Return-Based Style Analysis with Time-Varying Exposures

European Journal of Finance, Vol. 12, Issues 6-7, pp. 529-552, 2006

Posted: 2 Nov 2008

See all articles by Laurens Swinkels

Laurens Swinkels

Erasmus University Rotterdam (EUR); Robeco Asset Management - Quantitative Investing

Pieter Jelle van der Sluis

APG Asset Management, GTAA Fund; Free University of Amsterdam

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2006

Abstract

This paper focuses on the estimation of mutual fund styles by return-based style analysis. Often the investment style is assumed to be constant through time. Alternatively, time variation is sometimes implicitly accounted for by using rolling regressions when estimating the style exposures. The former assumption is often contradicted empirically, and the latter is inefficient due to its ad hoc chosen window size. We propose to use the Kalman filter to model time-varying exposures of mutual funds explicitly. 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. Several stylized examples indicate that more reliable style estimates can be obtained by modeling the style exposure as a random walk, and estimating the coefficients with the Kalman filter. The differences with traditional techniques are substantial in our stylized examples. The results from our empirical analyses indicate that the structural model estimated by the Kalman filter improves style predictions and influences results on performance measurement.

Keywords: Dynamic models, Kalman filter, Mutual funds, Style analysis

JEL Classification: C22, C61, C63, G11, G20, G23

Suggested Citation

Swinkels, Laurens and van der Sluis, Pieter Jelle, Return-Based Style Analysis with Time-Varying Exposures (June 1, 2006). European Journal of Finance, Vol. 12, Issues 6-7, pp. 529-552, 2006. Available at SSRN: https://ssrn.com/abstract=1293212

Laurens Swinkels (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Asset Management - Quantitative Investing ( email )

Rotterdam, 3000
Netherlands
+31 10 224 2470 (Phone)
+31 10 224 2110 (Fax)

Pieter Jelle Van der Sluis

APG Asset Management, GTAA Fund ( email )

Gustav Mahlerplein 3
Amsterdam, 1082MS
Netherlands

Free University of Amsterdam ( email )

De Boelelaan 1105
NL-1081HV Amsterdam
Netherlands

Register to save articles to
your library

Register

Paper statistics

Abstract Views
686
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information