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Portfolio Performance Measurement: a No Arbitrage Bounds Approach |
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| Authors: | Dong-Hyun Ahn H Henry Cao Stéphane Chrétien |
| Institution: | Department of Economics, Seoul National University, San 56-1, Sillim-Dong, Kwanak-Gu, Seoul, 151-742, Korea E-mail:; Department of Finance, Cheung Kong Graduate School of Business, Oriental Plaza 3/F, Tower E3, 1 East Chang An Avenue, Beijing, PR China, 100738 E-mail:; Department of Finance and Insurance, Faculty of Business Administration, Laval University and CIRPÉE, Pavillon Palasis-Prince, Quebec City, QC, Canada, G1V 0A6 E-mail: |
| Abstract: | 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. |
| Keywords: | portfolio performance measurement mutual funds |