A robust nonparametric approach to evaluate and explain the performance of mutual funds

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ejor.2005.06.010 Byline: Cinzia Daraio (a), Leopold Simar (b) Keywords: Economies of scale; Mutual funds; Nonparametric frontier; Portfolio analysis; Robust estimation Abstract: The topic of the measurement of mutual funds' performance is receiving an increasing interest both from an applied and a theoretical perspective. Beside the traditional financial literature, a growing body of studies has started to apply the tools of frontier analysis for benchmarking comparisons in portfolio analysis. Our paper contributes to this literature proposing a robust nonparametric approach for analysing mutual funds. It is based on the concept of order-m frontier [Cazals, C., Florens, J.P., Simar, L., 2002. Nonparametric frontier estimation: A robust approach. Journal of Econometrics 106, 1-25] and on a probabilistic approach [Daraio, C., Simar, L., 2005. Introducing environmental variables in nonparametric frontier models: A probabilistic approach. Journal of Productivity Analysis 24 (1), 93-121] to find out the factors explaining mutual funds' performance. Within this framework, a decomposition of conditional efficiency is proposed, and its usefulness for economic interpretation analysed. Our approach is illustrated by using US mutual funds data, grouped for category by objective. Economies of scale, slacks and market risks are investigated. A comparison of traditional, nonparametric and robust performance measures is also offered. Author Affiliation: (a) Institute for Informatics and Telematics, IIT-CNR and Scuola Superiore S. Anna, Via G. Moruzzi,1, I-56100 Pisa, Italy (b) Institut de Statistique, Universite Catholique de Louvain, Belgium Article History: Received 9 April 2004; Accepted 9 June 2005 Article Note: (footnote) [star] This paper has been presented during a seminar at the Dipartimento di Scienze Economiche, University of Verona, the 23 February 2004.