Financial Crisis, Intervention and Performance Measurement

Abstract

Aspects of the financial markets that became apparent in the 2008 crisis were exacerbated by the intervention of monetary authorities. Financial markets under stress validate the general concept of Prospect Theory, under certain assumptions about the distributional characteristics of asset returns. This validation points to the need for re-examining performance metrics, such as the Sharpe Ratio and the Information Ratio. This analysis proposes new ratios that accommodate a higher moment of the portfolio return distribution. This alteration is reflected by the qualitative analysis of investment managers, which is performed by the performance evaluation industry, as it pertains to fixed income.