Application of Multifactor Conditional CAPM Model in the Evaluation of Mutual Fund Performance

We explore the added value of introducing extra variables such as size, book to market, momentum. In addition to that we evaluate the use of introducing time-variation in betas and alpha. The search for the most suitable model to measure mutual fund performance will be addressed along two lines. First, we are interested in the statistical significance of adding more factors to the single factor model. Second, we focus on the economic importance of more elaborate model specification.The result is that unconditional CAPM is inferior than the conditional CAPM. The four factor conditional CAPM which include the momentum can best interpret the mutual fund performance.