A Skeptical Appraisal of the Bootstrap Approach in Fund Performance Evaluation

70 Pages Posted: 6 Aug 2015 Last revised: 15 Sep 2017

Date Written: September 8, 2017

Abstract

It has become standard practice in the fund performance evaluation literature to use the bootstrap approach to distinguish “skills” from “luck”, while its reliability has not been subject to rigorous statistical analysis. This paper reviews and critiques the bootstrap schemes used in the literature, and provides a simulation analysis of the validity and reliability of the bootstrap approach by applying it to evaluating the performance of hypothetical funds under various assumptions. We argue that this approach can be misleading, regardless of using alpha estimates or their t-statistics. While alternative bootstrap schemes can result in improvements, they are not foolproof either. The case can be worse if the benchmark model is misspecified. It is therefore only with caution that we can use the bootstrap approach to evaluate the performance of funds and we offer some suggestions for improving it.

Keywords: Monte Carlo simulation; Performance evaluation; Bootstrapping; Fama–French model; Alpha

JEL Classification: C15; G11

Suggested Citation

Zhang, Huazhu and Yan, Cheng, A Skeptical Appraisal of the Bootstrap Approach in Fund Performance Evaluation (September 8, 2017). Available at SSRN: https://ssrn.com/abstract=2639864

Huazhu Zhang

Nomura Group ( email )

Japan

Cheng Yan (Contact Author)

Essex Business School ( email )

University of Essex
Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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