Survivorship bias and attrition effects in measures of performance persistence
We generate samples of fund returns calibrated to match the U.S. mutual fund industry and simulate standard tests of performance persistence. We consider a variety of alternative return generating processes, survival criteria, and test methodologies. When survival depends on performance over several periods, survivorship bias induces spurious reversals, despite the presence of cross-sectional heteroskedasticity in performance. In samples which are largely free of survivorship bias, look-ahead biased methodologies and missing returns still affect statistics. In samples with no true persistence, the spurious persistence caused by survivorship bias in the presence of single-period survival criteria never reaches the magnitude found in recent empirical studies. When fund returns are truly persistent, the simulations reveal an attrition effect, distinct from survivorship bias. The systematic disappearance of poor performers causes mean persistence measures to differ from those in a hypothetical sample in which funds never disappear, even in tests which incorporate all data on disappearing funds. The magnitude and direction of this effect depends on the return generating process. We also examine the specification and power of the persistence tests. The t-test for the difference between top and bottom portfolios ranked by past performance is the best specified under the null and among the most powerful against the alternatives we consider.
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- Elton, Edwin J & Gruber, Martin J & Blake, Christopher R, 1996. "Survivorship Bias and Mutual Fund Performance," Review of Financial Studies, Society for Financial Studies, vol. 9(4), pages 1097-1120.
- Shumway, Tyler, 1997. " The Delisting Bias in CRSP Data," Journal of Finance, American Finance Association, vol. 52(1), pages 327-40, March.
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- Grinblatt, Mark & Titman, Sheridan, 1992. " The Persistence of Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 47(5), pages 1977-84, December.
- De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
- Darryll Hendricks & Jayendu Patel & Richard Zeckhauser, 1997. "The J-Shape Of Performance Persistence Given Survivorship Bias," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 161-166, May.
- Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
- Elton, Edwin J & Gruber, Martin J & Blake, Christopher R, 1996. "The Persistence of Risk-Adjusted Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 69(2), pages 133-57, April.
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