The paper aims to examine the performance of Spanish mutual funds between 1999 and 2003.
The methodolgy uses the stochastic discount factor (SDF) framework across a variety of models developed in the recent asset pricing literature. This approach is a fairly recent innovation in the evaluation of investment performance.
The present work complements the research of Farnworth et al. and Fletcher and Forbes, adding a new issue to the SDF, the third co‐moment of asset returns. Recent asset pricing studies show the relevance of the component of an asset's skewness related to the market portfolio's skewness, the coskewness, and how it helps to explain the time‐variation of ex‐ante market risk premiums. It is found that the effects of adding coskewness to evaluate the performance is significant even when factors based on size, book‐to‐market and momentum are included.
The omission of a coskewness factor may lead to erroneous evaluations of a fund's performance, and therefore, issues such as the persistence of performance should be revised.
This paper explores, for the first time, the effects of incorporating a coskewness factor in the analysis of investment performance, both in an unconditional and a conditional framework using SDF models.
