Survivorship bias and attrition effects in measures of performance persistence

We simulate standard tests of performance persistence using alternative return-generating processes, survival criteria, and test methodologies. When survival depends on performance over several periods, survivorship bias induces spurious reversals, despite the presence of cross-sectional heteroskedasticity in performance. Look-ahead biased methodologies and missing final returns typical of U.S. mutual fund datasets can also materially affect persistence measures. Our results reinforce previous findings that U.S, mutual fund performance is truly persistent. When fund performance is truly persistent, fund attrition affects persistence measures, even when the sample includes all nonsurvivor returns. We also examine the specification and power of the various persistence tests. (C) 1999 Elsevier Science S.A. All rights reserved.