Building on insights from the economics of superstars, I develop an efficient method for estimating the skill of mutual fund managers. Outliers are especially helpful for disentangling skill from luck when I explicitly model the cross-sectional distribution of managerial skill using a flexible and realistic function. Forecasted performance is dramatically improved relative to standard regression estimates: an investor selecting (avoiding) the best (worst) decile of funds would improve risk-adjusted performance by 2% (3%) annually. The distribution of skill is found to be fat-tailed and positively skewed, providing a theoretical explanation for the convexity of fund flows.
| Identifer | oai:union.ndltd.org:columbia.edu/oai:academiccommons.columbia.edu:10.7916/D8RX9K5V |
| Date | January 2012 |
| Creators | Sastry, Ravindra Vadali |
| Source Sets | Columbia University |
| Language | English |
| Detected Language | English |
| Type | Theses |
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