A Conditional Single Index model with Local Covariates for detecting and evaluating active portfolio management |
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| Affiliation: | 1. Department of Economics and Management “Marco Fanno”, University of Padua, Italy;2. Department of Statistical Sciences, University of Padua, Italy;1. Department of Finance, University of Birmingham, Edgbaston, Birmingham B15 2TT, UK;2. College of Business Administration, University of Wisconsin, River Falls, WI 54002, USA;3. Department of Economics and Finance, University of South Alabama, Mobile, AL 36688, USA;1. University of Pretoria, South Africa;2. Helmut Schmidt University, Germany;3. University of Nebraska at Omaha, United States;4. University of Nebraska-Omaha and Loughborough University, United States;1. John Molson School of Business, Concordia University, Montreal, QC H3G 1M8, Canada;2. Faculty of Business Administration, Memorial University of Newfoundland, St. John’s NL A1B 3X5, Canada;1. School of Finance, Zhejiang Gongshang University, No. 18 Xuezheng Street, Hangzhou 310018, China;2. Department of Banking & Finance, Tamkang University, Taiwan and the Center for Research of Private Economy at Zhejiang University, Hangzhou, China;3. College of Management, Taiwan Normal University, Taiwan;1. Department of Finance and Insurance, Miller College of Business, Ball State University, Muncie, IN 47306, United States;2. Department of Accounting, University of St. Thomas, St. Paul, MN 55105, United States |
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| Abstract: | The intercept of standard Single Index and Conditional Single Index models, the so-called alpha, is often used to evaluate the long-run performance of managed portfolios. However, this measure is not always appropriate for detecting the presence and impact of active management strategies. Based on the conditional factor models literature, we introduce a Conditional Single Index model where the time-varying alpha and beta parameters depend only on the past history of the underlying portfolio returns and of the benchmark returns. The dynamics of the parameters have two components: the first describes the long-term behaviour of the alpha and beta, whereas the second is associated with the short-term performance of the underlying portfolio. The interpretation of parameters allows the identification of portfolio managers who implement active management strategies. An application on a set of 1300 U.S. mutual funds shows how widespread active management is on the U.S. market. |
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