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Portfolio Performance Measurement: a No Arbitrage Bounds Approach

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  • Dong‐Hyun Ahn
  • H. Henry Cao
  • Stéphane Chrétien

Abstract

This paper presents a new method to examine the performance evaluation of mutual funds in incomplete markets. Based on the no arbitrage condition, we develop bounds on admissible performance measures. We suggest new ways of ranking mutual funds and provide a diagnostic instrument for evaluating the admissibility of candidate performance measures. Using a monthly sample of 320 equity funds, we show that admissible performance values can vary widely, supporting the casual observation that investors disagree on the evaluation of mutual funds. In particular, we cannot rule out that more than 80% of the mutual funds are given positive values by some investors. Moreover, we empirically demonstrate that potential inference errors embedded in existing parametric performance measures can be of important magnitude.

Suggested Citation

  • Dong‐Hyun Ahn & H. Henry Cao & Stéphane Chrétien, 2009. "Portfolio Performance Measurement: a No Arbitrage Bounds Approach," European Financial Management, European Financial Management Association, vol. 15(2), pages 298-339, March.
    • Handle: RePEc:bla:eufman:v:15:y:2009:i:2:p:298-339
    DOI: 10.1111/j.1468-036X.2009.00480.x
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    3. St¨¦phane Chr¨¦tien & Manel Kammoun, 2019. "Mutual Fund Styles and Clientele-Specific Performance Evaluation," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(12), pages 1-89, December.
    4. Fletcher, Jonathan, 2014. "Benchmark models of expected returns in U.K. portfolio performance: An empirical investigation," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 30-46.

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