Performance Attribution using an APT with Prespecified Macrofactors and Time-Varying Risk Premia and Betas

Abstract

This paper assesses the selection and timing abilities of 130 equity mutual funds using a conditional APT model with specified macrofactors, and time-varying risk premia and betas. For all fund categories based on investment objectives, a significant proportion of the funds exhibits negative abnormal asset selection performance based on the unconditional Jensen (1968) alpha, and a reduced proportion of the funds in each category attempts to time the realizations of the macrofactors (including those captured by the residual market factor). The average selection performance of the mutual funds improves and the proportion of funds attempting to time macrofactor realizations declines when measured using the asset selection and factor-timing models with time-varying risk premia and betas.