Evaluating Portfolio Performance: Reconciling Asset Selection and Market Timing

in Baker, H. Kent; Filbeck, Georges (Eds.) Portfolio Theory and Management (2013)

This chapter examines the performance measurement of mutual funds when both security selection and market timing management skills are considered. In an option replication approach, linear and quadratic ... [more ▼]

This chapter examines the performance measurement of mutual funds when both security selection and market timing management skills are considered. In an option replication approach, linear and quadratic coefficients of the Treynor and Mazuy regression are combined to assess performance in presence of market timing. This new correction has the potential to overcome the “artificial timing” bias and delivers particularly encouraging results on a sample of 1,413 U.S. mutual funds selected for an empirical analysis. Unlike alternative approaches proposed in the literature, most of positive market timers seem to be rewarded for the convexity they add to their portfolio, while negative market timers are penalized, and a correlation between abnormal performance and the convexity parameter is found. [less ▲]

Risk Horizon and Expected Market Returns

E-print/Working paper (2012)

The paper proposes an equilibrium asset pricing model that accounts of the incomplete information on returns distribution and investors' preferences. Only moments up to order four of unknown unconditional ... [more ▼]

The paper proposes an equilibrium asset pricing model that accounts of the incomplete information on returns distribution and investors' preferences. Only moments up to order four of unknown unconditional distribution can be observed, and the model does not impose that portfolio diversi fication or moments preference should hold. Using Chebyshev-type of inequalities, an intuitive risk measure (risk horizon) is introduced with reference to the speed of convergence of a security's mean return to its expectations. By an arbitrage argument, this risk measure is related to the horizon of treasury securities in a system of equations that allows the calibration of the model parameters using term structure information. In particular, the expected return on the market portfolio can be endogenously estimated inside this system. The model calibration on U.S. market data provides plausible parameters estimates and interesting cyclical patterns in the time series of the expected return. The empirical relevance of these estimates is examined with tests of statistical and economic predictive ability for stock excess returns. The results provide signi ficant evidence on the added value of the estimates when compared to popular predictors found in the literature (see a.o. Lettau and Ludvigson, 2001; Rapach and Wohar, 2006; Goyal and Welch, 2008). [less ▲]