Evaluation Of Chinese Money Funds’ Performance Based On Value At Risk (VaR) Method

The money funds in China have experienced a very rapid growth in the past few years and it has become a favorable investment tools for many small investors. However, choosing a money fund with a highly and excellent performance is a time consuming and costly process. The primary objective of this paper is to examine the accuracy of Value at Risk (VaR) model with the Cornish-Fisher expansion as a risk indicator that can be used to evaluate the performance of funds.This paper evaluates the performance of twenty sample funds for the period between2007to2011using three indices for measurement. Generally, Sharpe Index is the best measurement to evaluate the Chinese funds performance, but it still has some limitations while the averages of returns are not normally distributed. After conducting a simple regression we found that there is a positive and strong relationship between the average daily returns with standard deviation and VaR as risk indicators. From the normality test, we found that the averages of the daily return from twenty sample funds are not normally distributed. Thus, the use of standard deviation as risk indicator will lead to the bias results.In order to avoid this problem, we modified the traditional Sharpe Index into adjusted Sharpe Index with VaR method. Furthermore, we also applied Cornish-Fisher expansion into VaR calculation to get the better results. In order to assess whether the methods used to evaluate the funds performance are reliable or not, we also conducted back test. The back test is used to assess the accuracy of VaR model modified with Cornish-Fisher expansion approach, and the result of back testing reveals that the VaR model modified with Cornish-Fisher expansion approach could generate accurate risk estimation to the majority of sample funds. After analyzing the data collected, this paper observes that the most outstanding fund from twenty samples of Chinese money funds according to adjusted Sharpe Index with VaR method is the Da Mo Hua Xin Huo Bi fund.