Correcting alpha misattribution in portfolio sorts

No Thumbnail Available
Author (Corporation)
Publication date
2018
Typ of student thesis
Course of study
Type
06 - Presentation
Editors
Editor (Corporation)
Supervisor
Parent work
Special issue
DOI of the original publication
Link
Series
Series number
Volume
Issue / Number
Pages / Duration
Patent number
Publisher / Publishing institution
Place of publication / Event location
Paris
Edition
Version
Programming language
Assignee
Practice partner / Client
Abstract
We show that portfolio sorts, as commonly employed in empirical asset pricing applications, are at risk of accidentally misattributing parts of the risk-adjusted return (or "alpha") to the firm characteristic underlying the sort. Such misattribution occurs if the firm characteristic is correlated with an unobservable yet time-persistent factor. We propose a novel, regression-based methodology for analyzing asset returns. Our technique can reproduce the alpha and factor exposure estimates from all variants of sorting assets into (e.g., decile) portfolios. In addition, and contrary to standard portfolio sorts, our approach handles multivariate and continuous firm characteristics and, if firm-specific (fixed) effects are included in the analysis, is robust to alpha misattribution. In our empirical analysis, we indeed find alpha misattribution to be an issue in conventional portfolio sorts as several well-known characteristics-based factors lose their predictive power when we account for firm fixed effects.
Keywords
Subject (DDC)
330 - Wirtschaft
Project
Event
16th EUROFIDAI Paris December Finance Meeting
Exhibition start date
Exhibition end date
Conference start date
20.12.2018
Conference end date
20.12.2018
Date of the last check
ISBN
ISSN
Language
English
Created during FHNW affiliation
Yes
Strategic action fields FHNW
Publication status
Review
Peer review of the abstract
Open access category
License
Citation
HÖCHLE, Daniel, Markus SCHMID und Heinz ZIMMERMANN, 2018. Correcting alpha misattribution in portfolio sorts. 16th EUROFIDAI Paris December Finance Meeting. Paris. 2018. Verfügbar unter: https://irf.fhnw.ch/handle/11654/42349