Why not use SDF rather than beta models in performance measurement?

Gusset, Jonas and Zimmermann, Heinz. (2014) Why not use SDF rather than beta models in performance measurement? Financial markets and portfolio management, 28. pp. 307-336.

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Official URL: http://edoc.unibas.ch/dok/A6329092

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This paper analyzes performance measurement based on stochastic discount factors, compared to betamodels traditionally used in computing funds’ (Jensen) alphas. From a theoretical point of view, standardalphas suffer from several limitations. Our paper addresses this issue from an empirical point of view usinga sample of Swiss mutual funds from 2000 to 2011. Our results suggest that the key for a “fair”comparison between stochastic discount function (SDF) and beta models is the specification of the set ofprimitive assets used to calibrate the SDF function. Once this is established, the size of (absolute)performance differences considerably decreases between the two model families. However, there aresizeable performance deviations in the cross-section of funds if conditioning information is incorporated inthe tests, up to some 20 basis points per month, or about 2.3 % per year. In almost all cases, the SDFalphasare lower than the standard (Jensen) alphas. In absolute terms, the average SDF-basedunderperformance of the funds is way larger than the average expense ratio of the funds, both in aconditional and unconditional setting.
Faculties and Departments:06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften > Professuren Wirtschaftswissenschaften > Finanzmarkttheorie (Zimmermann)
UniBasel Contributors:Zimmermann, Heinz and Gusset, Jonas
Item Type:Article, refereed
Article Subtype:Research Article
Note:Publication type according to Uni Basel Research Database: Journal article
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Last Modified:21 Nov 2017 08:00
Deposited On:10 Apr 2015 09:12

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