Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 175: Evaluating Portfolio Performance with Stochastic Discount Factors

Magnus Dahlquist () and Paul Söderlind ()
Additional contact information
Magnus Dahlquist: Department of Finance, Postal: Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Paul Söderlind: Department of Economics, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden

Abstract: This paper provides evidence on the use of stochastic discount factors in the evaluation of portfolio performance. First we discuss evaluation in this setting, and relates it to traditional mean-variance analysis. We then use Monte Carlo experiments to examine the small sample properties of generalized method of moment (GMM) estimators, Both Size and power properties are characterized for various GMM approaches. Finally, we apply the methodology to Swedish-based mutual funds. We offer an evaluation allowing for passive as well as dynamic strategies. The conditional evaluation indicates that funds may have had superior performance over the sample period.

Keywords: GMM estimators; intersection and spanning tests; mean- variance analysis; mutual funds; small sample properties

JEL-codes: G11; G12; G23

39 pages, First version: May 1997. Revised: September 1, 1998.

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