IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/3181.html
   My bibliography  Save this paper

Evaluating Style Analysis

Author

Listed:
  • Nijman, Theo E
  • ter Horst, Jenke
  • de Roon, Frans

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.

Suggested Citation

  • Nijman, Theo E & ter Horst, Jenke & de Roon, Frans, 2002. "Evaluating Style Analysis," CEPR Discussion Papers 3181, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3181
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP3181
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. repec:bla:jfinan:v:55:y:2000:i:4:p:1655-1703 is not listed on IDEAS
    2. Huberman, Gur & Kandel, Shmuel & Stambaugh, Robert F, 1987. "Mimicking Portfolios and Exact Arbitrage Pricing," Journal of Finance, American Finance Association, vol. 42(1), pages 1-9, March.
    3. Brown, Stephen J. & Goetzmann, William N., 1997. "Mutual fund styles," Journal of Financial Economics, Elsevier, vol. 43(3), pages 373-399, March.
    4. DeRoon, Frans A. & Nijman, Theo E., 2001. "Testing for mean-variance spanning: a survey," Journal of Empirical Finance, Elsevier, vol. 8(2), pages 111-155, May.
    5. Tae-Hwan Kim, 2005. "Asymptotic and Bayesian Confidence Intervals for Sharpe-Style Weights," Journal of Financial Econometrics, Oxford University Press, vol. 3(3), pages 315-343.
    6. Jobson, J D & Korkie, Bob, 1984. "On the Jensen Measure and Marginal Improvements in Portfolio Performance: A Note," Journal of Finance, American Finance Association, vol. 39(1), pages 245-251, March.
    7. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock‐Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, vol. 55(4), pages 1655-1695, August.
    8. Nijman, T.E. & de Roon, F.A., 2001. "Testing for mean-variance spanning : A survey," Other publications TiSEM 0159f80a-c61b-4519-b004-a, Tilburg University, School of Economics and Management.
    9. Donald W. K. Andrews, 1999. "Estimation When a Parameter Is on a Boundary," Econometrica, Econometric Society, vol. 67(6), pages 1341-1384, November.
    10. Ter Horst, J.R. & Nijman, T.E. & de Roon, F.A., 1998. "Performance analysis of international mutual funds incorporating market frictions," Other publications TiSEM df378e85-9563-4738-b36a-4, Tilburg University, School of Economics and Management.
    11. Treynor, Jack L & Black, Fischer, 1973. "How to Use Security Analysis to Improve Portfolio Selection," The Journal of Business, University of Chicago Press, vol. 46(1), pages 66-86, January.
    12. Cumby, Robert E & Glen, Jack D, 1990. "Evaluating the Performance of International Mutual Funds," Journal of Finance, American Finance Association, vol. 45(2), pages 497-521, June.
    13. Fung, William & Hsieh, David A, 1997. "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," The Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 275-302.
    14. Ter Horst, J.R. & Nijman, T.E. & de Roon, F.A., 1998. "Performance analysis of international mutual funds incorporating market frictions," Discussion Paper 1998-51, Tilburg University, Center for Economic Research.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ter Horst, J.R. & Nijman, T.E. & de Roon, F.A., 2004. "Evaluating style analysis," Other publications TiSEM 8a501733-7a06-4399-8a43-0, Tilburg University, School of Economics and Management.
    2. de Roon, F.A. & Nijman, T.E. & Werker, B.J.M., 2000. "Evaluating Style Analysis," ERIM Report Series Research in Management ERS-2000-11-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    3. Renneboog, L.D.R. & Ter Horst, J.R. & Zhang, C., 2007. "Socially Responsible Investments : Methodology, Risk Exposure and Performance," Discussion Paper 2007-013, Tilburg University, Tilburg Law and Economic Center.
    4. Renneboog, L.D.R. & Ter Horst, J.R. & Zhang, C., 2007. "Socially Responsible Investments : Methodology, Risk and Performance," Other publications TiSEM 684d2aba-7b82-4306-b6a0-d, Tilburg University, School of Economics and Management.
    5. Renneboog, L.D.R. & Ter Horst, J.R. & Zhang, C., 2007. "Socially Responsible Investments : Methodology, Risk Exposure and Performance," Discussion Paper 2007-013, Tilburg University, Tilburg Law and Economic Center.
    6. Galvani, Valentina & Faychuk, Vita, 2022. "The Mean-Variance Core of Cryptocurrencies: When More is Not Better," Working Papers 2022-4, University of Alberta, Department of Economics.
    7. Beaulieu, Marie-Claude & Dufour, Jean-Marie & Khalaf, Lynda & Melin, Olena, 2023. "Identification-robust beta pricing, spanning, mimicking portfolios, and the benchmark neutrality of catastrophe bonds," Journal of Econometrics, Elsevier, vol. 236(1).
    8. Glabadanidis, Paskalis, 2009. "Measuring the economic significance of mean-variance spanning," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 596-616, May.
    9. Cai, Biqing & Cheng, Tingting & Yan, Cheng, 2018. "Time-varying skills (versus luck) in U.S. active mutual funds and hedge funds," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 81-106.
    10. Valentina Galvani & Stuart Landon, 2013. "Riding the yield curve: a spanning analysis," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 135-154, January.
    11. DeRoon, Frans A. & Nijman, Theo E., 2001. "Testing for mean-variance spanning: a survey," Journal of Empirical Finance, Elsevier, vol. 8(2), pages 111-155, May.
    12. Paul Karehnke & Frans de Roon, 2020. "Spanning Tests for Assets with Option-Like Payoffs: The Case of Hedge Funds," Management Science, INFORMS, vol. 66(12), pages 5969-5989, December.
    13. Galvani, Valentina & Behnamian, Aslan, 2009. "A Comparative Analysis of the Returns on Provincial and Federal Canadian Bonds," Working Papers 2009-7, University of Alberta, Department of Economics.
    14. Eliezer Fich & Viktoriya Lantushenko & Clemens Sialm, 2019. "Institutional Trading Around M&A Announcements," NBER Working Papers 25814, National Bureau of Economic Research, Inc.
    15. Nijman, T.E. & de Roon, F.A., 2001. "Testing for mean-variance spanning : A survey," Other publications TiSEM 0159f80a-c61b-4519-b004-a, Tilburg University, School of Economics and Management.
    16. Tae-Hwan Kim, 2005. "Asymptotic and Bayesian Confidence Intervals for Sharpe-Style Weights," Journal of Financial Econometrics, Oxford University Press, vol. 3(3), pages 315-343.
    17. Galvani, Valentina & Plourde, André, 2010. "Portfolio diversification in energy markets," Energy Economics, Elsevier, vol. 32(2), pages 257-268, March.
    18. Larrymore, Norris L. & Rodriguez, Javier, 2007. "Active fund management: Global asset allocation funds," Journal of Multinational Financial Management, Elsevier, vol. 17(3), pages 244-256, July.
    19. Galvani, Valentina & Plourde, Andre, 2009. "Spanning with Zero-Price Investment Assets," Working Papers 2009-5, University of Alberta, Department of Economics.
    20. Korkie, Bob & Nakamura, Masao, 1997. "Block holding and keiretsu in Japan: the effects of capital markets liberalization measures on the stock market," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 113-140, February.

    More about this item

    Keywords

    Style analysis; Performance evaluation; Portfolio choice;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:3181. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.