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Benchmark indices, alpha creation and performance persistence

Benchmark indices, alpha creation and performance persistence

Mateus, Irina Bezhentseva (2017) Benchmark indices, alpha creation and performance persistence. PhD thesis, University of Greenwich.

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This dissertation provides three self-contained empirical studies which investigate the role of benchmark indices, alpha creation and performance persistence. In the first essay, we re-visit the performance of 887 active UK equity mutual funds due to the fact that recent academic literature documents that standard benchmark models, such as FF3 and Carhart four factor models, produce economically and statistically significant non-zero alphas for passive benchmark indices. We use a new approach proposed by Angelidis, Giamouridis, and Tessaromatis (2013) which adjusts the alpha of a fund by the benchmark's alpha and, thereby, allows eliminating upward/downward biases in performance assessment caused by embedded benchmark alphas. In addition to the US evidence we identify persistently negative alphas of FTSE 100 Index in the period 1992–2013. By applying AGT method, we eliminate bias inflicted by benchmark alphas. The results show that adjusted Fama–French and Carhat alphas of UK equity mutual funds are higher than those implied by the standard three- and four-factor models and are overall positive.

The second essay re-visits the question of benchmark misclassification among 1281 US equity mutual funds and estimate its impact on benchmark-adjusted fund performance and ranking. All funds report S&P500 index as a prospectus benchmark, yet 2/3 of those are placed in the Morningstar category with risk and objectives different to those of the S&P500 index. We identify ‘true’ benchmarks for those mismatched funds and find that their S&P adjusted alphas are higher than ‘true’ benchmark adjusted alphas in 61.2% of the cases. In terms of fund quartile rankings, 30% of winner funds lose that status when the prospectus benchmark is substituted with a more suited one. In the remaining performance quartiles there is no clear advantage of using S&P 500 as a prospectus benchmark. The prospectus benchmark therefore can mislead investors about fund’s relative performance. This leads us to conclude that any reference to performance in a fund’s prospectus should be treated with caution.

In the third essay we assess UK mutual fund performance from a perspective of a peer-group, applying a novel approach suggested in Hunter et al. (2013). Our sample comprises of 817 UK long-only active equity mutual funds allocated to nine Morningstar style category peer-groups in the period 1992-2016. Overall, we find that those funds with most significant positive peer-group adjusted alphas continue to perform well one-year-ahead, using both parametric and non-parametric measures of persistence in performance. Further, a small increase in significance of peer-group adjusted alphas significantly improves probability that a fund will be placed in the top quartile in the following period. Finally, we document that persistence in performance is driven by both winner and loser funds. The results within each peer group by and large conform to these findings.

Item Type: Thesis (PhD)
Uncontrolled Keywords: Benchmarking methodology; investment return; financial performance;
Subjects: H Social Sciences > HG Finance
Faculty / School / Research Centre / Research Group: Faculty of Business
Faculty of Business > Department of Accounting & Finance
Last Modified: 30 May 2019 15:47

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