Biases in variance of decomposed portfolio returns

Alexeev, V; Ignatieva, K

Biases in variance of decomposed portfolio returns

Alexeev, V Ignatieva, K

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Publisher:: Wiley
Publication Type:: Journal Article
Citation:: International Review of Finance, 2020
Issue Date:: 2020-07-15

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Field	Value	Language
dc.contributor.author	Alexeev, V
dc.contributor.author	Ignatieva, K
dc.date.accessioned	2020-10-01T19:48:12Z
dc.date.available	2020-10-01T19:48:12Z
dc.date.issued	2020-07-15
dc.identifier.citation	International Review of Finance, 2020
dc.identifier.issn	1369-412X
dc.identifier.issn	1468-2443
dc.identifier.uri	http://hdl.handle.net/10453/142970
dc.description.abstract	Significant portfolio variance biases arise when contrasting multiperiod portfolio returns based on the assumption of fixed continuously rebalanced portfolio weights as opposed to buy‐and‐hold weights. Empirical evidence obtained using S&P 500 constituents from 2003 to 2011 demonstrates that, compared with a buy‐and‐hold assumption, applying fixed weights led to decreased estimates of portfolio volatilities during 2003, 2005 and 2010, but caused a significant increase in volatility estimates in the more turbulent 2008 and 2011. This discrepancy distorts assessments of portfolio risk‐adjusted performance when inappropriate weight assumptions are employed. Consequently, these variance biases have effect on statistical inference in factor models and may result in erroneous portfolio size recommendations for adequate diversification.
dc.language	English
dc.publisher	Wiley
dc.relation.ispartof	International Review of Finance
dc.relation.isbasedon	10.1111/irfi.12319
dc.rights	info:eu-repo/semantics/closedAccess
dc.subject	1501 Accounting, Auditing and Accountability, 1502 Banking, Finance and Investment
dc.title	Biases in variance of decomposed portfolio returns
dc.type	Journal Article
utslib.for	1501 Accounting, Auditing and Accountability
utslib.for	1502 Banking, Finance and Investment
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
pubs.organisational-group	/University of Technology Sydney
utslib.copyright.status	closed_access	*
pubs.consider-herdc	false
dc.date.updated	2020-10-01T19:47:57Z
pubs.publication-status	Published

Abstract:

Significant portfolio variance biases arise when contrasting multiperiod portfolio returns based on the assumption of fixed continuously rebalanced portfolio weights as opposed to buy‐and‐hold weights. Empirical evidence obtained using S&P 500 constituents from 2003 to 2011 demonstrates that, compared with a buy‐and‐hold assumption, applying fixed weights led to decreased estimates of portfolio volatilities during 2003, 2005 and 2010, but caused a significant increase in volatility estimates in the more turbulent 2008 and 2011. This discrepancy distorts assessments of portfolio risk‐adjusted performance when inappropriate weight assumptions are employed. Consequently, these variance biases have effect on statistical inference in factor models and may result in erroneous portfolio size recommendations for adequate diversification.

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http://hdl.handle.net/10453/142970