FIN-03-005 |
NYU Stern School of Business |
January 2003
Walter Boudry, Anthony W. Lynch and Jessica Wachter
ABSTRACT
Conditional factor models allow both risk loadings and performance over a period to be a func-
tion of information available at the start of the period. Much of the literature to date has allowed
risk loadings to be time-varying while imposing the assumption that conditional performance is
constant. We develop a new methodology that allows conditional performance to be a function
of information available at the start of the period. This methodology uses the Euler equation
restriction that comes out of the factor model rather than the beta pricing formula itself. The
Euler equation restrictions that we develop can be estimated using GMM. It is also possible to
allow the factor returns to have longer data series than the mutual fund series as in Stambaugh
(1997). We use our method to assess the conditional performance of funds in the Elton, Gruber
and Blake (1996) mutual fund data set. Using dividend yield to track the business cycle, we nd
that conditional mutual fund performance moves with the business cycle, with all fund types except
growth performing better in downturns than in peaks. The converse holds for growth funds, which
do better in peaks than in downturns.
Walter Boudry
Institution: Leonard N. Stern School of Business, New York University
Email: wboudry@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~wboudry
Anthony W. Lynch
Institution: Leonard N. Stern School of Business, New York University
Telephone: (212) 998-0350
Fax: (212) 995-4233
Email: alynch@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~alynch
Jessica Wachter
Institution: Leonard N. Stern School of Business, New York University
Telephone: (212) 998-0779
Fax: (212) 995-4233
Email: jwachter@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~jwachter
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