Performance Evaluation with Stochastic Discount Factors

38 Pages Posted: 26 Feb 2002

See all articles by Heber Farnsworth

Heber Farnsworth

University of Oklahoma - Michael F. Price College of Business

Wayne E. Ferson

University of Southern California; National Bureau of Economic Research (NBER)

David Jackson

Carleton University - Eric Sprott School of Business

Steven K. Todd

Loyola University of Chicago

Multiple version iconThere are 3 versions of this paper

Date Written: October 17, 2000

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: Performance evaluation, stochastic discount factors, mutual funds, conditional asset pricing

JEL Classification: G12, G14, G23, C15

Suggested Citation

Farnsworth, Heber and Ferson, Wayne E. and Jackson, David and Todd, Steven K., Performance Evaluation with Stochastic Discount Factors (October 17, 2000). Available at SSRN: https://ssrn.com/abstract=299394 or http://dx.doi.org/10.2139/ssrn.299394

Heber Farnsworth

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

Wayne E. Ferson (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

HOME PAGE: http://www-rcf.usc.edu/~ferson/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Jackson

Carleton University - Eric Sprott School of Business ( email )

1125 Colonel By Drive
Ottawa, Ontario K1S SB6
Canada
613-520-2600 x2383 (Phone)
613-520-4427 (Fax)

Steven K. Todd

Loyola University of Chicago ( email )

820 North Michigan Avenue
Chicago, IL 60611
United States
(312) 915-7218 (Phone)
(312) 915-8508 (Fax)

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