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Evaluating Portfolio Performance with Stochastic Discount Factors

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Author Info

  • Dahlquist, Magnus

    ()
    (Department of Finance)

  • Söderlind, Paul

    ()
    (Department of Economics)

Abstract

This paper provides evidence on the use of stochastic discount factors in the evaluation of portfolio performance. First we discuss evaluation in this setting, and relates it to traditional mean-variance analysis. We then use Monte Carlo experiments to examine the small sample properties of generalized method of moment (GMM) estimators, Both Size and power properties are characterized for various GMM approaches. Finally, we apply the methodology to Swedish-based mutual funds. We offer an evaluation allowing for passive as well as dynamic strategies. The conditional evaluation indicates that funds may have had superior performance over the sample period.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 175.

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Length: 39 pages
Date of creation: May 1997
Date of revision: 01 Sep 1998
Publication status: Published in Journal of Business, 1999, pages 347-384.
Handle: RePEc:hhs:hastef:0175

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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
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Web page: http://www.hhs.se/
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Related research

Keywords: GMM estimators; intersection and spanning tests; mean- variance analysis; mutual funds; small sample properties;

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Cited by:
  1. Ayadi, Mohamed A. & Kryzanowski, Lawrence, 2005. "Portfolio performance measurement using APM-free kernel models," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(3), pages 623-659, March.
  2. Roon, F.A. de & Nijman, T.E., 1998. "Testing for mean-variance spanning: A survey," Discussion Paper, Tilburg University, Center for Economic Research 1998-132, Tilburg University, Center for Economic Research.
  3. Gutierrez, Roberto Jr. & Prinsky, Christo A., 2007. "Momentum, reversal, and the trading behaviors of institutions," Journal of Financial Markets, Elsevier, Elsevier, vol. 10(1), pages 48-75, February.
  4. Bekaert, Geert & Liu, Jun, 2001. "Conditioning Information and Variance on Pricing Kernals," University of California at Los Angeles, Anderson Graduate School of Management, Anderson Graduate School of Management, UCLA qt9m7392rq, Anderson Graduate School of Management, UCLA.
  5. Dahlquist, Magnus & Engström, Stefan & Söderlind, Paul, 1999. "Performance and Characteristics of Swedish Mutual Funds 1993-97," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2166, C.E.P.R. Discussion Papers.
  6. Fletcher, Jonathan & Kihanda, Joseph, 2005. "An examination of alternative CAPM-based models in UK stock returns," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(12), pages 2995-3014, December.
  7. Abel, Ernest & Fletcher, Jonathan, 2004. "An empirical examination of UK emerging market unit trust performance," Emerging Markets Review, Elsevier, Elsevier, vol. 5(4), pages 389-408, December.
  8. Engstrom, Stefan, 2003. "Costly information, diversification and international mutual fund performance," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 11(4), pages 463-482, September.
  9. Potì, Valerio & Wang, DengLi, 2010. "The coskewness puzzle," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(8), pages 1827-1838, August.
  10. Antonio Diez de los Rios & René Garcia, 2011. "The option CAPM and the performance of hedge funds," Review of Derivatives Research, Springer, Springer, vol. 14(2), pages 137-167, July.
  11. Min, Byoung-Kyu & Kim, Tong Suk, 2012. "Are good-news firms riskier than bad-news firms?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(5), pages 1528-1535.
  12. Heber Farnsworth & Wayne E. Ferson & David Jackson & Steven Todd, 2002. "Performance Evaluation with Stochastic Discount Factors," NBER Working Papers 8791, National Bureau of Economic Research, Inc.

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