Abstract
We show that two prominent bootstrap tests for fund performance evaluation have distorted test sizes and lack test power to detect skilled funds when a substantial number of unskilled funds are present. We develop the theory for a valid bootstrap Hotelling’s T-squared test allowing for serial correlations and cross-sectional dependence in fund residuals. Applying the new bootstrap test in a sequential testing procedure, our empirical analysis finds that skilled funds are more engaged in active management and hold stocks with higher expected anomalous returns.
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