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Multifactor Evaluation of Style Rotation

Published online by Cambridge University Press:  06 April 2009

Kevin Q. Wang
Kevin Q. Wang
Affiliation:
[email protected], Rotman School of Management, University of Toronto, 105 St. George Street, Toronto, Ontario, M5S 3E6, Canada, and Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong.
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Abstract

A growing literature documents that various strategies of rotating across equity styles generate significant returns. However, the conventional risk adjustment regression is problematic in evaluating the gains from style rotation. I propose a weight-based multifactor risk adjustment approach as a solution. When interpreted as a performance attribution procedure, this approach extends Sharpe's (1992) classic method by emphasizing factor loading rotation. I use a logit-based timing strategy to show that the conventional procedure produces misleading results and the new method leads to the opposite conclusion.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 2 , June 2005 , pp. 349 - 372
Copyright
Copyright © School of Business Administration, University of Washington 2005

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