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Endogenous benchmarks

Author

Listed:
  • Hunter, David
  • Kandel, Eugene
  • Kandel, Shmuel
  • Wermers, Russ
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.

Suggested Citation

  • Hunter, David & Kandel, Eugene & Kandel, Shmuel & Wermers, Russ, 2009. "Endogenous benchmarks," CFR Working Papers 10-02, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:1002
    as

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    References listed on IDEAS

    as
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