Evaluating Fixed Income Fund Performance with Stochastic Discount Factors

81 Pages Posted: 28 Jul 2003

See all articles by Wayne E. Ferson

Wayne E. Ferson

University of Southern California; National Bureau of Economic Research (NBER)

Darren J. Kisgen

Boston College - Carroll School of Management

Tyler R. Henry

Miami University

Date Written: April 13, 2003

Abstract

We evaluate the performance of fixed income mutual funds using stochastic discount factors from continuous-time term structure models. Time-aggregation of the models for discrete returns generates additional empirical "factors," and these factors contribute significant explanatory power to empirical the models. We provide the first conditional performance evaluation for US fixed income mutual funds, conditioning on a variety of discrete ex ante characterizations of the state of the term structure and the economy. During 1985-1999 fixed income funds returned less on average than passive benchmarks that don't pay expenses, but not in all economic states. Fixed income funds typically do poorly when short term interest rates or industrial capacity utilization rates are high, and offer higher returns when quality-related credit spreads are high. We find more heterogeneity across fund styles than across characteristics-based fund groups. Mortgage funds under perform a GNMA index in all economic states. These excess returns are reduced, and typically become insignificant, when we adjust for risk using the stochastic discount factors.

Suggested Citation

Ferson, Wayne E. and Kisgen, Darren J. and Henry, Tyler R., Evaluating Fixed Income Fund Performance with Stochastic Discount Factors (April 13, 2003). EFA 2003 Annual Conference Paper No. 486. Available at SSRN: https://ssrn.com/abstract=424346 or http://dx.doi.org/10.2139/ssrn.424346

Wayne E. Ferson (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

HOME PAGE: http://www-rcf.usc.edu/~ferson/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Darren J. Kisgen

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Tyler R. Henry

Miami University ( email )

Oxford, OH 45056
United States

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