A skeptical appraisal of the bootstrap approach in fund performance evaluation

Zhang, H.; Yan, C.

doi:10.1111/fmii.12093

A skeptical appraisal of the bootstrap approach in fund performance evaluation

Zhang, H.; Yan, C.

Authors

H. Zhang

C. Yan

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.

Citation

Zhang, H., & Yan, C. (2018). A skeptical appraisal of the bootstrap approach in fund performance evaluation. Financial Markets, Institutions and Instruments, 27(2), 49-86. https://doi.org/10.1111/fmii.12093

Journal Article Type	Article
Acceptance Date	Sep 11, 2017
Online Publication Date	Apr 14, 2018
Publication Date	May 1, 2018
Deposit Date	Sep 28, 2017
Publicly Available Date	Apr 14, 2020
Journal	Financial Markets, Institutions and Instruments
Print ISSN	0963-8008
Electronic ISSN	1468-0416
Publisher	Wiley
Peer Reviewed	Peer Reviewed
Volume	27
Issue	2
Pages	49-86
DOI	https://doi.org/10.1111/fmii.12093
Public URL	https://durham-repository.worktribe.com/output/1348329

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Copyright Statement
This is the accepted version of the following article: Zhang, H. & Yan, C. (2018). A skeptical appraisal of the bootstrap approach in fund performance evaluation. Financial Markets, Institutions and Instruments 27(2): 49-86, which has been published in final form at https://doi.org/10.1111/fmii.12093. This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.