Beyond Brinson: Establishing the Link Between Sector and Factor Models

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In this paper, we show that the Brinson model represents a special kind of factor model, which we term the “Brinson-replicating factor model.”  We then demonstrate how this factor model can be augmented with other factors, such as styles, to gain insight that would not be possible under the simple Brinson framework.  We also discuss how to attribute risk to the same underlying set of decision variables.

Authors: Ben Davis, Ph.D., MSCI and Jose Menchero, Ph.D., CFA, MSCI

The sector-based Brinson model is widely used in the investment management community.  In this paper, we show that the Brinson model represents a special kind of factor model, which we term the "Brinso-replicating factor model."  We then demonstrate how this factor model can be augmented with other factors, such as styles, to gain insight that would not be possible under the simple Brinson framework.  We also discuss how to attribute risk to the same underlying set of decision variables.

Beyond Brinson: Establishing the Link Between Sector and Factor Models

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