Evaluating Style Analysis

35 Pages Posted: 28 Feb 2001

See all articles by Frans de Roon

Frans de Roon

Tilburg University - Department of Finance

Theo Nijman

Tilburg University - Center and Faculty of Economics and Business Administration

Jenke ter Horst

TIAS School for Business and Society

Multiple version iconThere are 2 versions of this paper

Date Written: October 15, 2000

Abstract

In this paper we evaluate applications of (return based) style analysis. The portfolio and positivity constraints imposed by style analysis are useful in constructing mimicking portfolios without short positions. Such mimicking portfolios can be used e.g. to construct efficient portfolios of mutual funds with desired factor loadings if the factor loadings in the underlying factor model are positively weighted portfolios. Under these conditions style analysis may also be used to determine a benchmark portfolio for performance measurement. Attribution of the returns on portfolios of which the actual composition is unobserved to specific asset classes on the basis of return based style analysis is attractive if moreover there are no additional cross exposures between the asset classes and if fund managers hold securities that on average have a beta of one relative to their own asset class. If such restrictions are not met, and in particular if the factor loadings do not generate a positively weighted portfolio, the restrictions inherent in return based style analysis distort the outcomes of standard regression approaches rather than that the analysis is improved. The size of the distortions is illustrated by considering empirical results on style analysis of US mutual funds.

Keywords: Style Analysis, Performance Measurment, Mutual Funds, Portfolio Choice

JEL Classification: G11, G23, G20

Suggested Citation

de Roon, Frans A. and Nijman, Theo E. and ter Horst, Jenke R., Evaluating Style Analysis (October 15, 2000). ERIM Report Series Reference No. ERS-2000-11-F&A; EFMA 2001 Lugano Meetings. Available at SSRN: https://ssrn.com/abstract=261852

Frans A. De Roon (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 1 3466 8361/3025 (Phone)
+31 1 3466 2875 (Fax)

Theo E. Nijman

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2342 (Phone)
+31 13 466 3280 (Fax)

Jenke R. Ter Horst

TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

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