Evaluating style analysis
AbstractIn this paper we evaluate applications of (return based) style analysis.The portfolio and positivity constraints imposed by style analysis are useful in constructing mimicking portfolios without short positions.Such mimicking portfolios can be used, e.g., to construct efficient portfolios of mutual funds with desired factor loadings if the factor loadings in the underlying factor model are positively weighted portfolios.Under these conditions style analysis may also be used to determine a benchmark portfolio for performance measurement. Attribution of the returns on portfolios of which the actual composition is unobserved to speciffic asset classes on the basis of return based style analysis is attractive if moreover there are no additional cross exposures between the asset classes and if fund managers hold securities that on average have a beta of one relative to their own asset class.If such restrictions are not met, and in particular if the factor loadings do not generate a positively weighted portfolio, the restrictions inherent in return based style analysis distort the outcomes of standard regression approaches rather than that the analysis is improved.The size of the distortions is illustrated by considering empirical results on style analysis of US mutual funds.
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Bibliographic InfoPaper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-123840.
Date of creation: 2004
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Publication status: Published in Journal of Empirical Finance (2004) v.11, p.29-53
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Other versions of this item:
- Roon, F.A. de & Nijman, T.E. & Horst, J.R. ter, 2000. "Evaluating Style Analysis," Discussion Paper 2000-64, Tilburg University, Center for Economic Research.
- de Roon, Frans & Nijman, Theo E & ter Horst, Jenke, 2002. "Evaluating Style Analysis," CEPR Discussion Papers 3181, C.E.P.R. Discussion Papers.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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