DEA Approach To Evaluate The Performance Of Investment Fund Based On Higher Moments Volatility Characteristics

With the fast development of the securities market, the China securities fundshave become larger and more various, which have become important institutionalinvestors in the stock market. And, the research of funds performance evaluation arebecoming an important topic in the field of financial engineering. It is essential tofound a scientific and objective method of funds performance evaluation. Thetraditional methods of funds performance evaluation, such as Sharpe, Treynor andJensen, which are based on CAPM models, are limited in a numble of ways. The keypoint is that the higher moment of the assets return was typically neglected. However,a great amount of research, both theoretical and empirical, has supported the existenceof nonnormality of portfolio return and that the higher moment of the return hasplayed an important role in the investment utility. This has led to widespreadsuspicion of the valid for the traditional evaluation methodology. So, this paperexpects to propose a more effective performance evaluation method.Firstly, the paper reviews and summarizes the foreign and domestic research onfunds performance. Meanwhile, the traditional methods of performance evaluationand their theoretical basis are introduced in the paper and the limitations in theapplication are also analyzed. Then, to solve these problems, the higher momentcharacteristics of the assets return are described, including the role in the investors’utility. The research indicates that the higher moments are important factors on fundsperformance evaluation. Based on higher moments characteristics, I represent a newperformance evaluation models with data envelopment analysis (DEA).Finally, this paper choose27open-end funds, which have become the mainstream in China funds market, as samples of empirical research. The performance ofthe27funds are evaluated in the consideration of higher moments. The results showthat the evaluation score is related to the utility preference of the investors; and theprojection analysis of funds provide the direction and extent of adjustment fornon-efficient funds to improve their performance; on the other hand, comparing theDEA method in higher moments framework to three traditional indexes, thecorrelations with Sharpe index and Treynor index are significant, but not with Jensenindex; this paper also anlysis the abilities of funds to avoid the risk and seizeopportunities, via evaluate the performance of funds in different market trends. In general, the results of funds performance evaluation in higher momentsframework are more realistic and consistent with the investors’ preference.Summarising the results of empirical research and also cosidering the current trend offunds performance evaluation, the paper proposed the focus and directions of futureresearch.