Nonlinear Factor Attribution

20 Pages Posted: 4 Aug 2018 Last revised: 16 Jan 2019

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2019

Abstract

Factor attribution based on linear regression often fails to satisfactorily explain the performance of systematic investment strategies. A volatile or persistent residual suggests nonlinear interactions between factor returns and portfolio construction. We propose a nonparametric adjustment to attribute the impact thereof to better reconcile realized performance with the investment process. The approach classifies stocks based on their squared standardized factor exposures and identifies which segments are most responsible for the unexplained portfolio return. The resulting nonlinear attribution is robust and testable for statistical significance.

Keywords: Factor Investing, Performance Attribution, Nonlinear Factor Model

JEL Classification: G12, G15, C13, C51, C52

Suggested Citation

De Boer, Sanne, Nonlinear Factor Attribution (January 15, 2019). Available at SSRN: https://ssrn.com/abstract=3209418 or http://dx.doi.org/10.2139/ssrn.3209418

Sanne De Boer (Contact Author)

Voya Investment Management ( email )

230 Park Avenue
13th Floor
New York, NY 10069
United States

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