Abstract
Data envelopment analysis has been applied in a number of papers to measure the performance of mutual funds, besides a great many applications on the more diverse fields of performance evaluation. The data envelopment analysis models proposed in the mutual funds literature do not generally set restrictions on the weights assigned to the input and output variables. In this paper, we study the effects of the introduction of different weight restrictions on the results of the performance evaluation of mutual funds. In addition, we provide a unified matrix representation for three widely used approaches on weight restrictions: virtual weight restrictions with constraints on all decision-making units (DMUs) (on all funds); virtual weight restrictions with constraints only on the target unit; assurance regions. Using the unified matrix representation of the weights constraints, we formulate the data envelopment analysis (DEA ) efficiency model and express the efficient frontier in a unified way for the different weight restrictions considered. We investigate the effects of the different weight restrictions on the performance evaluation by means of an empirical application on a set of European mutual funds. Moreover, we study the behaviour of the fund performance scores as the restrictions on the weights become increasingly strict.
Highlights
We study the effects of the introduction of different weight restrictions on the results of the performance evaluation of mutual funds
In the last two decades, the data envelopment analysis (DEA) methodology has been applied in different ways to measure the performance of mutual funds, besides a great many applications on the more diverse fields of performance evaluation
This fundamental feature of the DEA approach allows for highlighting the input and output variables that put in the best light the units examined, but it may sometimes lead to some drawbacks in the performance evaluation process
Summary
In the last two decades, the data envelopment analysis (DEA) methodology has been applied in different ways to measure the performance of mutual funds, besides a great many applications on the more diverse fields of performance evaluation (more than 10,000 journal articles have been published on DEA; for a recent review, see [1]). We study the effects of the introduction of different weight restrictions on the results of the performance evaluation of mutual funds. Virtual weight restrictions with constraints on all decision-making units (DMUs) (see Sections 3.1 and 4.1); virtual weight restrictions with constraints only on the target DMU (see Sections 3.1 and 4.2); weight restrictions with assurance regions (see Sections 3.2 and 5) This unified matrix representation enables us to formulate the DEA efficiency model and to express the efficient frontier in a unified way for the models with the different weight restrictions considered (Section 6). The effects of the different weight restrictions on the performance evaluation of mutual funds are analyzed by carrying out an empirical application on a set of 312 European mutual funds.
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