Mohamed A. Ayadi

Portfolio performance sensitivity for various asset-pricing kernels

This paper examines the sensitivity of various measures of portfolio performance to the choice of the benchmark model using the asset-pricing kernel methodology. It derives the appropriate estimation frameworks that are suitable to perform evaluations of fixed-weight and dynamic portfolio strategies. Various asset-pricing kernel-based benchmark models are tested using a comprehensive sample of Canadian equity mutual funds over the period, 1989-1999. The performance statistics and inferences are sensitive to the choice of the kernel-based benchmark model and to the choice of liquidity as an alternative sorting variable for forming the passive benchmark portfolios. However, they are robust to the removal of ex post index mimickers and somewhat less robust to the presence of nonlinearities in the structure of the pricing kernel. Since conditioning has a more pronounced impact on absolute than on relative performance inferences, this supports the common industry practice of comparing the performance of funds against each other.

Corporate Social Responsibility, Corporate Governance, and Managerial Risk-Taking

This paper investigates the association between corporate social responsibility (CSR) and managerial risk-taking, as well as the differences in governance structure that affect this association. Using a sample of US public firms, we find that firms with strong CSR records engage in higher risk-taking. Furthermore, we find that accounting for differences in governance structure substantially accentuates this relationship. Prior literature establishes that high managerial risk-tolerance is necessary for the undertaking of risky yet profitable investment decisions. Thus, these findings suggest that CSR, rather than being a waste of scarce corporate resources, is instead an important aspect of shareholder value creation. They contribute to the debate on CSR by documenting that corporate risk-taking is one mechanism among others through which CSR maps into higher firm value.

Canadian Socially Responsible Investment Mutual Funds Performance Evaluation Using Data Envelopment Analysis

Socially responsible investment (SRI) mutual funds, which rely on social, environmental and ethical considerations in the investment decision-making process, have experienced significant growth over the past 20 years worldwide. This chapter examines the performance, over the 2008–2011 period, of a survivorship bias-free sample of 85 Canadian SRI funds, using a Data Envelopment Analysis (DEA) approach. This technique does not require the specification of benchmarks and allows measuring the relative efficiency of decision making units/funds in the presence of a multiple input-output setting. Various performance indicators or efficiency scores are derived using higher-order moments and tail-risk measures, fee structures, net returns, and fund size. The results confirm the suitability of the DEA-based performance setting and suggest that front-end loads and fund size are the main causes of the inefficiency of Canadian SRI mutual funds. These findings carry important implications for the fund-selection process and performance persistence, and would be of interest to regulators, practitioners, and institutional and individual investors.

A Stochastic Discount Factor-Based Approach for Fixed-Income Mutual Fund Performance Evaluation

A general asset pricing framework is used to derive a conditional nonlinear asset pricing kernel that accounts efficiently for time variation in expected returns and risk, and is suitable to perform (un)conditional evaluations of fixed-weight and dynamic investment strategies. The negative abnormal unconditional performance of Canadian fixed-income mutual funds over the period 1985 – 2000 weakly improves with conditioning. The unconditional-based superior performance of larger over smaller funds that weakens with limited conditioning is somewhat alleviated with an expansion of the conditioning set.

A dynamic program for valuing corporate securities

We design and implement a dynamic program for valuing corporate securities, seen as derivatives on a firm’s assets, and computing the term structure of yield spreads and default probabilities. Our setting is flexible for it accommodates an extended balance-sheet equality, arbitrary corporate debts, multiple seniority classes, and a reorganization process. This flexibility comes at the expense of a minor loss of efficiency. The analytical approach proposed in the literature is exchanged here for a quasi-analytical approach based on dynamic programming coupled with finite elements. To assess our construction, which shows flexibility and efficiency, we carry out a numerical investigation along with a complete sensitivity analysis.

Performance appraisal of international equity mutual funds

This study provides a comprehensive empirical analysis of the performance of a large sample of 1,471 Canadian international equity mutual funds over the period 1988-2008. We find that the performance statistics are sensitive to the selected benchmark model and conditional specification. Fund selectivity underperformance is partially explained by higher expenses. Bootstrap tests reveal a substantial number of significantly skilled funds in the right tail of the cross-sectional distribution.

Robust Measures of Hybrid Emerging Market Mutual Funds Performance

This chapter uses the fundamental asset pricing theorem to derive new conditional stochastic discount factor-based performance measures. The proposed setting is suitable to perform (un)conditional evaluations of fixed-weight and dynamic strategies of hybrid emerging market mutual funds. The empirical framework and the associated performance statistical tests in a GMM framework are also developed and discussed.

Mutual Fund Performance Measurement with Nonlinear Stochastic Discount Factors

Mutual fund returns exhibit a nonlinear structure due to investment restrictions, and the use of option(-like) and dynamic trading strategies. SDF-based nonlinear risks are priced in the cross-section for Canadian equity mutual funds for 1988-2008. Improvement in the significantly negative unconditional performances for individual funds and portfolios with the use of conditional nonlinear SDF-based benchmarks is altered somewhat with the addition of a pricing restriction on the SDF mean. Risk-adjusted performance is related to management fees and fund (no) loads, and unrelated to fund age and size. These results have implications for the availability of scale economies and levels of competition in Canadian versus other mutual fund markets.