Hidden Errors in Regression-Based Attribution


Hidden Errors in Regression-Based Attribution
Leigh Sneddon, Ph.D., CFA

Quantitative investment managers often use regression-based performance attribution for portfolio monitoring and reporting. It frequently leaves substantial portions of performance unexplained. Econometrics tells us additionally of errors in regression betas and hence in the explained performance. This paper explores the sizes of these largely ignored errors. It determines exact attributions for three different portfolio construction scenarios. In each case, the exact attributions allow us to quantify the errors in regression-based attribution. The overall error is never less than, and in some cases is three or four times greater than, the unexplained performance, and can exceed the portfolio’s full return.

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