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Evaluating style analysis

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  • Horst, J.R. ter

    (Tilburg University)

  • Nijman, T.E.

    (Tilburg University)

  • Roon, F.A. de

    (Tilburg University)

Abstract

In this Paper we evaluate (return based) style analysis. The portfolio and positivity constraints imposed by style analysis are useful in constructing mimicking factor portfolios without short positions. We use a simple simulation experiment to show that imposing these constraints in estimating the factor portfolios leads to significant efficiency gains, if the factor loadings are indeed positively weighted portfolios. If this is not the case though, imposing the constraints can substantially bias the exposure estimates. We also show that the actual portfolio holdings will in general not reveal the actual investment style of a fund because of cross exposures between the asset classes, and because fund managers may hold securities that on average do not have a beta of one relative to their own asset class. Style analysis may be used to determine a benchmark portfolio for performance measurement. If the actual exposures are a positively weighted portfolio and if the risk free rate is one of the benchmarks, then the intercept coincides with the Jensen measure. In general, the intercept in the style regression can only be interpreted as a special case of the familiar Jensen measure.

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Bibliographic Info

Paper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-123840.

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Date of creation: 2004
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Publication status: Published in Journal of Empirical Finance (2004) v.11, p.29-53
Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-123840

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Web page: http://www.tilburguniversity.edu/

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  1. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, American Finance Association, vol. 55(4), pages 1655-1703, 08.
  2. Nijman, T.E. & Roon, F.A. de, 2001. "Testing for mean-variance spanning: A survey," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-87531, Tilburg University.
  3. Cumby, Robert E & Glen, Jack D, 1990. " Evaluating the Performance of International Mutual Funds," Journal of Finance, American Finance Association, American Finance Association, vol. 45(2), pages 497-521, June.
  4. Brown, Stephen J. & Goetzmann, William N., 1997. "Mutual fund styles," Journal of Financial Economics, Elsevier, Elsevier, vol. 43(3), pages 373-399, March.
  5. Tae-Hwan Kim, 2005. "Asymptotic and Bayesian Confidence Intervals for Sharpe-Style Weights," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(3), pages 315-343.
  6. Elton, Edwin J & Gruber, Martin J & Blake, Christopher R, 1996. "The Persistence of Risk-Adjusted Mutual Fund Performance," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 69(2), pages 133-57, April.
  7. Horst, J.R. ter & Nijman, T.E. & Roon, F.A. de, 1998. "Performance analysis of international mutual funds incorporating market frictions," Discussion Paper, Tilburg University, Center for Economic Research 1998-51, Tilburg University, Center for Economic Research.
  8. Donald W. K. Andrews, 1999. "Estimation When a Parameter Is on a Boundary," Econometrica, Econometric Society, Econometric Society, vol. 67(6), pages 1341-1384, November.
  9. Fung, William & Hsieh, David A, 1997. "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 10(2), pages 275-302.
  10. Huberman, Gur & Kandel, Shmuel & Stambaugh, Robert F, 1987. " Mimicking Portfolios and Exact Arbitrage Pricing," Journal of Finance, American Finance Association, American Finance Association, vol. 42(1), pages 1-9, March.
  11. Jobson, J D & Korkie, Bob, 1984. " On the Jensen Measure and Marginal Improvements in Portfolio Performance: A Note," Journal of Finance, American Finance Association, American Finance Association, vol. 39(1), pages 245-51, March.
  12. Treynor, Jack L & Black, Fischer, 1973. "How to Use Security Analysis to Improve Portfolio Selection," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 46(1), pages 66-86, January.
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Cited by:
  1. Renneboog, L.D.R. & Horst, J.R. ter & Zhang, C., 2007. "Socially Responsible Investments: Methodology, Risk and Performance," Discussion Paper, Tilburg University, Center for Economic Research 2007-31, Tilburg University, Center for Economic Research.
  2. Lau, Wee Yeap & Chan, Tze-Haw, 2004. "Does Misclassification of Equity Funds Exist? Evidence from Malaysia," MPRA Paper 2029, University Library of Munich, Germany, revised 2005.
  3. Enrique Sentana, 2009. "The econometrics of mean-variance efficiency tests: a survey," Econometrics Journal, Royal Economic Society, Royal Economic Society, vol. 12(3), pages C65-C101, November.
  4. Arjen Siegmann & Andr� Lucas, 2002. "Explaining Hedge Fund Investment Styles by Loss Aversion," Tinbergen Institute Discussion Papers, Tinbergen Institute 02-046/2, Tinbergen Institute.
  5. Swinkels, L.A.P. & Sluis, P.J. van der, 2001. "Return-Based Style Analysis with Time-Varying Exposures," Discussion Paper, Tilburg University, Center for Economic Research 2001-96, Tilburg University, Center for Economic Research.
  6. Beck, Thorsten & De Jonghe, Olivier, 2013. "Lending concentration, bank performance and systemic risk : exploring cross-country variation," Policy Research Working Paper Series 6604, The World Bank.
  7. Geetesh Bhardwaj & Gary B. Gorton & K. Geert Rouwenhorst, 2008. "Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors," NBER Working Papers 14424, National Bureau of Economic Research, Inc.
  8. Renneboog, L.D.R. & Horst, J.R. ter & Zhang, C., 2007. "Socially Responsible Investments: Methodology, Risk Exposure and Performance," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2007-013, Tilburg University, Tilburg Law and Economic Center.
  9. Ferruz Agudo, Luis & Vicente Gimeno, Luis A., 2005. "Are Style Factors exclusive, exhaustive and independent in Spanish Domestic Equity Funds?/¿Son los factores de estilo exclusivos, exhaustivos e independientes en los fondos de inversión españoles d," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 23, pages 495-506, Agosto.

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