An Intertemporal CAPM Approach to Evaluate Mutual Fund Performance

Authors: Chang J-r.¹; Hung M-w.²; Lee C-f.³

Source: Review of Quantitative Finance and Accounting, Volume 20, Number 4, June 2003 , pp. 415-433(19)

Publisher: Springer

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Abstract:

Merton (1973) and Campbell (1993) have demonstrated that if an investor anticipates information shifts, he will adjust his portfolio choice today in an attempt to hedge these shifts. Exploiting these insights, we construct a new performance measure to evaluate fund managers' hedging ability. This new measure is different from two widely adopted performance evaluation measures: securities selectivity and market timing. Moreover, an econometric methodology is developed to simultaneously estimate the magnitudes of these three portfolio performance evaluation measures. The results show that mutual fund managers are on average with positive security selection and negative market timing ability. Furthermore, the mutual funds with investment style classified as “Asset Allocation” generally have positive hedging timing ability.

Keywords: intertemporal CAPM; mutual fund; performance evaluation

Language: English

Document Type: Research article

Affiliations: 1: Department of Quantitative Finance, National Tsing Hua University, No. 101, Section 2, Kuang-Fu Rd., Hsinchu, Taiwan Tel.: 866-3-5742420, Fax: 866-3-5715403. jrchang@mx.nthu.edu.tw 2: College of Management, National Taiwan University, No. 1, Section 4, Roosevelt Road, Taipei, Taiwan Tel.: 886-2-23630231 ext 2988, Fax: 886-2-23690833. hung@mba.ntu.edu.tw 3: Department of Finance and Economics, Rutgers Business, Rutgers University, 94 Rockafeller Road, Piscataway, NJ 08854-8054, USA Tel.: 732-445-3530, Fax: 732-445-5927. lee@rbs.rutgers.edu

Publication date: 2003-06-01