Evaluating Portfolio Performance with Stochastic Discount Factors

46 Pages Posted: 20 Aug 1999 Last revised: 15 Jun 2013

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Paul Söderlind

University of St. Gallen; Centre for Economic Policy Research (CEPR); University of St. Gallen - School of Finance

Date Written: June 6, 2010

Abstract

We first discuss performance evaluation using stochastic discount factors and relate it to traditional mean-variance analysis. We then use Monte Carlo experiments to examine the properties of various general method of moment (GMM) estimators. The test statistics are fairly well behaved although serious size distortions are found in some cases. The simulations also show that significant excess return, or a long sample, is needed to reject neutral performance. Finally, we offer an evaluation of Swedish-based mutual funds. The conditional evaluation indicates that funds have had nonneutral performance as revealed by the predictability of the unconditional performance measure.

JEL Classification: G12

Suggested Citation

Dahlquist, Magnus and Söderlind, Paul, Evaluating Portfolio Performance with Stochastic Discount Factors (June 6, 2010). Journal of Business, Vol. 72, No. 3, pp. 347-384, 1999, Available at SSRN: https://ssrn.com/abstract=163828

Magnus Dahlquist (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Paul Söderlind

University of St. Gallen ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland
+41 71 224 7064 (Phone)
+41 71 224 7088 (Fax)

HOME PAGE: http://https://sites.google.com/site/paulsoderlindecon/home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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