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Decomposing Performance

Daniel Hoechle, Markus Schmid & Heinz Zimmermann

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.
   
type working paper (English)
   
keywords Performance evaluation, Alpha decomposition, Portfolio sorts, Fama-French model
   
date of appearance 2012
issuer institution Universit├Ąt St. Gallen
series title SoF Working Paper Series
publisher s/bf - HSG (St. Gallen)
review not reviewed
   
citation Hoechle, D., Schmid, M., & Zimmermann, H., Universit├Ąt St. Gallen (Eds.), (2012). Decomposing Performance. SoF Working Paper Series. St. Gallen: s/bf - HSG.