Benchmarking Mutual Fund Returns

67 Pages Posted: 24 Sep 2019 Last revised: 9 Mar 2020

See all articles by Tingting Cheng

Tingting Cheng

Nankai University - School of Finance

Cheng Yan

University of Essex - Essex Business School

Yayi Yan

Department of Econometrics and Business Statistics

Date Written: September 15, 2019

Abstract

We question the appropriateness of using time-invariant indices as benchmarks and propose a regime-switching methodology to identify the time-varying de facto benchmarks from a pool of the market-based indices, with or without a risk-free asset. We highlight the benchmark mismatch phenomenon and the role of risk-free rate as an additional benchmark. Our de facto benchmark better capture fund styles than other benchmark choices, substantially improves the identification of significant fund alphas, and provides better out-of-sample forecasts. Importantly, we uncover several new findings in terms of fund performance evaluation using our identified benchmarks in this paper.

Keywords: Alpha, Benchmark, Measurement error, Mutual fund, Performance evaluation

JEL Classification: C15, G11, G12, G23

Suggested Citation

Cheng, Tingting and Yan, Cheng and Yan, Yayi, Benchmarking Mutual Fund Returns (September 15, 2019). Available at SSRN: https://ssrn.com/abstract=3454130 or http://dx.doi.org/10.2139/ssrn.3454130

Tingting Cheng

Nankai University - School of Finance

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

Cheng Yan (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Yayi Yan

Department of Econometrics and Business Statistics ( email )

900 Dandenong Road
Caulfield, Victoria 3145
Australia
0498101110 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
90
Abstract Views
603
rank
318,929
PlumX Metrics