A New Measure of Tactical Allocation Skills in Performance Attribution Analysis
Journal of Performance Measurement, Forthcoming
Posted: 5 Aug 2010 Last revised: 12 Aug 2010
Date Written: August 4, 2010
The emergence of tactical allocation and factor timing strategies has prompted professionals to devise various means of measuring tactical and timing skills. This paper proposes a new measure, based on the new cash flows into and out of asset segments of the portfolio, which can easily be incorporated into conventional holdings-based or multifactor-based performance attribution systems. The other advantages are its use of portfolio weighting and characteristics that provide a more accurate measurement of risk exposure and its capture of dynamic exposure changes that react to new information. Using the Monte Carlo simulation method, I show that this method is more conservative than the Daniel et al. (1997) or Lo (2008) method in the literature.
Keywords: Performance Measurement, Active Management, Holdings-Based Performance Attribution, Multifactor-Based Performance Attribution, Tactical Asset Allocation, Factor Timing Skill, Mutual Funds
JEL Classification: G11, G12
Suggested Citation: Suggested Citation