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Benchmarking benchmarks: measuring characteristic selectivity using portfolio holdings data

Benchmarking benchmarks: measuring characteristic selectivity using portfolio holdings data This study proposes methodological adjustments to the widely adopted performance benchmarking methodology of Daniel . (1997) as a means of improving the precision of alpha measurement for active equity fund managers. We achieve this by considering the monthly updating of characteristic benchmarks and to ensure neutrality to the Standard & Poor's/Australian Stock Exchange 300 index. Applying this benchmark to a representative sample of active Australian equity funds and simulated passive portfolios that mimic fund manager‐style characteristics, we find statistically different and lower tracking error compared with using the standard characteristic benchmark methodology. We also find evidence that the modified benchmark statistically infers an alpha closer to zero compared with the standard benchmark methodology. Our findings suggest that improved specifications of characteristic benchmarks represent better methods in quantifying fund manager skill. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting & Finance Wiley

Benchmarking benchmarks: measuring characteristic selectivity using portfolio holdings data

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References (37)

Publisher
Wiley
Copyright
© The Authors. Journal compilation © 2008 AFAANZ
ISSN
0810-5391
eISSN
1467-629X
DOI
10.1111/j.1467-629X.2008.00263.x
Publisher site
See Article on Publisher Site

Abstract

This study proposes methodological adjustments to the widely adopted performance benchmarking methodology of Daniel . (1997) as a means of improving the precision of alpha measurement for active equity fund managers. We achieve this by considering the monthly updating of characteristic benchmarks and to ensure neutrality to the Standard & Poor's/Australian Stock Exchange 300 index. Applying this benchmark to a representative sample of active Australian equity funds and simulated passive portfolios that mimic fund manager‐style characteristics, we find statistically different and lower tracking error compared with using the standard characteristic benchmark methodology. We also find evidence that the modified benchmark statistically infers an alpha closer to zero compared with the standard benchmark methodology. Our findings suggest that improved specifications of characteristic benchmarks represent better methods in quantifying fund manager skill.

Journal

Accounting & FinanceWiley

Published: Dec 1, 2008

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