Asset Pricing Model Fit for Canadian Mutual Funds

Abstract

Asset pricing models have been used extensively in studies to predict fund performance. However, my motivation is to test which asset pricing model is the best to evaluate mutual fund performance in Canada. In addition, I identify whether there is any difference in model performance before and after Covid-19. The competing models are the Capital Asset Pricing Model of Sharp and Lintner, Fama and French’s Three-Factor Pricing Model, Carhart’s Four-Factor Pricing Model, and Fama and French’s Five- and Six-Factor Pricing Models. I compare frequently employed factor models using Gibbons, Ross and Shanken's methodology. I find that the Fama French Six-Factor Model is the best model for the entire period including post-Covid-19. It also performs best for all types of funds and equity funds in the pre-Covid-19 period. However, the CAPM emerges as the best performer for bond funds, and the FF5 best explains the mixed asset fund performance for pre-Covid-19.