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Portfolio Performance Measurement: a No Arbitrage Bounds Approach
Author(s) -
Ahn DongHyun,
Cao H. Henry,
Chrétien Stéphane
Publication year - 2009
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2009.00480.x
Subject(s) - arbitrage , portfolio , equity (law) , ranking (information retrieval) , econometrics , casual , mutual fund , performance measurement , actuarial science , economics , computer science , financial economics , finance , artificial intelligence , materials science , management , political science , law , composite material
This paper presents a new method to examine the performance evaluation of mutual funds in incomplete markets. Based on the no arbitrage condition, we develop bounds on admissible performance measures. We suggest new ways of ranking mutual funds and provide a diagnostic instrument for evaluating the admissibility of candidate performance measures. Using a monthly sample of 320 equity funds, we show that admissible performance values can vary widely, supporting the casual observation that investors disagree on the evaluation of mutual funds. In particular, we cannot rule out that more than 80% of the mutual funds are given positive values by some investors. Moreover, we empirically demonstrate that potential inference errors embedded in existing parametric performance measures can be of important magnitude.