Research on Fund Performance Measure with CVaR

Abstract

Abstract:

This paper presents a theoretically sound fund performance measure that generalizes the Sharpe ratio. The new performance measure is monotone with respect to stochastic dominance and consistently accounts for mean, variance and higher moments of the return distribution. It is equivalent to the Sharpe ratio if returns are normally distributed, while the new measure can produce more reasonable performance rankings than Sharpe ratio under non-normal distribution. We suggest a parametric and two non-parametric estimators for the new performance measure and compare their estimation errors by Monte Carlo simulation. Finally we provide an empirical illustration using mutual funds data in China. The empirical results show that performance rankings induced by the Sharpe ratio and new measure are consistent when funds' higher moments are not different from each other, while performance rankings induced by Sharpe ratio and new measure are inconsistent when differences of funds' higher moments are significant. The new measure is more reasonable since it accounts for the higher moments, which confirms theoretical analysis.

Key words: fund performance measure, monotonic with respect to stochastic dominance, higher moments, Sharpe ratio, conditional value-at-risk

Huang Jinbo, Li Zhongfei, Ding Jie. Research on Fund Performance Measure with CVaR[J]. , 2018, 30(4): 20-32.

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