Essay About Fund Performance Measures And Finance Literature

Different Risk-Adjusted Fund Performance Measures – a Comparison
Different Risk-Adjusted Fund Performance Measures – a Comparison
Referee Report for Economics
Manuscript # 385
“Different Risk-Adjusted Fund Performance Measures: A Comparison”
Summary
This paper compares various risk-adjusted performance measures for a set of mutual funds.
The authors argue that performance measures based on Value-at-Risk (VaR) or Extreme Value
Theory (EVT) are more appropriate than other popular performance measures such as the
Sharpe ratio (SR), the Treynor index (TI) or Jensen´s Alpha (JA) . They propose a performance
index similar to the SR and the TI based on losses calculated by means of VaR together with
EVT. They find that EVT-VaR measures are more appropriate in the presence of non-normal
data.
Main Comments
The topic of the paper is of relevance for financial practitioners as well as academics and it is
certainly applicable to the current financial stability context. The paper is also generally wellwritten.
However, I have some comments for its improvement.
1. The contribution of the paper is not clearly stated. In the 6th paragraph of the
introduction, the authors suggest that their main contribution is the construction of a
performance index based on EVT-VAR. However, it is not very clear why the new
proposed measure should be better in relation to existing measures as it is now
explained. It is true that VaR or EVT should be more reliable measures for extreme
events but when looking at formula (13) it is not apparent why this measure should be
more reliable than the traditional measures. The denominator has, in fact, an “extreme
return” as opposed to the SR or TI which have strictly second moments, so it is not very
straight forward to relate these measures. A better job should be done at explaining the
implications of such VaR based measure, how it relates to other measures and why it
should be better.
2. Why have the measures been compared only in a “static” way? It is widely known in the
finance literature that asset return volatility is time-varying, and to some extent, also
expected returns. It would be possible to go around the latter by arguing market
efficiency (which is also questionable) but it is certainly much more difficult to argue
against time-variability of the standard deviation in the VaR measures (or in the SA and
TI ratios). This is very important as the “good” or “bad” applicability of a particular
performance measure could be sample dependent and as it is now with unconditional
measures, this is hard to uncover. For instance, while the authors account for nonnormality
of returns in the modified-VaR measure by means of a Corner-Fisher quantile,
they assume a constant standard deviation which means that in periods of high volatility
they could still understate the VaR. So at the minimum, the performance comparisons
should be done for the full sample and different sub-samples and it should be tested
whether the measures obtained are significantly different over different samples.
3. The authors concentrate on top 10 and bottom 10 funds for their analysis and discarded
the other funds “for the sake of simplicity”. However, by choosing only the “tail” funds,