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Evaluating Government Bond Fund Performance with Stochastic Discount Factors

  • Wayne Ferson
  • Tyler R. Henry
  • Darren J. Kisgen
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    This article shows how to evaluate the performance of managed portfolios using stochastic discount factors (SDFs) from continuous-time term structure models. These models imply empirical factors that include time averages of the underlying state variables. The approach addresses a performance measurement bias, described by Goetzmann, Ingersoll, and Ivkovic (2000) and Ferson and Khang (2002), arising because fund managers may trade within the return measurement interval or hold positions in replicable options. The empirical factors contribute explanatory power in factor model regressions and reduce model pricing errors. We illustrate the approach on US government bond funds during 1986--2000. Copyright 2006, Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/rfs/hhj015
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    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 19 (2006)
    Issue (Month): 2 ()
    Pages: 423-455

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    Handle: RePEc:oup:rfinst:v:19:y:2006:i:2:p:423-455
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