Working Paper: NBER ID: w8791
Authors: Heber Farnsworth; Wayne E. Ferson; David Jackson; Steven Todd
Abstract: We study the use of stochastic discount factor (SDF) models in evaluating the investment performance of portfolio managers. By constructing artificial mutual funds with known levels of investment ability, we evaluate a large set of SDF models. We find that the measures of performance are not highly sensitive to the SDF model, and that most of the models have a mild negative bias when performance is neutral. We use the models to evaluate a sample of U.S. equity mutual funds. Adjusting for the observed bias, we find that the average mutual fund has enough ability to cover its transactions costs. Extreme funds are more likely to have good rather than poor risk adjusted performance. Our analysis also reveals a number of implementation issues relevant to other applications of SDF models.
Keywords: No keywords provided
JEL Codes: G12; G14; G23; C15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| SDF model (C69) | performance measure (C52) |
| true performance being neutral (H21) | performance measure (C52) |
| fund ability (G23) | performance (D29) |
| extreme funds (G23) | risk-adjusted performance (C52) |