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Discussion Paper Details

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Title: Evaluating Portfolio Performance with Stochastic Discount Factors

Author(s): Magnus Dahlquist and Paul Söderlind

Publication Date: June 1997

Keyword(s): GMM estimators, intersection and spanning tests, mean-variance analysis, mutual funds and small sample properties

Programme Area(s): Financial Economics

Abstract: This paper provides evidence on the use of stochastic discount factors in the evaluation of portfolio performance. First, we discuss evaluation in this setting, and relate it to traditional mean-variance analysis. We then use Monte Carlo experiments to examine the small sample properties of generalized method of moment (GMM) estimators. Both size and power properties are characterized for various GMM approaches. Finally, we apply the methodology to Swedish-based mutual funds. We offer an evaluation allowing for passive as well as dynamic strategies. The conditional evaluation indicates that funds may have had superior performance over the sample period.

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Bibliographic Reference

Dahlquist, M and Söderlind, P. 1997. 'Evaluating Portfolio Performance with Stochastic Discount Factors'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1663