Performance Evaluation with Stochastic Discount Factors

Posted: 17 Apr 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

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Abstract

We study stochastic discount factor (SDF) models for evaluating investment performance. Constructing artificial funds with known levels of ability, we find that the measures of performance are not highly sensitive to the SDF model. Most of the models have a mild negative bias when performance is neutral. We evaluate a sample of U.S. equity mutual funds. Adjusting for the observed bias, the average mutual fund has enough ability to cover transactions costs. Extreme funds are more likely to have good rather than poor risk-adjusted performance. Our analysis reveals a number of implementation issues relevant to other applications.

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. Available at SSRN: https://ssrn.com/abstract=304899

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
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Canada
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613-520-4427 (Fax)

Steven K. Todd

Loyola University of Chicago ( email )

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Chicago, IL 60611
United States
(312) 915-7218 (Phone)
(312) 915-8508 (Fax)

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