IDEAS home Printed from https://ideas.repec.org/a/gam/jijfss/v8y2020i2p24-d347105.html
   My bibliography  Save this article

Data Envelopment Analysis and Multifactor Asset Pricing Models

Author

Listed:
  • Pablo Solórzano-Taborga

    (Department of Business Administration, Rey Juan Carlos University, 28032 Madrid, Spain)

  • Ana Belén Alonso-Conde

    (Department of Business Administration, Rey Juan Carlos University, 28032 Madrid, Spain)

  • Javier Rojo-Suárez

    (Department of Business Administration, Rey Juan Carlos University, 28032 Madrid, Spain)

Abstract

Recent literature shows that market anomalies have significantly diminished, while research on market factors has largely improved the performance of asset pricing models. In this paper we study the extent to which data envelopment analysis (DEA) techniques can help improve the performance of multifactor models. Specifically, we test the explanatory power of the Fama and French three-factor model, combined with an additional factor based on DEA, on a sample of 2101 European equity funds, for the period from 2001 to 2016. Accordingly, we first form the fund portfolios that constitute our test assets and create the efficiency factor. Secondly, we estimate the prices of risk tied to the four factors using ordinary least squares (OLS) on a two-stage cross-sectional regression. Finally, we use the R-squared statistic estimated by generalized least squares (GLS), as well as the Gibbons Ross and Shanken test and the J -test for overidentifying restrictions in order to study the performance of the model, including and omitting the efficiency factor. The results show that the efficiency factor improves the performance of the model and reduces the pricing errors of the assets under consideration, which allows us to conclude that the efficiency index may be used as a factor in asset pricing models.

Suggested Citation

  • Pablo Solórzano-Taborga & Ana Belén Alonso-Conde & Javier Rojo-Suárez, 2020. "Data Envelopment Analysis and Multifactor Asset Pricing Models," IJFS, MDPI, vol. 8(2), pages 1-18, April.
    • Handle: RePEc:gam:jijfss:v:8:y:2020:i:2:p:24-:d:347105
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7072/8/2/24/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7072/8/2/24/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Sandeep Kapur & Allan Timmermann, 2005. "Relative Performance Evaluation Contracts and Asset Market Equilibrium," Economic Journal, Royal Economic Society, vol. 115(506), pages 1077-1102, October.
    2. Basso, Antonella & Funari, Stefania, 2001. "A data envelopment analysis approach to measure the mutual fund performance," European Journal of Operational Research, Elsevier, vol. 135(3), pages 477-492, December.
    3. Guanhao Feng & Stefano Giglio & Dacheng Xiu, 2020. "Taming the Factor Zoo: A Test of New Factors," Journal of Finance, American Finance Association, vol. 75(3), pages 1327-1370, June.
    4. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2011. "Recent trends in trading activity and market quality," Journal of Financial Economics, Elsevier, vol. 101(2), pages 243-263, August.
    5. Parkan, Celik, 1991. "The calculation of operational performance ratings," International Journal of Production Economics, Elsevier, vol. 24(1-2), pages 165-173, November.
    6. Premachandra, I.M. & Zhu, Joe & Watson, John & Galagedera, Don U.A., 2012. "Best-performing US mutual fund families from 1993 to 2008: Evidence from a novel two-stage DEA model for efficiency decomposition," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3302-3317.
    7. Gregoriou, Greg N. & Sedzro, Komlan & Zhu, Joe, 2005. "Hedge fund performance appraisal using data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 164(2), pages 555-571, July.
    8. C Serrano Cinca & C Mar Molinero, 2004. "Selecting DEA specifications and ranking units via PCA," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 55(5), pages 521-528, May.
    9. John H. Cochrane, 2011. "Presidential Address: Discount Rates," Journal of Finance, American Finance Association, vol. 66(4), pages 1047-1108, August.
    10. Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, vol. 4(2), pages 129-176, March.
    11. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    12. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    13. Lewellen, Jonathan & Nagel, Stefan & Shanken, Jay, 2010. "A skeptical appraisal of asset pricing tests," Journal of Financial Economics, Elsevier, vol. 96(2), pages 175-194, May.
    14. Jonathan B. Berk & Richard C. Green, 2004. "Mutual Fund Flows and Performance in Rational Markets," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1269-1295, December.
    15. Premachandra, I. M., 2001. "A note on DEA vs principal component analysis: An improvement to Joe Zhu's approach," European Journal of Operational Research, Elsevier, vol. 132(3), pages 553-560, August.
    16. Fried, Harold O. & Lovell, C. A. Knox & Schmidt, Shelton S. (ed.), 1993. "The Measurement of Productive Efficiency: Techniques and Applications," OUP Catalogue, Oxford University Press, number 9780195072181.
    17. J. Francisco Rubio & Neal Maroney & M. Kabir Hassan, 2018. "Can Efficiency of Returns Be Considered as a Pricing Factor?," Computational Economics, Springer;Society for Computational Economics, vol. 52(1), pages 25-54, June.
    18. Antonella Basso & Stefania Funari, 2016. "DEA Performance Assessment of Mutual Funds," International Series in Operations Research & Management Science, in: Joe Zhu (ed.), Data Envelopment Analysis, chapter 0, pages 229-287, Springer.
    19. F. Fecher & D. Kessler & S. Perelman & P. Pestieau, 1993. "Productive performance of the French insurance industry," Journal of Productivity Analysis, Springer, vol. 4(1), pages 77-93, June.
    20. Vassilios Babalos & Michael Doumpos & Nikolaos Philippas & Constantin Zopounidis, 2015. "Towards a Holistic Approach for Mutual Fund Performance Appraisal," Computational Economics, Springer;Society for Computational Economics, vol. 46(1), pages 35-53, June.
    21. Pablo Durán-Santomil & Luis Otero-González & Renato Heitor Correia-Domingues & Juan Carlos Reboredo, 2019. "Does Sustainability Score Impact Mutual Fund Performance?," Sustainability, MDPI, vol. 11(10), pages 1-17, May.
    22. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    23. N Adler & B Golany, 2002. "Including principal component weights to improve discrimination in data envelopment analysis," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 53(9), pages 985-991, September.
    24. R. David Mclean & Jeffrey Pontiff, 2016. "Does Academic Research Destroy Stock Return Predictability?," Journal of Finance, American Finance Association, vol. 71(1), pages 5-32, February.
    25. Chordia, Tarun & Subrahmanyam, Avanidhar & Tong, Qing, 2014. "Have capital market anomalies attenuated in the recent era of high liquidity and trading activity?," Journal of Accounting and Economics, Elsevier, vol. 58(1), pages 41-58.
    26. A. Charnes & W. W. Cooper & E. Rhodes, 1981. "Evaluating Program and Managerial Efficiency: An Application of Data Envelopment Analysis to Program Follow Through," Management Science, INFORMS, vol. 27(6), pages 668-697, June.
    27. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    28. Murthi, B. P. S. & Choi, Yoon K. & Desai, Preyas, 1997. "Efficiency of mutual funds and portfolio performance measurement: A non-parametric approach," European Journal of Operational Research, Elsevier, vol. 98(2), pages 408-418, April.
    29. Sherman, H. David & Gold, Franklin, 1985. "Bank branch operating efficiency : Evaluation with Data Envelopment Analysis," Journal of Banking & Finance, Elsevier, vol. 9(2), pages 297-315, June.
    30. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    31. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    32. Zhu, Joe, 1998. "Data envelopment analysis vs. principal component analysis: An illustrative study of economic performance of Chinese cities," European Journal of Operational Research, Elsevier, vol. 111(1), pages 50-61, November.
    33. Ammann, Manuel & Odoni, Sandro & Oesch, David, 2012. "An alternative three-factor model for international markets: Evidence from the European Monetary Union," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1857-1864.
    34. R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, vol. 30(9), pages 1078-1092, September.
    35. Antonella Basso & Stefania Funari, 2007. "DEA models for ethical and non ethical mutual funds with negative data," Working Papers 153, Department of Applied Mathematics, Università Ca' Foscari Venezia.
    36. Eugene F. Fama & Kenneth R. French, 2016. "Dissecting Anomalies with a Five-Factor Model," The Review of Financial Studies, Society for Financial Studies, vol. 29(1), pages 69-103.
    37. Martin Eling, 2006. "Performance measurement of hedge funds using data envelopment analysis," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(4), pages 442-471, December.
    38. A Basso & S Funari, 2003. "Measuring the performance of ethical mutual funds: a DEA approach," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 54(5), pages 521-531, May.
    39. Pätäri, Eero & Leivo, Timo & Honkapuro, Samuli, 2012. "Enhancement of equity portfolio performance using data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 220(3), pages 786-797.
    40. I. M. Premachandra & Joe Zhu & John Watson & Don U. A. Galagedera, 2016. "Mutual Fund Industry Performance: A Network Data Envelopment Analysis Approach," International Series in Operations Research & Management Science, in: Joe Zhu (ed.), Data Envelopment Analysis, chapter 0, pages 165-228, Springer.
    41. Morey, Matthew R. & Morey, Richard C., 1999. "Mutual fund performance appraisals: a multi-horizon perspective with endogenous benchmarking," Omega, Elsevier, vol. 27(2), pages 241-258, April.
    42. Glawischnig, Markus & Sommersguter-Reichmann, Margit, 2010. "Assessing the performance of alternative investments using non-parametric efficiency measurement approaches: Is it convincing?," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 295-303, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. David Alaminos & Ignacio Esteban & M. Belén Salas, 2023. "Neural networks for estimating Macro Asset Pricing model in football clubs," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 30(2), pages 57-75, April.
    2. Isabelle Piot-Lepetit & Joseph Nzongang, 2021. "Business analytics for managing performance of microfinance Institutions: A flexible management of the implementation process," Post-Print hal-03209188, HAL.
    3. Isabelle Piot-Lepetit & Joseph Nzongang, 2021. "Business Analytics for Managing Performance of Microfinance Institutions: A Flexible Management of the Implementation Process," Sustainability, MDPI, vol. 13(9), pages 1-22, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. J. Francisco Rubio & Neal Maroney & M. Kabir Hassan, 2018. "Can Efficiency of Returns Be Considered as a Pricing Factor?," Computational Economics, Springer;Society for Computational Economics, vol. 52(1), pages 25-54, June.
    2. Tarnaud, Albane Christine & Leleu, Hervé, 2018. "Portfolio analysis with DEA: Prior to choosing a model," Omega, Elsevier, vol. 75(C), pages 57-76.
    3. Vassilios Babalos & Michael Doumpos & Nikolaos Philippas & Constantin Zopounidis, 2015. "Towards a Holistic Approach for Mutual Fund Performance Appraisal," Computational Economics, Springer;Society for Computational Economics, vol. 46(1), pages 35-53, June.
    4. Andreu, Laura & Serrano, Miguel & Vicente, Luis, 2019. "Efficiency of mutual fund managers: A slacks-based manager efficiency index," European Journal of Operational Research, Elsevier, vol. 273(3), pages 1180-1193.
    5. Javier Rojo‐Suárez & Ana Belén Alonso‐Conde & Ricardo Ferrero‐Pozo, 2022. "Liquidity, time‐varying betas and anomalies: Is the high trading activity enhancing the validity of the CAPM in the UK equity market?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 45-60, January.
    6. Solórzano-Taborga, Pablo & Alonso-Conde, Ana Belén & Rojo-Suárez, Javier, 2018. "Efficiency and Persistence of Spanish Absolute Return Funds || Eficiencia y persistencia de los fondos de retorno absolutos españoles," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 25(1), pages 186-214, Junio.
    7. Babalos, Vassilios & Mamatzakis, Emmanuel C. & Matousek, Roman, 2015. "The performance of US equity mutual funds," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 217-229.
    8. Martin Eling, 2006. "Performance measurement of hedge funds using data envelopment analysis," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(4), pages 442-471, December.
    9. Cujean, Julien & Andrei, Daniel & Fournier, Mathieu, 2019. "The Low-Minus-High Portfolio and the Factor Zoo," CEPR Discussion Papers 14153, C.E.P.R. Discussion Papers.
    10. Banker, Rajiv & Chen, Janice Y.S. & Klumpes, Paul, 2016. "A trade-level DEA model to evaluate relative performance of investment fund managers," European Journal of Operational Research, Elsevier, vol. 255(3), pages 903-910.
    11. Huber, Daniel & Jacobs, Heiko & Müller, Sebastian & Preissler, Fabian, 2023. "International factor models," Journal of Banking & Finance, Elsevier, vol. 150(C).
    12. Söhnke M. Bartram & Harald Lohre & Peter F. Pope & Ananthalakshmi Ranganathan, 2021. "Navigating the factor zoo around the world: an institutional investor perspective," Journal of Business Economics, Springer, vol. 91(5), pages 655-703, July.
    13. Virk, Nader Shahzad & Butt, Hilal Anwar, 2022. "Asset pricing anomalies: Liquidity risk hedgers or liquidity risk spreaders?," International Review of Financial Analysis, Elsevier, vol. 81(C).
    14. Sun, Yang & Zhang, Xuan & Zhang, Zhekai, 2022. "The reduced-rank beta in linear stochastic discount factor models," International Review of Financial Analysis, Elsevier, vol. 84(C).
    15. Babalos, Vassilios & Philippas, Nikolaos & Doumpos, Michael & Zompounidis, Constantin, 2011. "Mutual funds performance appraisal using stochastic multicriteria acceptability analysis," MPRA Paper 37953, University Library of Munich, Germany.
    16. Lin, Ruiyue & Li, Zongxin, 2020. "Directional distance based diversification super-efficiency DEA models for mutual funds," Omega, Elsevier, vol. 97(C).
    17. Clarke, Charles, 2022. "The level, slope, and curve factor model for stocks," Journal of Financial Economics, Elsevier, vol. 143(1), pages 159-187.
    18. Andrew Detzel & Jack Strauss, 2018. "Combination Return Forecasts and Portfolio Allocation with the Cross-Section of Book-to-Market Ratios [Illiquidity and stock returns: cross-section and time-series effects]," Review of Finance, European Finance Association, vol. 22(5), pages 1949-1973.
    19. Fletcher, Jonathan, 2018. "Betas V characteristics: Do stock characteristics enhance the investment opportunity set in U.K. stock returns?," The North American Journal of Economics and Finance, Elsevier, vol. 46(C), pages 114-129.
    20. Doron Avramov & Guy Kaplanski & Avanidhar Subrahmanyam, 2022. "Postfundamentals Price Drift in Capital Markets: A Regression Regularization Perspective," Management Science, INFORMS, vol. 68(10), pages 7658-7681, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jijfss:v:8:y:2020:i:2:p:24-:d:347105. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.