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A New Direction of Fund Rating Based on the Finite Normal Mixture Model

Author

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  • Zhangpeng Gao

    (Nanyang Technological University, Singapore)

  • Shahidur Rahman

    (Division of Economics,School of Humanities and Social Sciences, Nanyang Technological University, Singapore)

Abstract

In this paper we try to develop a theoretical framework for fund rating under the assumption that superior funds could have a higher expected return than that of inferior funds, which could arise from the segmented market information or the differentiated ability of mangers to acquire and analyze the information. Under this setting, the funds are rated based on the cross-sectional distribution of all the funds instead of the presetpercentiles as Morningstar. We use the finite normal mixture for rating fund performance with the number of performance groups determined by likelihood ratio test using parametric bootstrap procedures, and we estimate the model with EM algorithm by treating the group information of funds as missing information.

Suggested Citation

  • Zhangpeng Gao & Shahidur Rahman, 2006. "A New Direction of Fund Rating Based on the Finite Normal Mixture Model," Economic Growth Centre Working Paper Series 0603, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    • Handle: RePEc:nan:wpaper:0603
    as

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    File URL: http://www3.ntu.edu.sg/hss2/egc/wp/2006/2006-03.pdf
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    References listed on IDEAS

    as
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    4. Robert Kosowski & Allan Timmermann & Russ Wermers & Hal White, 2006. "Can Mutual Fund “Stars” Really Pick Stocks? New Evidence from a Bootstrap Analysis," Journal of Finance, American Finance Association, vol. 61(6), pages 2551-2595, December.
    5. Cai, Jun & Chan, K C & Yamada, Takeshi, 1997. "The Performance of Japanese Mutual Funds," The Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 237-273.
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    7. John H. Cochrane, 1992. "A Cross-Sectional Test of a Production-Based Asset Pricing Model," NBER Working Papers 4025, National Bureau of Economic Research, Inc.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Fund Rating; Fund Performance; Finite Normal Mixture; Bootstrap; EM Algorithm;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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