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Return-based Style Analysis with Time-varying Exposures

  • Laurens Swinkels, Pieter Jelle VanDerSluis

This paper focuses on the estimation of mutual fund styles by return-based style analysis. Usually, the investment style is assumed to be either constant through time, or time variation is implicitly accounted for by using rolling regressions. The former assumption is often contradicted by data analysis, and the latter is inefficient due to its ad hoc chosen window size. We propose to use the Kalman filter to explicitly model time-varying exposures of mutual funds. This leads to a testable model and more efficient use of the data, which reduces the influence of spurious correlation between mutual fund returns and style indices.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 125.

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Date of creation: 01 Apr 2001
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Handle: RePEc:sce:scecf1:125
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  1. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-26, May.
  2. Ter Horst, J.R. & Nijman, T.E. & de Roon, F.A., 2004. "Evaluating style analysis," Other publications TiSEM 8a501733-7a06-4399-8a43-0, Tilburg University, School of Economics and Management.
  3. 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.
  4. Josef Lakonishok & Andrei Shleifer & Richard Thaler & Robert Vishny, 1991. "Window Dressing by Pension Fund Managers," NBER Working Papers 3617, National Bureau of Economic Research, Inc.
  5. ter Horst, Jenke R. & Nijman, Theo E. & de Roon, Frans A., 2004. "Evaluating style analysis," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 29-53, January.
  6. Siem Jan Koopman & Neil Shephard & Jurgen A. Doornik, 1999. "Statistical algorithms for models in state space using SsfPack 2.2," Econometrics Journal, Royal Economic Society, vol. 2(1), pages 107-160.
  7. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  8. Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, vol. 36(1), pages 3-27, August.
  9. repec:ner:tilbur:urn:nbn:nl:ui:12-123840 is not listed on IDEAS
  10. Fisher, Lawrence & Kamin, Jules H., 1985. "Forecasting Systematic Risk: Estimates of “Raw” Beta that Take Account of the Tendency of Beta to Change and the Heteroskedasticity of Residual Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(02), pages 127-149, June.
  11. Alexander, Gordon J. & Benson, P. George & Eger, Carol E., 1982. "Timing Decisions and the Behavior of Mutual Fund Systematic Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(04), pages 579-602, November.
  12. Durbin, James & Koopman, Siem Jan, 2001. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, number 9780198523543, March.
  13. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-80.
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