Flaw in the fund skill/luck test method of Cuthbertson et al
Cuthbertson et al have recently described a method that is claimed to be able to identify individual fund managers who exhibited skill over a long period in the past. The only input to the process is monthly fund returns. We suggest that a critical step in the Cuthbertson method is flawed. This step involves the study of the order statistics of period average fund returns. We construct a simple model to which the Cuthbertson method should apply. Simulations with the model conclusively demonstrate that the method fails to detect many funds with skill, and also erroneously identifies many funds as having skill they do not possess.
|Date of creation:||22 Jan 2007|
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- Robert Kosowski & Allan Timmermann & Russ Wermers & Hal White, 2006.
"Can Mutual Fund "Stars" Really Pick Stocks? New Evidence from a Bootstrap Analysis,"
Journal of Finance,
American Finance Association, vol. 61(6), pages 2551-2595, December.
- Kosowski, Robert & Timmermann, Allan & Wermers, Russ & White, Hal, 2005. "Can mutual fund stars really pick stocks? New evidence from a bootstrap analysis," CFR Working Papers 05-14, University of Cologne, Centre for Financial Research (CFR).
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