A Performance Evaluation of Norwegian Mutual Funds: Luck versus Skill
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Original versionJørgensen, A. & Driveklepp, J. (2021) A Performance Evaluation of Norwegian Mutual Funds: Luck versus Skill (Master's thesis). University of Agder, Kristiansand.
In this master’s thesis, we examine the performance of Norwegian mutual fund man-agers. Through a dataset of 107 Norwegian mutual funds’ monthly returns from 1987-2019, we estimate fund managers’ abnormal performance using Carhart (1997) four-factor model. First, we find that the managers cannot generate significant abnormal returns on an aggregate level. Further, we test the null hypothesis of zero performance in bootstrap approaches similar to Kosowski, Timmermann, Wermers and White (2006) and Fama & French (2010) to test whether the performance is is a result of luck or skills. We find no evidence of skill among the outperforming funds. However, we find evidence towards a lack of skill among the underperforming funds. Ultimately, we implement a new approach by Harvey & Liu (2020) for statistical testing under a new null hypothesis: A specific fraction of managersoutperform or underperform the benchmark. The approach allows us to estimate the Type II error rate and the Test power. We find that the Test power is well below the recommended level. Hence, there might be some skillful managers in the Norwegian mutual fund market, though our test lacks the power to detect these. However, we find clear evidence towards the absence of skill under the assumption that a fraction of funds are underperforming.
Master's thesis in Business administration (BE501)