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Decomposing Performance

Author

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  • Hoechle, Daniel
  • Schmid, Markus
  • Zimmermann, Heinz

Abstract

We present a new methodology for decomposing the (risk-adjusted) performance in empirical finance. Our technique offers the same straightforward economic intuition and all the statistical benefits of the portfolio sorts approach, in particular robustness to cross-sectional correlation, and in addition resolves the major drawbacks of portfolio sorts. Most importantly, our regression-based methodology handles multiple dimensions and continuous firm, fund, or investor characteristics. Moreover, the technique allows for relying on standard Wald-tests as an alternative to the popular Gibbons, Ross, and Shanken (1989) test. We illustrate our methodology with an asset pricing application and a long-horizon event study.

Suggested Citation

  • Hoechle, Daniel & Schmid, Markus & Zimmermann, Heinz, 2012. "Decomposing Performance," Working Papers on Finance 1216, University of St. Gallen, School of Finance, revised Nov 2015.
    • Handle: RePEc:usg:sfwpfi:2012:16
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    More about this item

    Keywords

    Performance measurement; Alpha decomposition; Portfolio sorts; Fama-French model.;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D1 - Microeconomics - - Household Behavior

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