Performance Evaluation with High Moments and Disaster Risk
69 Pages Posted: 15 Mar 2012 Last revised: 22 Dec 2017
Date Written: February 20, 2014
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: Suggested Citation