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Should Benchmark Indices Have Alpha? Revisiting Performance

  • Martijn Cremers
  • Antti Petajisto
  • Eric Zitzewitz

Standard Fama-French and Carhart models produce economically and statistically significant nonzero alphas even for passive benchmark indices such as the S&P 500 and Russell 2000. We find that these alphas primarily arise from the disproportionate weight the Fama-French factors place on small value stocks which have performed well, and from the CRSP value-weighted market index which is historically a downward-biased benchmark for U.S. stocks. We explore alternative ways to construct these factors and propose alternative models constructed from common and easily tradable benchmark indices. The index-based models outperform the standard models in common applications such as performance evaluation of mutual fund managers.

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File URL: http://icfpub.som.yale.edu/publications/2452
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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2452.

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Date of creation: 26 Mar 2008
Date of revision: 26 Jan 2010
Handle: RePEc:ysm:somwrk:amz2452
Contact details of provider: Web page: http://icf.som.yale.edu/

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