Cross-sectional alpha dispersion and performance evaluation

Published

Journal Article

© 2019 Elsevier B.V. Our paper explores the link between cross-sectional fund return dispersion and performance evaluation. The foundation of our model is the simple intuition that in periods of high return dispersion, which is associated with high levels of idiosyncratic risk for zero-alpha funds, unskilled managers can more easily disguise themselves as skilled. Rational investors should be more skeptical and apply larger discounts to reported performance in high dispersion environments. Our empirical results are consistent with this prediction. Using fund flow data, we show that a one standard deviation increase in cross-sectional return dispersion is associated with an 11% to 17% decline in flow-performance sensitivity. The effect is stronger for recent data and among outperforming funds.

Full Text

Duke Authors

Cited Authors

  • Harvey, CR; Liu, Y

Published Date

  • November 1, 2019

Published In

Volume / Issue

  • 134 / 2

Start / End Page

  • 273 - 296

International Standard Serial Number (ISSN)

  • 0304-405X

Digital Object Identifier (DOI)

  • 10.1016/j.jfineco.2019.04.005

Citation Source

  • Scopus