Tuesday, July 20, 2010

Linking fixed income attribution

As you're probably aware, arithmetic attribution results in subperiod effects which are linking challenged; that is, if we attempt to link these subperiod (e.g., monthly) results to obtain longer (e.g., annual) period results, using, for example, simple geometric linking (as we use with returns), the results won't reconcile to the longer period excess return: a residual typically results [geez! what a sentence!]. As a result, several individuals (e.g., Jose Menchero, David CariƱo, and Andrew Frongello) developed models which eliminate the residuals. These models are typically demonstrated with one of the Brinson (i.e., Brinson-Hood-Beebower and Brinson-Fachler) models.

But what if you're doing fixed income attribution and using, for example, the Campisi model: how do we link these subperiod results?

Answer: the same as we would with equity attribution; that is, use one of the linking models. Special models aren't required to make this work.

2 comments:

  1. Stephen Campisi - Intuitive Performance SolutionsJuly 21, 2010 at 11:50 PM

    Thank you a thousand times over for this posting, because this continues to be a source of confusion, even though it's clear that ANY additive attribution model should be treated the same way when linking attribution effects over multiple periods. True, the attribution factors may differ between models, but they all share the common characteristic of being single-period effects that sum to the total excess return - and that the excess return is the difference between the portfolio return and the benchmark return.

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  2. Steve, thanks for your concurrence!

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