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Abstract We introduce a test to assess mutual funds’ “conditional” performance that is based on updated information and corrects data snooping bias. Our method, named the functional false discovery rate “plus” (fFDR^+), incorporates fund characteristics in estimating fund performance free of data snooping bias. Simulations suggest that the fFDR^+ controls well the ratio of false discoveries and gains considerable power over prior methods that do not account for extra information. Portfolios of funds selected by the fFDR^+ outperform other tests not accounting for information updating, highlighting the importance of evaluating mutual funds from a conditional perspective.
Hsu et al. (Thu,) studied this question.