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Benchmarking benchmarks: measuring characteristic selectivity using portfolio holdings data
Author(s) -
Fong Kingsley,
Gallagher David R.,
Lee Adrian D.
Publication year - 2008
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.2008.00263.x
Subject(s) - benchmarking , benchmark (surveying) , tracking error , portfolio , computer science , equity (law) , stock exchange , econometrics , accounting , actuarial science , business , economics , finance , artificial intelligence , control (management) , geodesy , marketing , political science , law , geography
This study proposes methodological adjustments to the widely adopted performance benchmarking methodology of Daniel et al . (1997) as a means of improving the precision of alpha measurement for active equity fund managers. We achieve this by considering the monthly updating of characteristic benchmarks and to ensure neutrality to the Standard & Poor's/Australian Stock Exchange 300 index. Applying this benchmark to a representative sample of active Australian equity funds and simulated passive portfolios that mimic fund manager‐style characteristics, we find statistically different and lower tracking error compared with using the standard characteristic benchmark methodology. We also find evidence that the modified benchmark statistically infers an alpha closer to zero compared with the standard benchmark methodology. Our findings suggest that improved specifications of characteristic benchmarks represent better methods in quantifying fund manager skill.