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Performance measurement with selectivity, market and volatility timing

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  • Ferson, Wayne
  • Mo, Haitao

Abstract

The performance of portfolio managers depends on market timing, volatility timing, and security selection. We develop holdings-based performance measures that adjust for risk using stochastic discount factors, display all three components in a consistent framework, and avoid strong assumptions about managers’ behavior. Previous models leave out some of the components of performance, and correcting for this we deliver better measures of selectivity. Sorting stocks held by funds on selectivity produces a quintile spread in four-factor alphas greater than 2.5% per year before costs and more than 1.7% greater than found using the Daniel, Grinblatt, Titman, and Wermers (1997) measure.

Suggested Citation

  • Ferson, Wayne & Mo, Haitao, 2016. "Performance measurement with selectivity, market and volatility timing," Journal of Financial Economics, Elsevier, vol. 121(1), pages 93-110.
    • Handle: RePEc:eee:jfinec:v:121:y:2016:i:1:p:93-110
    DOI: 10.1016/j.jfineco.2016.02.012
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    More about this item

    Keywords

    Mutual funds; Performance measurement; Stochastic discount factor; Market timing; Volatility;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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