Performance Evaluation with High Moments and Disaster Risk

69 Pages Posted: 15 Mar 2012 Last revised: 22 Dec 2017

See all articles by Ohad Kadan

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Fang Liu

Cornell University

Date Written: February 20, 2014

Abstract

Traditional performance evaluation measures do not account for tail events and rare disasters. To address this issue, we reinterpret the riskiness measures of Aumann and Serrano (Journal of Political Economy, 2008) and Foster and Hart (Journal of Political Economy, 2009) as performance indices. We derive the moment properties of these indices and their sensitivity to rare disasters and show that they are consistent with the asset pricing literature. As applications, we show that “anomalous” investment strategies such as “momentum” or investment in private equity lose much of their glamour when accounting for high moments and rare events. Furthermore, using the indices to select mutual funds results in desirable high-moment properties out of sample.

Keywords: Performance evaluation; Rare disasters; High distribution moments

JEL Classification: D81, G11

Suggested Citation

Kadan, Ohad and Liu, Fang, Performance Evaluation with High Moments and Disaster Risk (February 20, 2014). Journal of Financial Economics (JFE), Vol. 113, No. 1, 2014. Available at SSRN: https://ssrn.com/abstract=2020724 or http://dx.doi.org/10.2139/ssrn.2020724

Ohad Kadan (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Fang Liu

Cornell University ( email )

Ithaca, NY 14853
United States

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