Should Benchmark Indices Have Alpha? Revisiting Performance

Martijn Cremers, Antti Petajisto and Eric Zitzewitz

Yale School of Management Working Papers from Yale School of Management

Abstract: Standard Fama-French and Carhart models produce economically and statistically significant nonzero alphas even for passive benchmark indices such as the S&P 500 and Russell 2000. We find that these alphas primarily arise from the disproportionate weight the Fama-French factors place on small value stocks which have performed well, and from the CRSP value-weighted market index which is historically a downward-biased benchmark for U.S. stocks. We explore alternative ways to construct these factors and propose alternative models constructed from common and easily tradable benchmark indices. The index-based models outperform the standard models in common applications such as performance evaluation of mutual fund managers.

Keywords: performance evaluation; benchmark index; factor model; Fama-French; Carhart (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 G20 G23 (search for similar items in EconPapers)
Date: 2008-03-26, Revised 2010-01-26
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