Portfolio Performance Measurement: a No Arbitrage Bounds Approach

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." Copyright (c) 2009 The Authors Journal compilation (c) 2009 Blackwell Publishing Ltd.

The Analysis of Size and Book-to-Market Ratio Effects in KRX under Good Deal Condition

“…This causes the mispricing of reference assets which means assigning zero performance to passive strategies of reference portfolios, as in [6]. This causes performance measures based on equilibrium models not to be admissible in terms of [8]. This implies that portfolio performance evaluation can be significantly different according to parametric model.…”

“…If Size effects exist in Korea equity market, smaller (higher) portfolios must have higher estimates of GD bound than bigger (lower) portfolios. Reference [8] suggests portfolio dominance criteria by admissible SDFs. According to them, Upper (Lower) bound can be thought as the performance assessment of the most (least) favorable marginal investor class.…”

“…In this sense, reference [8] and [9] suggests to use all of admissible SDFs under incomplete market. As the result, they derived no arbitrage performance bound and no good deal bound irrespectively.…”

“…Examples of these models are Sharpe, Lintner and Mossin"s capital asset pricing model (CAPM) and Fama and French"s 3 factor model, (for example, [1]- [4]). Non-parametric methods are based on no arbitrage principle which means both the law of one price and the positivity of SDF, (for example, [5]- [8]). Non-parametric approach extracts admissible SDF that has not any pricing error for reference assets.…”

Investor Heterogeneity and the Cross-section of U.K. Investment Trust Performance

“…Elton et al also point out the closed-end funds might be 1 See Chen and Knez(1996) for an overview of evaluating fund performance using the stochastic discount factor approach. 2 The issue of investor heterogeneity on fund performance is also explored implicitly in the papers by Chen and Knez(1996) and Ahn, Cao and Chretien(2009).…”