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Survivorship bias in performance studies

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Abstract

Recent evidence suggests that past mutual fund performance predicts future performance. We analyze the relationship between volatility and returns in a sample that is truncated by survivorship and show that this relationship gives rise to the appearance of predictability. We present some numerical examples to show that this effect can be strong enough to account for the strength of the evidence favoring return predictability.
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... Because this study only collects samples from those who have previously been dining in a micro-celebrity restaurant, survivorship bias may exist. Survivorship bias is a form of selection bias focusing on those who pass a certain selection process and ignoring those who do not, usually because they lack visibility (Brown et al., 1992). In this study, we only invited those who have experience dining in micro-celebrity restaurants to participate in the investigation. ...
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Dining in Internet-celebrity (or micro-celebrity) restaurants is an increasingly popular indulgence. Rooted in the micro-celebrity economy research, the present study draws on self-signaling and self-determination theories to propose an integrated research framework that examines how extrinsic and intrinsic factors impact customers’ intention to revisit micro-celebrity restaurants. External social needs (i.e., restaurant competence, signaling identity, and foodstagramming benefits) and internal personality traits (i.e., neophilic and neophobic tendencies) are synthesized to better understand their impacts on conative propensities. The findings indicate that foodstagramming benefits mediates the relationship between restaurant competence and intention to revisit, whereas neophilic renders a boundary condition suppressing this relationship. However, neophilic and neophobic tendencies positively moderate the effect of identity-signaling.
... The discussed issue refers to the above-mentioned strand in the literature, namely one concerned with performance persistence, which was concentrated mainly in low-liquidity sectors or at shorter horizons. It is the results obtained there (e.g., Brown et al. 1992, Brown and Goetzmann 1995, Malkiel 1995, Elton et al. 1996) that sparked the investigations on the flow-performance relationship. As a rule, the performance generated by fund managers does not result from earlier investment returns, i.e., it is hard to predict them relying on historical data only. ...
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This paper is a review of literature for findings on the flow–performance relationship of mutual funds. It is noted that the discussed issue has been examined virtually exclusively in developed countries. There are no or only fragmentary findings of this kind in developing economies. Based on a survey of empirical findings, it is possible to outline the main directions of research within the strands examined by contemporary researchers and explain the basic assumptions when formulating hypotheses. Moreover, the evaluation of the existing literature lets to offer several propositions for future research. It is a preliminary paper that systematises the analysed subject matter and an introduction to an empirical study dedicated to small European mutual fund markets. Keywords: mutual funds, performance, net flows, individual investors, behavioral finance
... This bias can occur when some samples are selected, and not others. Normally, in a performance study, overlooking non-surviving firms which do not exist at a certain period of time could lead to erroneous interpretation(Brown, Goetzmann, Ibbotson, & Ross, 1992;Stock & Watson, 2007). Although this study adopts the Monte Carlo approach for simulating the potential profit of businesses in different industries, it does not suffer from sample survivorship bias. ...
Thesis
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This thesis investigates the impact of symbiotic relationships on risk, return and value of micro-, small and medium enterprises (MSMEs). The research study examines how connections and networking help MSMEs to enhance financial gains by maximising return and minimising risks associated with business performance. This thesis focuses on New Zealand MSMEs, as they are significant contributors to the country’s economy and provide employment opportunities for many people. Funds allocated by the New Zealand government to different business clusters indicate how the government pay attention to these associations making it pertinent to explore whether these MSMEs grow, and how helpful the concept of symbiosis is in promoting their growth. Globalization and changes in economic conditions can intensify competitive behaviour among businesses. While increased business competitiveness may have minimal effects on the business performance of large-sized firms, it can create challenges for MSMEs. Limitations of resources and finance, volatility and opacity can push these businesses to a critical juncture. In order to overcome these problems, many MSMEs’ owners have discarded the idea of flying solo, and adopted a synergistic model of working where everybody get benefits from cooperation. The concept of symbiosis is adopted as a strategic tool which can improve profitability, business survival rates, goodwill and growth potential, as well as reduce potential risk caused by the limitations of firm size. Symbiotic relationships can enhance the bottom-line and help businesses to be successful, as a consequence of creating innovative outcomes for individual firms, societies and countries. Although some previous studies discuss the impact of networks and connections, there is still considerable work to be done in evaluating the effects of business symbiosis, especially from a financial perspective. In order to do this, various financial theories, namely Signalling theory, Stakeholder theory and Agency theory are incorporated into this thesis to explain how symbiotic relationships enable MSMEs to increase return, and reduce risks and uncertainties associated with business performance of MSMEs. Significantly, these theories are widely adopted in studies relating to (listed) large companies, but not often found in small business studies. Therefore, this thesis contributes to the literature. This study points out how financial theories adopted in (listed) large firms can also explain business transactions in MSMEs, particularly when the concept of symbiosis is incorporated. Furthermore, the adoption of non-finance theories such as Social network theory, Resource dependency theory and Transaction cost theory in this thesis encourages an innovative cross-disciplinary perspective. At the same time, a financial perspective is important and necessary to investigate how business symbiosis enhances MSMEs performance, particularly regarding risk and return. As this thesis aims to examine the impact of connections between several MSMEs and how their cooperation helps MSMEs owners to boost financial gains, this study reviews prior works to understand the factors that can be affected by networks and connections in businesses. Following this step, secondary data was accessed from the New Zealand Benchmarking Survey, provided by the Institute of Business Research at the University of Waikato, to run simulations to assess the potential profit of firms when applying the concept of symbiosis. It was found that potential firm profits differ depending on the specified range of parameters and type of distributions used. To ascertain the impacts of symbiosis more precisely, it was necessary to use real samples. Correspondingly, the researcher conducted fieldwork and collected primary data by using surveys and semi-structured interviews. The research participants are MSMEs’ owners who operate businesses in Cambridge New Zealand. Both surveys and interviews are concurrently conducted and both close-ended and open-ended questions were asked. The questions relate to owner characteristics, business attributes, symbiotic relationship activities and firm performance. The analytical process is divided into two parts: quantitative analysis and qualitative analysis. All survey responses were analysed by applying econometric models namely Ordered Logistics Regression (Ologit) and Partial Less Square Structural Equation Modelling (PLS-SEM). The results of Ologit in relation to symbiotic relationships between MSMEs and banks are important. The findings show that having no connections with banks is positively associated with a reduction in net profit while having connections with banks positively relates to an increase in net profit. It was also found that symbiotic relationships among firms are crucial. The study found a positive relationship between a change in net profit and having business connections among MSMEs. This positive association is also found in MSMEs operated by business owners who have frequent interactions with other business owners. Regarding business owner characteristics and firm attributes, the findings indicate that there is a significant difference between the age of a business owner and frequency of interaction among firms across different industries. Also, the frequency of interaction among businesses is associated with firm age (the operating years) and firm size (the number of employees). The thesis also examines the association between two groups of symbiotic relationships, interfirm relations (connections between several businesses), and business-bank relations (connections between businesses and banks) to see if these associations relate to the change in net profit of MSMEs. PLS-SEM was applied for this section of the study. Moreover, Social Network Analysis (SNA) was adopted to calculate network scores when MSMEs have been connected with others, and these scores were put into PLS-SEM as indicative variables. Findings of SNA show there are seven industrial areas with a high density of connections. PLS-SEM results showed there is no association between interfirm relations and business-bank relations. However, it was found that change in net profit is negatively associated with business-bank relations. The findings also demonstrate that connection with only one bank is the important indicator explaining business-bank relations in Cambridge. In order to examine why and how symbiotic relationships impact on risk, return and value of MSMEs, thematic analysis was used to analyse the responses to open-ended questions in semi-structured interviews. The empirical findings confirm that business symbiosis enables MSMEs to reduce costs and expenses while also assisting them to increase return and added values. Moreover, MSMEs having good connections with banks obtain benefits regarding access to finance and services. It was found that signals indicating symbiotic relationships in Cambridge are donations, use of referrals, participation in trade associations or professional networks among MSMEs’ owners, and personal interactions among business owners. The study found factors supporting and maintaining business symbiosis in Cambridge. These factors relate to location proximity of the town, non-growth-oriented characteristics of MSMEs, two-way relationships where both business partners get mutual advantages from connections, trustworthiness of business owners, a rapidly developing and high-growth town, the density of embeddedness relationships, and good corporate governance in trade associations and business clusters. The findings support Signalling theory regarding asymmetric information. MSMEs try harder, compared with larger firms, to reduce information asymmetry, and this goal can be achieved when they connect or network with others. With the consistence of Stakeholder theory and Agency theory, these symbiotic relationships provide mutual and additional benefits to MSMEs, and it can last longer when they have good corporate governance to manage the whole network. It could be worthwhile to have a nominee or some group of people who can deliver ideas or information in business clusters and associations, however a conflict of interest between this group of people and other members could diminish the whole network. Therefore, trading off between risk and return is still significant. This thesis supports Transaction cost theory and Resource dependency theory which were incorporated with Social network theory to examine how having networks and connections enable MSMEs to reduce transaction costs and enhance overall performance as well as the security market line. This thesis has implications for MSMEs, banks, government and policy makers. While the study does have limitations, however these does not affect the analysis. Although this thesis uses Cambridge as a case study, this thesis is generalizable in concept, and the findings show a particular context where existing theories can be developed. Some recommendations for further studies relating to the uses of a Business Operations Survey are stated. This could not only be beneficial for investigating symbiotic relationships in other contexts, but could also lead to further contributions based on this thesis.
... Survivorship bias refers to the tendency to exclude from performance studies the failed companies because they no longer exist[30]. ...
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In recent years, machine learning algorithms have been successfully employed to leverage the potential of identifying hidden patterns of financial market behavior and, consequently, have become a land of opportunities for financial applications such as algorithmic trading. In this paper, we propose a statistical arbitrage trading strategy with two key elements: an ensemble of regression algorithms for asset return prediction, followed by a dynamic asset selection. More specifically, we construct an extremely heterogeneous ensemble ensuring model diversity by using state-of-the-art machine learning algorithms, data diversity by using a feature selection process, and method diversity by using individual models for each asset, as well models that learn cross-sectional across multiple assets. Then, their predictive results are fed into a quality assurance mechanism that prunes assets with poor forecasting performance in the previous periods. We evaluate the approach on historical data of component stocks of the S&P500 index. By performing an in-depth risk-return analysis, we show that this setup outperforms highly competitive trading strategies considered as baselines. Experimentally, we show that the dynamic asset selection enhances overall trading performance both in terms of return and risk. Moreover, the proposed approach proved to yield superior results during both financial turmoil and massive market growth periods, and it showed to have general application for any risk-balanced trading strategy aiming to exploit different asset classes.
... For example, in income smoothing studies, this is of great concern as disproportionately high (low) number of firms engaging in income smoothing eliminated because of survivorship would result in a low (high) likelihood of detecting smoothing in firms retained in the sample. Brown et al. (1992) provides further discussion of the problem. (Johnson andRamanan, 1988, citing Campbell andStanley, 1966). ...
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... In this section, we further explore the relation between SR fund performance and the level of carbon risk and fossil fuel portfolio involvements. To do this, we form two-way tables (Brown et al., 1992;Drago et al., 2010;Ando and Bai, 2016) based on the relative levels of the two categories of environmental portfolio attributes (carbon risk/fossil fuel involvement). ...
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Sustainable investment responds to demands for carbon and climate‐neutral societies. To address the urgency around climate change and provide investors with more qualified information, Morningstar has developed the Low Carbon Designation (LCD) to indicate that the companies held in a portfolio are in general alignment with the transition to a low‐carbon economy. The designation is given to portfolios that have low carbon risk and fossil fuel exposure scores. The present study builds on the LCD by examining the relationship between these scores and financial performance. With this aim, we analyze 3920 socially responsible mutual funds from across the world. Results show differences in financial performance according to scores and investment areas. We find evidence that funds considered to have higher levels of sustainability achieved better performance than funds with higher exposure to companies involved in carbon and fossil fuel industries. We provide insights on the informativeness of these new scores with a focus on climate change and their relevance in helping investors to identify climate‐aware funds. This study highlights the importance of introducing strategies to develop green finance; the analysis confirms that sustainability improves performance. Finally, the LCD indicator is shown to be relevant for making fairer comparisons among socially responsible funds and, ultimately, for developing low‐carbon economies.
... Goetzmann and Ibbotson (1994) introduced non parametric method using two-way contingency table to examine mutual fund performance persistence. The parametric method used a regression model to test mutual fund performance persistence (GRINBLATT; TITMAN, 1989;BROWN et al., 1992). ...
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Purpose: Since 1990s, the discussion on whether mutual funds can perform better and persistently as compare to market has become an ongoing issue. Current research investigates the performance persistence of equity mutual funds’, particularly in the financial market of Bangladesh.Theoretical Framework: Different researchers have strived to examine the performance of mutual funds by using numerous performance indicators and risk adjustment techniques.Design/Methodology/Approach: The equity mutual funds data for this study are obtained from DSE (Dhaka Stock Exchange) database. The sample set includes all open-end mutual funds from 2010 to 2015. There is no mutual fund that has ceased trade or merged with other mutual funds during the study period.Originality/Value: Broad literature have been directed on the performance and persistence of mutual funds in the American markets, while some of the studies also centered on Australia, China, Hong Kong and U.K. financial markets. However, in the context of Bangladesh’s financial market, no identical research has been carried on the performance persistence of mutual funds.Findings: The results reveal that the managers of equity mutual funds have selective ability to obtain higher returns in Bangladesh. Moreover, the past performance of mutual funds has an impact on their future performance. The size of mutual funds doesn’t have any impact on their performance. The parametric and non-parametric models demonstrate that as compare to long run, equity mutual funds in Bangladesh could perform persistently in the short-run.
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