Evaluating Style Analysis

30 Pages Posted: 21 Feb 2002

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: January 2002

Abstract

In this Paper we evaluate (return based) style analysis. The portfolio and positivity constraints imposed by style analysis are useful in constructing mimicking factor portfolios without short positions. We use a simple simulation experiment to show that imposing these constraints in estimating the factor portfolios leads to significant efficiency gains, if the factor loadings are indeed positively weighted portfolios. If this is not the case though, imposing the constraints can substantially bias the exposure estimates. We also show that the actual portfolio holdings will in general not reveal the actual investment style of a fund because of cross exposures between the asset classes, and because fund managers may hold securities that on average do not have a beta of one relative to their own asset class. Style analysis may be used to determine a benchmark portfolio for performance measurement. If the actual exposures are a positively weighted portfolio and if the risk free rate is one of the benchmarks, then the intercept coincides with the Jensen measure. In general, the intercept in the style regression can only be interpreted as a special case of the familiar Jensen measure.

Keywords: Style analysis, performance evaluation, portfolio choice

JEL Classification: G11, G12

Suggested Citation

de Roon, Frans A. and Nijman, Theo E. and ter Horst, Jenke R., Evaluating Style Analysis (January 2002). CEPR Discussion Paper No. 3181. Available at SSRN: https://ssrn.com/abstract=301206

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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