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Endogenous benchmarks

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  • Hunter, David
  • Kandel, Eugene
  • Kandel, Shmuel
  • Wermers, Russ

Abstract

This paper develops a new approach that controls for commonalities in actively managed investment fund returns when measuring their performance. It is well-known that many investment funds may systematically load on common priced factors omitted from popular models, exhibit similarities in their choices of specific stocks and industries, or vary their risk-loadings in a similar way over time. We propose a parsimonious model that uses the return on the group of mutual funds as a benchmark for each individual fund within that group. We demonstrate that this model substantially reduces the correlation between fund residuals from standard models used for equity and fixed-income funds, and improves the estimates of fund α's and β's from commonly used equity and fixed-income models. --

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Bibliographic Info

Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 10-02.

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Date of creation: 2009
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Handle: RePEc:zbw:cfrwps:1002

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  1. William N. Goetzmann & Stephen J. Brown, 2005. "Performance Persistence," Yale School of Management Working Papers ysm451, Yale School of Management.
  2. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  3. Mark M. Carhart & Jennifer N. Carpenter & Anthony W. Lynch & David K. Musto, 2002. "Mutual Fund Survivorship," Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1439-1463.
  4. Mary Margaret Myers & James M. Poterba & Douglas A. Shackelford, 2001. "Copycat Funds: Information Disclosure Regulation and the Returns to Active Management in the Mutual Fund Industry," NBER Working Papers 8653, National Bureau of Economic Research, Inc.
  5. Brown, Stephen J, et al, 1992. "Survivorship Bias in Performance Studies," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 553-80.
  6. Wayne E. Ferson & Andrew F. Siegel, 2006. "Testing Portfolio Efficiency with Conditioning Information," NBER Working Papers 12098, National Bureau of Economic Research, Inc.
  7. Keim, Donald B. & Madhavan, Ananth, 1997. "Transactions costs and investment style: an inter-exchange analysis of institutional equity trades," Journal of Financial Economics, Elsevier, vol. 46(3), pages 265-292, December.
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