Different risk-adjusted fund performance measures: a comparison

Pilar Grau, Jorge Sainz (), Javier Otamendi and Luis Miguel Doncel

No 2009-54, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: Traditional risk-adjusted performance measures, such as the Sharpe ratio, the Treynor index or Jensen's alpha, based on the mean-variance framework, are widely used to rank mutual funds. However, performance measures that consider risk by taking into account only losses, such as Value-at-Risk (VaR), would be more appropriate. Standard VaR assumes that returns are normally distributed, though they usually present skewness and kurtosis. In this paper we compare these different measures of risk: traditional ones vs. ones that take into account fat tails and asymmetry, such as those based on the Cornish-Fisher expansion and on the extreme value theory. Moreover, we construct a performance index similar to the Sharpe ratio using these VaR-based risk measures. We then use these measures to compare the rating of a set of mutual funds, assessing the different measures' usefulness under the Basel II risk management framework.

Keywords: Mutual funds; performance measures; Value-at-Risk; extreme value theory (search for similar items in EconPapers)
JEL-codes: G10 G11 G20 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-rmg
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https://www.econstor.eu/bitstream/10419/29353/1/615306616.pdf (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:200954

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