TY  - JOUR
AU  - Farnsworth,Heber
AU  - Ferson,Wayne E.
AU  - Jackson,David
AU  - Todd,Steven
TI  - Performance Evaluation with Stochastic Discount Factors
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8791
PY  - 2002
Y2  - February 2002
UR  - http://www.nber.org/papers/w8791
L1  - http://www.nber.org/papers/w8791.pdf
N1  - Author contact info:
Wayne E. Ferson
Department of Finance
and Business Economics
University of Southern California
3670 Trousdale Parkway Suite 308
Los Angeles, CA 90089-0804
Tel: 213/740-5615
Fax: 213/740-6650
E-Mail: ferson@marshall.usc.edu

David L. Jackson
E-Mail: djackson0080@numail.org

Steven Todd
AB  - We study the use of stochastic discount factor (SDF) models in evaluating the investment performance of portfolio managers.  By constructing artificial mutual funds with known levels of investment ability, we evaluate a large set of SDF models.  We find that the measures of performance are not highly sensitive to the SDF model, and that most of the models have a mild negative bias when performance is neutral.  We use the models to evaluate a sample of U.S. equity mutual funds.  Adjusting for the observed bias, we find that the average mutual fund has enough ability to cover its transactions costs.  Extreme funds are more likely to have good rather than poor risk adjusted performance.  Our analysis also reveals a number of implementation issues relevant to other applications of SDF models.
ER  -