Evaluating Government Bond Fund Performance with Stochastic Discount Factors

87 Pages Posted: 20 Jan 2004

See all articles by Wayne E. Ferson

Wayne E. Ferson

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

Tyler R. Henry

Miami University

Darren J. Kisgen

Boston College - Carroll School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: September 10, 2003

Abstract

This paper evaluates the performance of government bond mutual funds with stochastic discount factors from continuous-time term structure models. The approach addresses the interim trading bias described by Goetzmann, Ingersoll and Ivkovic (2000) and Ferson and Khang (2002). It replaces the ad hoc selection of empirical factors and instruments with variables prescribed by theory. Time-aggregation of the models for discrete returns generates empirical factors that contribute explanatory power to the models, and may be useful in other settings. We provide the first conditional performance evaluation for US fixed income mutual funds. During 1986-2000 most government bond funds returned less on average than passive benchmarks that don't pay expenses, but not for all states of the term structure. The abnormal returns are reduced, and with a few interesting exceptions become insignificant, when we adjust for risk using the stochastic discount factors from term structure models.

Suggested Citation

Ferson, Wayne E. and Henry, Tyler R. and Kisgen, Darren J., Evaluating Government Bond Fund Performance with Stochastic Discount Factors (September 10, 2003). 14th Annual Conference on Financial Economics and Accounting (FEA). Available at SSRN: https://ssrn.com/abstract=488165 or http://dx.doi.org/10.2139/ssrn.488165

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

Tyler R. Henry

Miami University ( email )

Oxford, OH 45056
United States

Darren J. Kisgen

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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