Hostname: page-component-78c5997874-j824f Total loading time: 0 Render date: 2024-11-03T01:36:39.476Z Has data issue: false hasContentIssue false

Performance Attribution using an APT with Prespecified Macrofactors and Time-Varying Risk Premia and Betas

Published online by Cambridge University Press:  06 April 2009

Lawrence Kryzanowski
Affiliation:
Department of Finance, Faculty of Commerce and Administration, Concordia University, 1455 de Maisonneuve Blvd. W., Montreal, Quebec H3G 1M8, Canada
Simon Lalancette
Affiliation:
School of Business, University of Quebec at Montreal, C.P. 3888, Succ. Centre Ville, 315 Ste-Catherine East (R-1525), Montreal, Quebec H3C 3P8, Canada
Minh Chau To
Affiliation:
Ecole des Hautes Etudes Commerciales de Montreal, 3000 Chemin de la Cote Ste-Catherine, Montreal, Quebec H3T 2A7, Canada.

Abstract

This paper assesses the selection and timing abilities of 130 equity mutual funds using a conditional APT model with specified macrofactors, and time-varying risk premia and betas. For all fund categories based on investment objectives, a significant proportion of the funds exhibits negative abnormal asset selection performance based on the unconditional Jensen (1968) alpha, and a reduced proportion of the funds in each category attempts to time the realizations of the macrofactors (including those captured by the residual market factor). The average selection performance of the mutual funds improves and the proportion of funds attempting to time macrofactor realizations declines when measured using the asset selection and factor-timing models with time-varying risk premia and betas.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 1997

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A.; Bhattacharya, S.; Pfleiderer, P.; and Ross, S.. “On Timing and Selectivity.” Journal of Finance, 41 (1986), 715730.CrossRefGoogle Scholar
Akaike, H.A New Look at the Statistical Model Identification.” IEEE Transactions on Automatic Control, AC-19 (1974), 716723.CrossRefGoogle Scholar
Banz, R. W.The Relationship between Return and Market Value of Common Stock.” Journal of Financial Economics, 9 (1981), 318.CrossRefGoogle Scholar
Brown, S.The Number of Factors in Security Returns.” Journal of Finance, 44 (1989), 12471261.CrossRefGoogle Scholar
Burmeister, E., and McElroy, M. J.. “Joint Estimation of Factor Sensitivities and Risk Premia for the Arbitrage Pricing Theory.” Journal of Finance, 43 (1988), 721735.CrossRefGoogle Scholar
Coggin, T. D.; Fabozzi, F. J.; and Rahman, S.. “The Investment Performance of U.S. Equity Pension Fund Managers: An Empirical Investigation.” Journal of Finance, 48 (1993), 10391055.CrossRefGoogle Scholar
Connor, G., and Korajczyk, R.. “Performance Measurement with the Arbitrage Pricing Theory: A New Framework for Analysis.” Journal of Financial Economics, 15 (1986), 373394.CrossRefGoogle Scholar
Constantinides, G. “Theory of Valuation: Overview and Recent Developments.” In Theory of Valuation, Frontiers of Modern Financial Theory, Bhattacharya, S. and Constantinides, G., eds. Rowman and Littlefield (1989).Google Scholar
Cox, J.; Ingersoll, J. E.; and Ross, S.. “An Intertemporal General Equilibrium Model of Asset Prices.” Econometrica, 53 (1985), 363384.CrossRefGoogle Scholar
Cumby, R. E., and Glenn, J. D.. “Evaluating the Performance of International Mutual Funds.” Journal of Finance, 45 (1990), 497521.CrossRefGoogle Scholar
Davidian, M., and Carrol, R. J.. “Variance Function Estimation.” Journal of the American Statistical Association, (1987), 10791091.CrossRefGoogle Scholar
Dybvig, P., and Ross, S.. “Differential Information and Performance Measurement Using a Security Market Line.” Journal of Finance, 40 (1985), 383399.CrossRefGoogle Scholar
Ferson, W. E., and Schadt, R. W.. “Measuring Fund Strategy and Performance in Changing Economic Conditions.” Journal of Finance, 51 (1996), 425461.CrossRefGoogle Scholar
Ferson, W. E., and Harvey, C.. “The Variation of Economic Risk Premiums.” Journal of Political Economy, 47 (1991), 385415.CrossRefGoogle Scholar
Ferson, W. E., and Korajczyk, R. A.. “Do Arbitrage Pricing Models Explain the Predictability of Stock Returns?” Journal of Business, 68 (1995), 309350.CrossRefGoogle Scholar
Glejser, H.A New Test for Heteroscedasticity.” Journal of the American Statistical Association, 64 (1969), 316323.CrossRefGoogle Scholar
Grinblatt, M., and Titman, S.. “A Study of Monthly Mutual Fund Returns and Performance Evaluation Techniques.” Journal of Financial and Quantitative Analysis, 29 (1994), 419444.CrossRefGoogle Scholar
Grinblatt, M., and Titman, S.. “Portfolio Performance Evaluation: Old Issues and New Insights.” Review of Financial Studies, 2 (1989), 393421.CrossRefGoogle Scholar
Harvey, C.The World Price of Covariance Risk.” Journal of Finance, 46 (1991), 111157.CrossRefGoogle Scholar
Huberman, G.; Kandel, S.; and Stambaugh, R. F.. “Mimicking Portfolios and Exact Arbitrage Pricing.” Journal of Finance, 42 (1987), 110.CrossRefGoogle Scholar
Jensen, M.The Performance of Mutual Funds in the Period 1945–1964.” Journal of Finance, 23 (1968), 389416.Google Scholar
Jensen, M. “Optimal Utilization of Market Forecasts and the Evaluation of Investment Portfolio Performance.” In Mathematical Methods in Investment and Finance, Szego, G. and Shell, K., eds. North Holland (1972).Google Scholar
Korkie, B.A Note on the TSE/Western Treasury Bill Returns.” Canadian Journal of Administrative Sciences, 7 (1990), 2628.CrossRefGoogle Scholar
Koutoulas, G., and Kryzanowski, L.. “Macrofactor Conditional Volatilities, Time-Varying Risk Premia and Stock Return Behavior.” Financial Review, 31 (1996), 169195.CrossRefGoogle Scholar
Kryzanowski, L., and Zhang, H.. “Economic Forces and Seasonality in Security Returns.” Review of Quantitative Finance and Accounting, 1 (1992), 227244.CrossRefGoogle Scholar
Lee, C. F., and Rahman, S.. “Market Timing, Selectivity, and Mutual Fund Performance: An Empirical Investigation.” Journal of Business, 63 (1990), 261279.CrossRefGoogle Scholar
Lehmann, B., and Modest, D.. “The Empirical Foundations of the Arbitrage Pricing Theory I: The Empirical Tests.” Working Paper, Columbia Univ. (1985a).CrossRefGoogle Scholar
Lehmann, B., and Modest, D.. “The Empirical Foundations of the Arbitrage Pricing Theory II: The Optimal Construction of Basis Portfolios.” Working Paper, Columbia Univ. (1985b).CrossRefGoogle Scholar
Lehmann, B., and Modest, D.. “Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmarks Comparisons.” Journal of Finance, 42 (1987), 233265.CrossRefGoogle Scholar
Merton, R. C.An Intertemporal Capital Asset Pricing Model.” Econometrica, 41 (1973), 867887.CrossRefGoogle Scholar
Merton, R. C., and Henriksson, R. D.. “On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills.” Journal of Business, 54 (1981), 513534.Google Scholar
Reinganum, M.Misspecification of Capital Asset Pricing: Empirical Anomalies Based on Earnings Yields and Market Values.” Journal of Financial Economics, 9 (1981), 1946.CrossRefGoogle Scholar
Schwert, W.Why Does Stock Market Volatility Change over Time?” Journal of Finance, 44 (1989), 11151153.CrossRefGoogle Scholar
Schwert, W., and Sequin, P.. “Heteroscedasticity in Stock Returns.” Journal of Finance, 45 (1990), 11291155.CrossRefGoogle Scholar
Shanken, J.Multivariate Tests of the Zero-Beta CAPM.” Journal of Financial Economics, 14 (1985), 327348.CrossRefGoogle Scholar
Wei, J.An Asset-Pricing Theory Unifying the CAPM and APT.” Journal of Finance, 43 (1988), 881892.Google Scholar