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Performance Evaluation with Stochastic Discount Factors

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Author Info
Heber Farnsworth (Washington University)
Abstract

We study stochastic discount factor (SDF) models for evaluating investment performance. Constructing artificial funds with known levels of ability, we find that the measures of performance are not highly sensitive to the SDF model. Most of the models have a mild negative bias when performance is neutral. We evaluate a sample of U.S. equity mutual funds. Adjusting for the observed bias, the average mutual fund has enough ability to cover transactions costs. Extreme funds are more likely to have good rather than poor risk-adjusted performance. Our analysis reveals a number of implementation issues relevant to other applications.

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File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?JB750304
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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 75 (2002)
Issue (Month): 3 (July)
Pages: 473-504
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:ucp:jnlbus:v:75:y:2002:i:3:p:473-504

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  1. Carlos Enrique Carrasco Gutierrez & Wagner Piazza Gaglianone, 2008. "Evaluating Asset Pricing Models in a Fama-French Framework," Working Papers Series 175, Central Bank of Brazil, Research Department. [Downloadable!]
  2. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2005. "Unobserved Actions of Mutual Funds," NBER Working Papers 11766, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Jonathan Fletcher & Patricia Ntozi-Obwale, 2009. "Exploring the Conditional Performance of U.K. Unit Trusts," Journal of Financial Services Research, Springer, vol. 36(1), pages 21-44, August. [Downloadable!] (restricted)
  4. Peter Christoffersen & Kris Jacobs & Gregory Vainberg, 2007. "Forward-Looking Betas," CREATES Research Papers 2007-39, School of Economics and Management, University of Aarhus. [Downloadable!]
  5. Schrimpf, Andreas & Schröder, Michael & Stehle, Richard, 2006. "Evaluating conditional asset pricing models for the German stock market," ZEW Discussion Papers 06-43, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  6. Sergey Iskoz & Jiang Wang, 2003. "How to Tell if a Money Manager Knows More?," NBER Working Papers 9791, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Dariusz Stanko, 2003. "Performance Evaluation of Public Pension Funds: The Reformed Pension System in Poland," Finance 0306002, EconWPA. [Downloadable!]
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