Tuesday, December 8, 2015
Rethinking Performance Evaluation
The current approach to performance evaluation is to run equation-by-equation regressions to calculate alphas. With this approach, three issues arise: 1) the estimation does not take into account any cross-sectional information; 2) there is no allowance for parameter uncertainty; and 3) the estimated alphas do a poor job of predicting future alphas. In “Rethinking Performance Evaluation,” the authors depart from the existing literature by proposing a ‘random effects’ counterpart of the current performance evaluation model.
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From the December 2015 issue of Barclay's Insider Report. Accredited investors can subscribe to the full newsletter for free.
Labels: Barclay Insider Report, Barclay Insider Report Guest Article, Bayesian, EM algorithm, Fixed effects, hedge funds, Multiple testing, Mutual funds, Performance evaluation, Random effects, Regularization
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