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Evaluating Style Analysis

Author

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  • de Roon, F.A.
  • Nijman, T.E.
  • Werker, B.J.M.

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.

Suggested Citation

  • 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.
    • Handle: RePEc:ems:eureri:25
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    References listed on IDEAS

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    3. 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.
    4. Brown, Stephen J. & Goetzmann, William N., 1997. "Mutual fund styles," Journal of Financial Economics, Elsevier, vol. 43(3), pages 373-399, March.
    5. 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.
    6. 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.
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    Cited by:

    1. Post, G.T., 2001. "LP Tests for MV Efficiency," ERIM Report Series Research in Management ERS-2001-66-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.
    2. Arjen Siegmann & André Lucas, 2002. "Explaining Hedge Fund Investment Styles by Loss Aversion," Tinbergen Institute Discussion Papers 02-046/2, Tinbergen Institute.
    3. Post, G.T., 2001. "Testing for Stochastic Dominance with Diversification Possibilities," ERIM Report Series Research in Management ERS-2001-38-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.
    4. Post, G.T., 2001. "Spanning and Intersection: a stochastic dominance approach," ERIM Report Series Research in Management ERS-2001-63-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.

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    More about this item

    Keywords

    Style analysis; mutual funds; performance measurement; portfolio choice;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics

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