it does, the induced lack of randomness challenges robust and unbiased inference. If survivors are sorted into two groups based on past performance, spurious persistence has been demonstrated if variance in performance is heterogeneous. However, as we show both theoretically and with simulations, if performance is categorized finely, the spurious persistence will be J - shaped; that is, at the bottom better performance in one period "predicts" worse performance for another period. We propose a simple t - test applied to the quadratic coefficient in a regression to distinguish between a spurious J - shape and monotonic patterns. Mutual funds, our example, exhibit the monotonically increasing pattern produced by true performance persistence. © 1997 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 79 (1997)
Issue (Month): 2 (May)
Pages: 161-166

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Handle: RePEc:tpr:restat:v:79:y:1997:i:2:p:161-166

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Cited by:
  1. Getmansky, Mila & Lo, Andrew & Makarov, Igor, 2003. "An Econometric Model of Serial Correlation and Illiquidity In Hedge Fund Returns," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 4288-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Zhao, Xinge, 2004. "Why are some mutual funds closed to new investors?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(8), pages 1867-1887, August.
  3. Stephen Brown, 1999. "Conditions for Survival: Changing Risk and the Performance of Hedge Fund Managers and CTAs," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 99-077, New York University, Leonard N. Stern School of Business-.
  4. Jondeau, E. & Rockinger, M., 2004. "The Bank Bias: Segmentation of French Fund Families," Working papers, Banque de France 107, Banque de France.
  5. Dai, John & Sundaresan, Suresh, 2009. "Risk Management Framework for Hedge Funds: Role of Funding and Redemption Options on Leverage," MPRA Paper 16483, University Library of Munich, Germany.
  6. Qiang Bu & Nelson Lacey, 2009. "On understanding mutual fund terminations," Journal of Economics and Finance, Springer, Springer, vol. 33(1), pages 80-99, January.
  7. Astrachan, Joseph H., 2010. "Strategy in family business: Toward a multidimensional research agenda," Journal of Family Business Strategy, Elsevier, Elsevier, vol. 1(1), pages 6-14, March.
  8. Nicholas Chan & Mila Getmansky & Shane M. Haas & Andrew W. Lo, 2005. "Systemic Risk and Hedge Funds," NBER Working Papers 11200, National Bureau of Economic Research, Inc.
  9. Simon Stevenson, 2004. "A performance evaluation of portfolio managers: tests of micro and macro forecasting," The European Journal of Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 10(5), pages 391-411.
  10. Carpenter, Jennifer N. & Lynch, Anthony W., 1999. "Survivorship bias and attrition effects in measures of performance persistence," Journal of Financial Economics, Elsevier, Elsevier, vol. 54(3), pages 337-374, December.
  11. Philpot, James & Hearth, Douglas & Rimbey, James, 2000. "Performance persistence and management skill in nonconventional bond mutual funds," Financial Services Review, Elsevier, Elsevier, vol. 9(3), pages 247-258, 00.
  12. Huij, Joop & Verbeek, Marno, 2007. "Cross-sectional learning and short-run persistence in mutual fund performance," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(3), pages 973-997, March.

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