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Evaluating style analysis

  • ter Horst, Jenke R.
  • Nijman, Theo E.
  • de Roon, Frans A.

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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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 11 (2004)
Issue (Month): 1 (January)
Pages: 29-53

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Handle: RePEc:eee:empfin:v:11:y:2004:i:1:p:29-53
Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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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, vol. 55(4), pages 1655-1703, 08.
  2. Treynor, Jack L & Black, Fischer, 1973. "How to Use Security Analysis to Improve Portfolio Selection," The Journal of Business, University of Chicago Press, vol. 46(1), pages 66-86, January.
  3. Nijman, T.E. & de Roon, F.A., 2001. "Testing for mean-variance spanning : A survey," Other publications TiSEM 0159f80a-c61b-4519-b004-a, Tilburg University, School of Economics and Management.
  4. DeRoon, Frans A. & Nijman, Theo E., 2001. "Testing for mean-variance spanning: a survey," Journal of Empirical Finance, Elsevier, vol. 8(2), pages 111-155, May.
  5. Kim, Tae-Hwan & White, Halbert & Stone, Douglas, 2000. "Asymptotic and Bayesian Confidence Intervals for Sharpe Style Weights," University of California at San Diego, Economics Working Paper Series qt5h98h28m, Department of Economics, UC San Diego.
  6. Huberman, Gur & Kandel, Shmuel & Stambaugh, Robert F, 1987. " Mimicking Portfolios and Exact Arbitrage Pricing," Journal of Finance, American Finance Association, vol. 42(1), pages 1-9, March.
  7. Ter Horst, J.R. & Nijman, T.E. & de Roon, F.A., 1998. "Performance analysis of international mutual funds incorporating market frictions," Discussion Paper 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, vol. 67(6), pages 1341-1384, November.
  9. Jobson, J D & Korkie, Bob, 1984. " On the Jensen Measure and Marginal Improvements in Portfolio Performance: A Note," Journal of Finance, American Finance Association, vol. 39(1), pages 245-51, March.
  10. Brown, Stephen J. & Goetzmann, William N., 1997. "Mutual fund styles," Journal of Financial Economics, Elsevier, vol. 43(3), pages 373-399, March.
  11. Cumby, Robert E & Glen, Jack D, 1990. " Evaluating the Performance of International Mutual Funds," Journal of Finance, American Finance Association, vol. 45(2), pages 497-521, June.
  12. 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, vol. 10(2), pages 275-302.
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