Working Paper: NBER ID: w1721
Authors: Bruce N. Lehmann; David M. Modest
Abstract: Our primary goal in this paper is to ascertain whether the absolute and relative rankings of managed funds are sensitive to the benchmark chosen to measure normal performance. We employ the standard CAPM benchmarks and a variety of APT benchmarks to investigate this question. We found that there is little similarity between the absolute and relative mutual fund rankings obtained from alternative benchmarks which suggests the importance of knowing the appropriate model for risk and expected return in this context. In addition, the rankings are quite sensitive to the method used to construct the APT benchmark. One would reach very different conclusions about the funds' performance using smaller numbers of securities in the analysis or the less efficient methods for estimating the necessary factor models than one would arrive at using the maximum likelihood procedures with 750 securities. We did, however, find the rankings of the funds are not very sensitive to the exact number of common sources of systematic risk that are assumed to impinge on security returns. Finally, we found statistically significant measured abnormal performance using all the benchmarks. The economic explanation of this phenomenon appears to be an open question.
Keywords: Mutual Funds; Performance Evaluation; CAPM; APT
JEL Codes: G11; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| benchmark selection (C52) | performance assessment (O22) |
| different benchmarks (C52) | different rankings of mutual funds (G23) |
| number of securities and estimation method (C13) | conclusions about fund performance (G23) |
| common sources of systematic risk (P34) | rankings of managed funds (G23) |
| benchmarks used (C52) | measured abnormal performance (C52) |