Performance Evaluation of Investment Funds with DEA and Higher Moments Characteristics: Financial Engineering Perspective

With the development of funds market, the research of funds performance evaluation are becoming an important topic in the field of financial engineering. In the previous research, performance evaluation of investment funds was based on some typical hypothesis, and higher moment of the assets return was mostly neglected. However, a great amount of research, both theoretical and empirical, has supported the existence of nonnormality of portfolio return and the important role of higher moments of return in the investors’ utility. This has led to widespread suspicion of the validity of the traditional evaluation methodology. In this paper, data envelopment analysis (DEA) is used to evaluate the performance of the funds in the consideration of higher moments. The results show that the evaluation score is related to the utility preference of the investors, which indicates that the evaluation results are more realistic and consistent with the investors’ preference. © 2011 Published by Elsevier Ltd. Selection and peer-review under responsibility of Desheng Dash Wu