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Flaw in the fund skill/luck test method of Cuthbertson et al

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  • Nuttall, John

Abstract

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.

Suggested Citation

  • Nuttall, John, 2007. "Flaw in the fund skill/luck test method of Cuthbertson et al," MPRA Paper 1584, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:1584
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    File URL: https://mpra.ub.uni-muenchen.de/1584/1/MPRA_paper_1584.pdf
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    References listed on IDEAS

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    1. 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.
    2. Dirk Nitzsche & Keith Cuthbertson & Niall O'Sullivan, 2005. "Mutual Fund Performance: Skill Or Luck?," Money Macro and Finance (MMF) Research Group Conference 2005 4, Money Macro and Finance Research Group.
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    Cited by:

    1. Parshakov, Petr, 2015. "Estimation of skill of Russian mutual fund managers," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 37(1), pages 57-66.

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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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