Biases in Decomposing Holding-Period Portfolio Returns

Posted: 19 Sep 2008

See all articles by Weimin Liu

Weimin Liu

Nottingham University Business School

Norman C. Strong

University of Manchester - Alliance Manchester Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 2008

Abstract

A growing number of studies in finance decompose multiperiod portfolio returns into a series of single-period returns, using these to test asset pricing models or market efficiency or to evaluate the returns to investment strategies such as those based on momentum, size, and value-growth. We provide a formal analysis of the decomposition method. Crucially, we argue and present empirical evidence that some methods researchers use involve portfolios that nobody would seriously consider ex ante, that transactions costs associated with such portfolios make them poor investment vehicles, and that they can lead to spurious statistical inferences.

Keywords: G10

Suggested Citation

Liu, Weimin and Strong, Norman Charles, Biases in Decomposing Holding-Period Portfolio Returns (September 2008). The Review of Financial Studies, Vol. 21, Issue 5, pp. 2243-2274, 2008. Available at SSRN: https://ssrn.com/abstract=1270456 or http://dx.doi.org/hhl034

Weimin Liu (Contact Author)

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Norman Charles Strong

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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