Advertisement

Computational Economics

, Volume 52, Issue 1, pp 25–54 | Cite as

Can Efficiency of Returns Be Considered as a Pricing Factor?

  • J. Francisco Rubio
  • Neal Maroney
  • M. Kabir Hassan
Article

Abstract

We add to the investments literature by employing new techniques to estimate asset performance. We estimate a data envelopment analysis based efficiency score that allows for direct comparison between ex-post efficiency rankings and test the ex-ante relevance of such scores by including them into asset pricing models. We find that knowing the fund efficiency score can help explain time-series returns. When efficiency is included in an asset pricing model, the absolute value of the average mispricing error is decreased, which we take as evidence of the explanatory power of efficiency scores. But more importantly, we show that efficacy scores can be used as next period predictors of stock returns. In addition, we further use the efficiency scores to differentiate between the performance of constrained and unconstrained investment assets, as in the case of socially responsible investments. Our findings give robustness to the literature on constrained investments showing significant underperformance of socially and responsible investments.

Keywords

Mutual funds Performance Data envelopment analysis DEA Risk factors SRI Ethical investing 

References

  1. Ang, A., Chen, J., & Xing, Y. (2006). Downside risk. Review of Financial Studies, 19(4), 1191–1239.CrossRefGoogle Scholar
  2. Ang, J. S., & Chua, J. H. (1979). Composite measures for the evaluation of investment performance. Journal of Financial and Quantitative Analysis, 14(02), 361–384.CrossRefGoogle Scholar
  3. Arditti, F. D. (1975). Skewness and investors’ decisions: a reply. Journal of Financial and Quantitative Analysis, 10(01), 173–176.CrossRefGoogle Scholar
  4. Arditti, F. D., & Levy, H. (1975). Portfolio efficiency analysis in three moments: the multiperiod case. The Journal of Finance, 30(3), 797–809.Google Scholar
  5. Ball, C. A., & Torous, W. N. (1983). A simplified jump process for common stock returns. Journal of Financial and Quantitative analysis, 18(1), 53–65.CrossRefGoogle Scholar
  6. Banker, R. D., Charnes, A., & Cooper, W. W. (1984). Some models for estimating technical and scale inefficiencies in data envelopment analysis. Management Science, 30(9), 1078–1092.CrossRefGoogle Scholar
  7. Barnett, M. L., & Salomon, R. M. (2006). Beyond dichotomy: The curvilinear relationship between social responsibility and financial performance. Strategic Management Journal, 27(11), 1101–1122.CrossRefGoogle Scholar
  8. Basso, A., & Funari, S. (2001). A data envelopment analysis approach to measure the mutual fund performance. European Journal of Operational Research, 135(3), 477–492.CrossRefGoogle Scholar
  9. Basso, A., & Funari, S. (2003). Measuring the performance of ethical mutual funds: A DEA approach. Journal of the Operational Research Society, 54(5), 521–531.CrossRefGoogle Scholar
  10. Basso, A., & Funari, S. (2005). A generalized performance attribution technique for mutual funds. Central European Journal of Operations Research, 13(1), 65.Google Scholar
  11. Basso, A., & Funari, S. (2008). DEA models for ethical and non ethical mutual funds. Mathematical Methods in Economics and Finance, 2(1), 21–40.Google Scholar
  12. Bauer, R., Koedijk, K., & Otten, R. (2005). International evidence on ethical mutual fund performance and investment style. Journal of Banking & Finance, 29(7), 1751–1767.CrossRefGoogle Scholar
  13. Bera, A. K., & Jarque, C. M. (1981). Efficient tests for normality, homoscedasticity and serial independence of regression residuals: Monte Carlo evidence. Economics Letters, 7(4), 313–318.CrossRefGoogle Scholar
  14. Blattberg, R. C., & Gonedes, N. J. (1974). A comparison of the stable and student distributions as statistical models for stock prices. The Journal of Business, 47(2), 244–280.CrossRefGoogle Scholar
  15. Bollen, N. P. (2007). Mutual fund attributes and investor behavior. Journal of Financial and Quantitative Analysis, 42(3), 683. (Renneboog et al. 2005).Google Scholar
  16. Campbell, J. Y., & Hentschel, L. (1992). No news is good news: An asymmetric model of changing volatility in stock returns. Journal of financial Economics, 31(3), 281–318.CrossRefGoogle Scholar
  17. Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of Finance, 52(1), 57–82.CrossRefGoogle Scholar
  18. Chang, K. P. (2004). Evaluating mutual fund performance: An application of minimum convex input requirement set approach. Computers & Operations Research, 31(6), 929–940.CrossRefGoogle Scholar
  19. Charnes, A., Cooper, W. W., & Rhodes, E., (1978, 1979). Measuring the efficiency of decision making units. European Journal of Operational Research, 2(6), 429–444.Google Scholar
  20. Choi, Y. K., & Murthi, B. P. S. (2001). Relative performance evaluation of mutual funds: A non-parametric approach. Journal of Business Finance & Accounting, 28(7–8), 853–876.CrossRefGoogle Scholar
  21. Darling, G., Mukherjee, K., & Wilkens, K. (2004). CTA performance evaluation with data envelopment analysis. Commodity trading advisors: Risk, performance analysis and selection. Hoboken, NJ: Wiley.Google Scholar
  22. Diltz, D. J. (1995). The private cost of socially responsible investing. Applied Financial Economics, 5(2), 69–77.CrossRefGoogle Scholar
  23. Eling, M. (2006). Performance measurement of hedge funds using data envelopment analysis. Financial Markets and Portfolio Management, 20(4), 442–471.CrossRefGoogle Scholar
  24. Fama, E. F. (1965). The behavior of stock-market prices. The Journal of Business, 38(1), 34–105.CrossRefGoogle Scholar
  25. Fama, E. F., & French, K. R. (1992). The cross-section of expected stock returns. The Journal of Finance, 47(2), 427–465.CrossRefGoogle Scholar
  26. Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3–56.CrossRefGoogle Scholar
  27. Fama, E. F., & MacBeth, J. D. (1973). Risk, return, and equilibrium: Empirical tests. The Journal of Political Economy, 81, 607–636.CrossRefGoogle Scholar
  28. Galagedera, D. U., & Silvapulle, P. (2002). Australian mutual fund performance appraisal using data envelopment analysis. Managerial Finance, 28(9), 60–73.CrossRefGoogle Scholar
  29. Geczy, C., Stambaugh, R., & Levin, D. (2005). Investing in socially responsible mutual funds. Available at SSRN 416380.Google Scholar
  30. Gil-Bazo, J., Ruiz-Verdú, P., & Santos, A. A. (2010). The performance of socially responsible mutual funds: The role of fees and management companies. Journal of Business Ethics, 94(2), 243–263.CrossRefGoogle Scholar
  31. Glawischnig, M., & Sommersguter-Reichmann, M. (2010). Assessing the performance of alternative investments using non-parametric efficiency measurement approaches: Is it convincing? Journal of Banking & Finance, 34(2), 295–303.CrossRefGoogle Scholar
  32. Goldreyer, E. F., & Diltz, J. D. (1999). The performance of socially responsible mutual funds: Incorporating sociopolitical information in portfolio selection. Managerial Finance, 25(1), 23–36.CrossRefGoogle Scholar
  33. Gray, J. B., & French, D. W. (1990). Empirical comparisons of distributional models for stock index returns. Journal of Business Finance & Accounting, 17(3), 451–459.CrossRefGoogle Scholar
  34. Gregoriou, G. N. (2003). Performance appraisal of funds of hedge funds using data envelopment analysis. Journal of Wealth Management, 5(4), 88–95.CrossRefGoogle Scholar
  35. Gregoriou, G. N. (2006). Trading efficiency of commodity trading advisors using data envelopment analysis. Derivatives Use, Trading Regulation, 12(1), 102–114.CrossRefGoogle Scholar
  36. Gregoriou, G. N., & Chen, Y. (2006). Evaluation of commodity trading advisors using fixed and variable and benchmark models. Annals of Operations Research, 145(1), 183–200.CrossRefGoogle Scholar
  37. Gregoriou, G. N., & McCarthy, K. (2005). Efficiency of funds of hedge funds: A data envelopment analysis approach. Hedge Funds: Insights in Performance Measurement, Risk Analysis, and Portfolio Allocation. New Jersey: Wiley.Google Scholar
  38. Gregoriou, G. N., Rouah, F., Satchell, S., & Diz, F. (2005). Simple and cross efficiency of CTAs using data envelopment analysis. The European Journal of Finance, 11(5), 393–409.CrossRefGoogle Scholar
  39. Guerard, J. B, Jr. (1997). Additional evidence on the cost of being socially responsible in investing. The Journal of Investing, 6(4), 31–36.CrossRefGoogle Scholar
  40. Hamilton, S., Jo, H., & Statman, M. (1993). Doing well while doing good? The investment performance of socially responsible mutual funds. Financial Analysts Journal, 49, 62–66.CrossRefGoogle Scholar
  41. Hanoch, G., & Levy, H. (1969). The efficiency analysis of choices involving risk. The Review of Economic Studies, 36(3), 335–346.CrossRefGoogle Scholar
  42. Haslem, J., & Scheraga, C. (2003). Data envelopment analysis of Morningstar’s large-cap mutual funds. Journal of Investing, 12(4), 41–48.CrossRefGoogle Scholar
  43. Ho, Y. K., & Cheung, Y. L. (1991). Behaviour of intra-daily stock return on an Asian emerging market-Hong Kong 1. Applied Economics, 23(5), 957–966.CrossRefGoogle Scholar
  44. Jarque, C. M., & Bera, A. K. (1980). Efficient tests for normality, homoscedasticity and serial independence of regression residuals. Economics Letters, 6(3), 255–259.CrossRefGoogle Scholar
  45. Jarque, C. M., & Bera, A. K. (1987). A test for normality of observations and regression residuals. International Statistical Review/Revue Internationale de Statistique, 55, 163–172.Google Scholar
  46. Jensen, M. C. (1968). The performance of mutual funds in the period 1945–1964. The Journal of Finance, 23(2), 389–416.CrossRefGoogle Scholar
  47. Joro, T., & Na, P. (2006). Portfolio performance evaluation in a mean-variance-skewness framework. European Journal of Operational Research, 175(1), 446–461.CrossRefGoogle Scholar
  48. Kane, A. (1982). Skewness preference and portfolio choice. Journal of Financial and Quantitative Analysis, 17(01), 15–25.CrossRefGoogle Scholar
  49. Kraus, A., & Litzenberger, R. H. (1976). Skewness preference and the valuation of risk assets. The Journal of Finance, 31(4), 1085–1100.Google Scholar
  50. Kon, S. J. (1984). Models of stock returns–A comparison. The Journal of Finance, 39(1), 147–165.Google Scholar
  51. Kurtz, L. (1997). No effect, or no net effect? Studies on socially responsible investing. The Journal of Investing, 6(4), 37–49.CrossRefGoogle Scholar
  52. Kurtz, L., & DiBartolomeo, D. (1996). Socially screened portfolios: An attribution analysis of relative performance. The Journal of Investing, 5(3), 35–41.CrossRefGoogle Scholar
  53. Lau, A. H. L., Lau, H. S., & Wingender, J. R. (1990). The distribution of stock returns: New evidence against the stable model. Journal of Business & Economic Statistics, 8(2), 217–223.Google Scholar
  54. Leland, H. E. (1999). Beyond mean-variance: Performance measurement in a nonsymmetrical world. Financial analysts journal, 27–36.Google Scholar
  55. Lim, S., Oh, K. W., & Zhu, J. (2014). Use of DEA cross-efficiency evaluation in portfolio selection: An application to Korean stock market. European Journal of Operational Research, 236(1), 361–368.CrossRefGoogle Scholar
  56. Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. The Review of Economics and Statistics, 47(1), 13–37.CrossRefGoogle Scholar
  57. Mandelbrot, B. (1963). The stable Paretian income distribution when the apparent exponent is near two. International Economic Review, 4(1), 111–115.CrossRefGoogle Scholar
  58. Markowitz, H. (1952). Portfolio selection*. The Journal of Finance, 7(1), 77–91.Google Scholar
  59. Markowitz, H. (1959). Portfolio selection: Efficient diversification of investments (No. 16). New Haven: Yale University Press.Google Scholar
  60. McMullen, P. R., & Strong, R. A. (1998). Selection of mutual funds using data envelopment analysis. Journal of Business and Economic Studies, 4(1), 1–12.Google Scholar
  61. Morey, M. R., & Morey, R. C. (1999). Mutual fund performance appraisals: A multi-horizon perspective with endogenous benchmarking. Omega, 27(2), 241–258.CrossRefGoogle Scholar
  62. Moskowitz, M. (1972). Choosing socially responsible stocks. Business and Society Review, 1(1), 71–75.Google Scholar
  63. Murthi, B. P. S., Choi, Y. K., & Desai, P. (1997). Efficiency of mutual funds and portfolio performance measurement: A non-parametric approach. European Journal of Operational Research, 98(2), 408–418.CrossRefGoogle Scholar
  64. Praetz, P. D. (1972). The distribution of share price changes. Journal of Business, 45, 49–55.CrossRefGoogle Scholar
  65. Press, S. J. (1967). A compound events model for security prices. Journal of Business, 40, 317–335.CrossRefGoogle Scholar
  66. Renneboog, L., Ter Horst, J., & Zhang, C. (2008). The price of ethics and stakeholder governance: The performance of socially responsible mutual funds. Journal of Corporate Finance, 14(3), 302–322.CrossRefGoogle Scholar
  67. Sauer, D. A. (1997). The impact of social-responsibility screens on investment performance: Evidence from the Domini 400 Social Index and Domini Equity Mutual Fund. Review of Financial Economics, 6(2), 137–149.CrossRefGoogle Scholar
  68. Sharpe, W. F. (1966). Mutual fund performance. The Journal of Business, 39(1), 119–138.CrossRefGoogle Scholar
  69. Simkowitz, M. A., & Beedles, W. L. (1980). Asymmetric stable distributed security returns. Journal of the American Statistical Association, 75(370), 306–312.CrossRefGoogle Scholar
  70. Smith, J. B. (1981). The probability distribution of market returns: A logistic hypothesis. Doctoral dissertation, Graduate School of Business, University of Utah.Google Scholar
  71. So, J. C. (1987). The distribution of foreign exchange price changes: Trading day effects and risk measurement-A comment. The Journal of Finance, 42(1), 181–188.Google Scholar
  72. Statman, M. (2000). Socially responsible mutual funds. Financial Analysts Journal, 56, 30–39.CrossRefGoogle Scholar
  73. Tobin, J. (1958). Liquidity preference as behavior towards risk. The review of economic studies, 25(2), 65–86.CrossRefGoogle Scholar
  74. Treynor, J. L. (1965). How to rate management of investment funds. Harvard Business Review, 43, 63–75.Google Scholar
  75. Turner, A. L., & Weigel, E. J. (1992). Daily stock market volatility: 1928–1989. Management Science, 38(11), 1586–1609.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  • J. Francisco Rubio
    • 1
  • Neal Maroney
    • 1
  • M. Kabir Hassan
    • 1
  1. 1.Central Connecticut State UniversityNew BritainUSA

Personalised recommendations