Measuring investment performance with a stochastic parameter regression model |
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Institution: | 1. Department of Economics and Finance, Southern Illinois University Edwardsville, Alumni Hall, Edwardsville, IL 62026, USA;2. John Cook School of Business, Department of Finance, Saint Louis University, 3674 Lindell Blvd., St. Louis, MO 63108, USA |
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Abstract: | This paper develops a generalization of the Hildreth and Houck (1968) random coefficient model for use in evaluating the macroforecasting ability of portfolio managers. Most studies have assumed that astute managers ignore the strength of the market trend and create a binary portfolio beta with one value during up markets and a lower value during down markets. In contrast, this paper examines a model in which the superior manager adjusts beta period by period according to changing market conditions. The findings indicate that portfolio managers are not superior macroforecasters. |
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