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Endogenous benchmarks

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

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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File URL: http://econstor.eu/bitstream/10419/41364/1/636990613.pdf
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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
Date of revision:
Handle: RePEc:zbw:cfrwps:1002
Contact details of provider: Postal: 0221 / 470 5607
Phone: 0221 / 470 5607
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Web page: http://cfr-cologne.de/english/version06/html/home.php
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  1. Brown, Stephen J & Goetzmann, William N, 1995. " Performance Persistence," Journal of Finance, American Finance Association, vol. 50(2), pages 679-98, June.
  2. 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.
  3. 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.
  4. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  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. 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.
  7. Wayne E. Ferson & Andrew F. Siegel, 2006. "Testing Portfolio Efficiency with Conditioning Information," NBER Working Papers 12098, National Bureau of Economic Research, Inc.
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