Review of New Trends in the Literature on Factor Models and Mutual Fund Performance

34 Pages Posted: 17 Nov 2018

See all articles by Irina B. Mateus

Irina B. Mateus

Aalborg University

Cesario Mateus

Aalborg University Business School

Natasa Todorovic

City University London - The Business School

Date Written: October 26, 2018

Abstract

In this paper we provide critical review of recent developments in the mutual fund performance evaluation literature. The new literature centres around two main themes: enhancing explanatory power of the standard Fama-French-Carhart factor models by augmenting them with different factors and altering standard models to account for presence of non-zero alphas in passive indices used as fund benchmarks. The latter includes the literature providing solutions for scenarios in which those benchmarks do not match fund objectives. We find that in the plethora of suggested ‘missing’ factors, not one can be universally used to explain all anomalies or price all stocks. We also find that new models that adjust a fund’s standard Carhart alpha for alpha of its benchmark or for commonalities in its peer–group, provide additional information on fund performance to that given by the standard models. Specifically, these models give account of fund’s relative performance - to the benchmark or the peer-group, which is of use to investors.

Keywords: Standard Factor Models, Mutual Fund Performance, Augmented Models, Benchmark-Adjusted Models, Peer-Group Adjusted Models

JEL Classification: G1, G23

Suggested Citation

B. Mateus, Irina and Mateus, Cesario and Todorovic, Natasa, Review of New Trends in the Literature on Factor Models and Mutual Fund Performance (October 26, 2018). Available at SSRN: https://ssrn.com/abstract=3273374 or http://dx.doi.org/10.2139/ssrn.3273374

Irina B. Mateus

Aalborg University ( email )

Fredrik Bajers Vej 7E
Aalborg, DK-9220
Denmark

Cesario Mateus

Aalborg University Business School ( email )

Aalborg
Denmark

Natasa Todorovic (Contact Author)

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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