On the Use of Multifactor Models to Evaluate Mutual Fund Performance
We show that multifactor performance estimates for mutual funds suffer from systematic biases, and argue that these biases are a result of miscalculating the factor premiums. Because the factor proxies are based on hypothetical stock portfolios and do not incorporate transaction costs, trade impact, and trading restrictions, the factor premiums are either over- or underestimated. We argue that factor proxies based on mutual fund returns rather than stock returns provide better benchmarks to evaluate professional money managers.
|Keywords||model misspecification, momentum premium, multisector models, mutual fund performance, value premium|
|Publisher||Erasmus Research Institute of Management (ERIM)|
Huij, J.J., & Verbeek, M.J.C.M.. (2007). On the Use of Multifactor Models to Evaluate Mutual Fund Performance. Erasmus Research Institute of Management (ERIM). Retrieved from http://hdl.handle.net/1765/12667