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Data envelopment analysis models of investment funds

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  • Lamb, John D.
  • Tee, Kai-Hong
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    Abstract

    This paper develops theory missing in the sizable literature that uses data envelopment analysis to construct return–risk ratios for investment funds. It explores the production possibility set of the investment funds to identify an appropriate form of returns to scale. It discusses what risk and return measures can justifiably be combined and how to deal with negative risks, and identifies suitable sets of measures. It identifies the problems of failing to deal with diversification and develops an iterative approximation procedure to deal with it. It identifies relationships between diversification, coherent measures of risk and stochastic dominance. It shows how the iterative procedure makes a practical difference using monthly returns of 30 hedge funds over the same time period. It discusses possible shortcomings of the procedure and offers directions for future research.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0377221711007600
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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 216 (2012)
    Issue (Month): 3 ()
    Pages: 687-696

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    Handle: RePEc:eee:ejores:v:216:y:2012:i:3:p:687-696

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    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Data envelopment analysis; Investment fund; Diversification; Coherent risk measure; Returns to scale; Stochastic dominance;

    References

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    1. Basso, Antonella & Funari, Stefania, 2001. "A data envelopment analysis approach to measure the mutual fund performance," European Journal of Operational Research, Elsevier, vol. 135(3), pages 477-492, December.
    2. Tone, Kaoru, 2001. "A slacks-based measure of efficiency in data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 130(3), pages 498-509, May.
    3. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
    4. Jati Sengupta, 2003. "Efficiency tests for mutual fund portfolios," Applied Financial Economics, Taylor & Francis Journals, vol. 13(12), pages 869-876.
    5. Robert Russell, R., 1990. "Continuity of measures of technical efficiency," Journal of Economic Theory, Elsevier, vol. 51(2), pages 255-267, August.
    6. Greg Gregoriou & Fabrice Rouah & Stephen Satchell & Fernando Diz, 2005. "Simple and cross efficiency of CTAs using data envelopment analysis," The European Journal of Finance, Taylor & Francis Journals, vol. 11(5), pages 393-409.
    7. R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, vol. 30(9), pages 1078-1092, September.
    8. Briec, Walter & Kerstens, Kristiaan, 2009. "Multi-horizon Markowitz portfolio performance appraisals: A general approach," Omega, Elsevier, vol. 37(1), pages 50-62, February.
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    12. Murthi, B. P. S. & Choi, Yoon K. & Desai, Preyas, 1997. "Efficiency of mutual funds and portfolio performance measurement: A non-parametric approach," European Journal of Operational Research, Elsevier, vol. 98(2), pages 408-418, April.
    13. Ogryczak, Wlodzimierz & Ruszczynski, Andrzej, 1999. "From stochastic dominance to mean-risk models: Semideviations as risk measures," European Journal of Operational Research, Elsevier, vol. 116(1), pages 33-50, July.
    14. Léopold Simar & Paul Wilson, 2000. "Statistical Inference in Nonparametric Frontier Models: The State of the Art," Journal of Productivity Analysis, Springer, vol. 13(1), pages 49-78, January.
    15. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    16. Peter Bogetoft, 1996. "DEA on Relaxed Convexity Assumptions," Management Science, INFORMS, vol. 42(3), pages 457-465, March.
    17. Walter Briec & Kristiaan Kerstens, 2009. "Portfolio Selection in Multidimensional General and Partial Moment Space," Working Papers 2009-ECO-08, IESEG School of Management.
    18. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
    19. Carlo Acerbi & Dirk Tasche, 2001. "On the coherence of Expected Shortfall," Papers cond-mat/0104295, arXiv.org, revised May 2002.
    20. Morey, Matthew R. & Morey, Richard C., 1999. "Mutual fund performance appraisals: a multi-horizon perspective with endogenous benchmarking," Omega, Elsevier, vol. 27(2), pages 241-258, April.
    21. Bing Liang & Hyuna Park, 2007. "Risk Measures for Hedge Funds: a Cross-sectional Approach," European Financial Management, European Financial Management Association, vol. 13(2), pages 333-370.
    22. Lozano, Sebastián & Gutiérrez, Ester, 2008. "Data envelopment analysis of mutual funds based on second-order stochastic dominance," European Journal of Operational Research, Elsevier, vol. 189(1), pages 230-244, August.
    23. Carlo Acerbi, 2007. "Coherent measures of risk in everyday market practice," Quantitative Finance, Taylor & Francis Journals, vol. 7(4), pages 359-364.
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    Citations

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    Cited by:
    1. Antonella Basso & Stefania Funari, 2012. "Constant and variable returns to scale DEA models for socially responsible investment funds," Working Papers 2012_20, Department of Economics, University of Venice "Ca' Foscari".
    2. Branda, Martin, 2013. "Diversification-consistent data envelopment analysis with general deviation measures," European Journal of Operational Research, Elsevier, vol. 226(3), pages 626-635.
    3. Lee, Chia-Yen & Johnson, Andrew L., 2014. "Proactive data envelopment analysis: Effective production and capacity expansion in stochastic environments," European Journal of Operational Research, Elsevier, vol. 232(3), pages 537-548.
    4. repec:ies:wpaper:e201218 is not listed on IDEAS
    5. Y. Alperovych & K. Amess & M. Wright, 2012. "Private Equity Firm Experience and Buy-out Vendor Source: What is their Impact on Efficiency?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/800, Ghent University, Faculty of Economics and Business Administration.
    6. Amparo Soler Domínguez & Juan Carlos Matallín Sáez & Emili Tortosa-Ausina, 2013. "Does active management add value? New evidence from a quantile regression approach," Working Papers. Serie EC 2013-02, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    7. J. Carlos Matallín-Sáez & Amparo Soler-Domínguez & Emili Tortosa-Ausina, 2013. "Does active management add value? New evidence from a quantile regression," Working Papers 2013/01, Economics Department, Universitat Jaume I, Castellón (Spain).
    8. Cheng, Gang & Zervopoulos, Panagiotis & Qian, Zhenhua, 2011. "A variant of radial measure capable of dealing with negative inputs and outputs in data envelopment analysis," MPRA Paper 30951, University Library of Munich, Germany.
    9. Lamb, John D. & Tee, Kai-Hong, 2012. "Resampling DEA estimates of investment fund performance," European Journal of Operational Research, Elsevier, vol. 223(3), pages 834-841.

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