Identifying the Value Premium: A Test of Mutual Fund Performance Measures

22 Pages Posted: 2 Sep 2012 Last revised: 3 Feb 2013

See all articles by Glenn N. Pettengill

Glenn N. Pettengill

Grand Valley State University

George Chang

Grand Valley State University - Department of Finance; Department of Finance

C. James Hueng

Western Michigan University - Department of Economics

Date Written: September 24, 2012

Abstract

This paper extends recent discussion on the effectiveness of mutual fund performance measures. We utilize the well-known value premium to examine the ability of mutual fund performance measures to distinguish between the results of value funds and growth funds. Specifically, we examine the effectiveness of mutual fund performance measures over a sample period where value outperforms growth without question, where such measures ought to identify the superior performance of value funds. We find that the Capital Asset Pricing Model successfully identifies superior performance of value funds. The Fama-French three-factor model, on the other hand, provides an inaccurate comparison. We conclude that measurement using the Fama-French three-factor model is biased against value funds and should not be used to judge the performance of value funds, or in general, funds containing a significant proportion of value securities. We suggest that a similar bias would exist for mutual funds holding small-firm securities.

Keywords: Value Premium, Mutual Fund Performance measures, Risk-adjusted Return, CAPM, Fama-French 3-factor Model

JEL Classification: G00, G10, G12, G19

Suggested Citation

Pettengill, Glenn N. and Chang, George and Chang, George and Hueng, C. James, Identifying the Value Premium: A Test of Mutual Fund Performance Measures (September 24, 2012). Midwest Finance Association 2013 Annual Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2139819 or http://dx.doi.org/10.2139/ssrn.2139819

Glenn N. Pettengill (Contact Author)

Grand Valley State University ( email )

1 Campus Dr.
Allendale, MI 49401-9403
United States

George Chang

Department of Finance ( email )

Seidman School of Business
1 Campus Drive
Allendale, MI 49401
United States
616-331-7350 (Phone)
616-331-7445 (Fax)

HOME PAGE: http://www.gvsu.edu

Grand Valley State University - Department of Finance ( email )

Seidman School of Business
1 Campus Drive
Allendale, MI 49401
United States
616-331-7350 (Phone)
616-331-7445 (Fax)

HOME PAGE: http://www.gvsu.edu

C. James Hueng

Western Michigan University - Department of Economics ( email )

Kalamazoo, MI 49008
United States

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