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Endogenous benchmarks

David Hunter, Eugene Kandel (), Shmuel Kandel and Russ Wermers

No 10-02, CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: This paper develops a new approach that controls for commonalities in actively managed investment fund returns when measuring their performance. It is well-known that many investment funds may systematically load on common priced factors omitted from popular models, exhibit similarities in their choices of specific stocks and industries, or vary their risk-loadings in a similar way over time. We propose a parsimonious model that uses the return on the group of mutual funds as a benchmark for each individual fund within that group. We demonstrate that this model substantially reduces the correlation between fund residuals from standard models used for equity and fixed-income funds, and improves the estimates of fund α's and β's from commonly used equity and fixed-income models.

Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:1002

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