Return-Based Style Analysis with Time-Varying Exposures

42 Pages Posted: 28 Nov 2001

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: October 11, 2002


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 (October 11, 2002). Available at SSRN: or

Laurens Swinkels (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

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

Robeco Asset Management - Quantitative Investing ( email )

Rotterdam, 3000
+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

Free University of Amsterdam ( email )

De Boelelaan 1105
NL-1081HV Amsterdam

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