DP1663 Evaluating Portfolio Performance with Stochastic Discount Factors

Author(s):	Magnus Dahlquist, Paul Söderlind
Publication Date:	June 1997
Keyword(s):	GMM estimators, intersection and spanning tests, mean-variance analysis, mutual funds, small sample properties
JEL(s):	G11, G12, G23
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=1663

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.