Currency, Country, and Security Selection Performance Attribution
Summary
The discussion outlines ways to separate currency effects from local-market allocation and security selection when portfolio and benchmark weights and returns are available. One approach measures currency value added with a simple currency attribution, then applies a single-factor Brinson model to local-market returns to estimate country allocation and security selection. A second approach uses the Karnosky-Singer framework to distinguish currency effects on securities from the effects of currency hedging, followed by Brinson-style attribution on local returns after accounting for local deposit rates.
The answers note that attribution can use arithmetic or geometric compounding. A separate example illustrates stripping an exchange-rate contribution from a foreign stock’s base-currency return to estimate its local-currency return. The exchange-rate calculation is illustrative rather than a complete portfolio attribution procedure, and the suggestions do not specify data alignment, treatment of interaction effects, or a preferred compounding convention. A further answer points to a portfolio attribution implementation, but provides no evaluation of it.
Key ideas
- Currency decisions can be analyzed separately from local-market allocation and security selection.
- A simple currency attribution can be paired with a single-factor Brinson model for local-market effects.
- Karnosky-Singer attribution can distinguish currency effects on securities from currency hedging effects.
- Local deposit rates may need to be separated from local returns in the Karnosky-Singer approach.
- Arithmetic and geometric methods are both mentioned, without a recommendation between them.
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# How to do performance attribution for a few characteristics? # How to do performance attribution for a few characteristics? Let's say the characteristics that I am interested in are - FX - Country - Security selection I have the benchmark weights and returns, the FX returns, and the portfolio weights and returns. Can someone give a few pointers on how I would be able to get the performance attributions for 1,2,3? ## Answer by John D Simpson CIPM (score 1) https://quant.stackexchange.com/a/4724 You can approach this in two ways: You could calculate what is known as a naive currency attribution to measure the value added due to currency decisions. This would give you one portion of the manager's value added. You could then use a single factor Brinson model to calculate attribution in the local markets, which would give you a country allocation and a security selection. Alternatively, you could, measure the manager's value added from currency decisions using the Karnosky Singer model. This would give you multiple components, including a value added due to currency decisions on the physical securities, and a value added due to hedging of currency. Attribution if the local market value added would then be done using a Brinson style approach, after separating local Eurodeposit rates from local returns (these would be included in the currency part of the attribution). Either approach could be done using arithmetic or geometric math. ## Answer by Matt Wolf (score 0) https://quant.stackexchange.com/a/4731 I am not sure you need to setup complicated models to achieve what you try to get to (unless I misunderstand your question): - Security selection? You mean asset class or individual asset? Either way, same as above. The assumption of all that is that the residual return of each asset (after stripping off all other return attributions is the alpha (excess return) generated in each asset. This assumes you identify all return attribution that are not directly attributable to the asset itself (fx, country, industry, sector, ...). Example, you have a EUR denominated stock holding. You reduce the usd converted return of the stock over the observed period by eur/usd returns. If stock price changed between t0 -> t1 from euro 100 -> euro 150, and eur/usd rate changed from 1.30 -> 1.40 then your usd denominated return is (150*1.4 / 100*1.3 - 1 = 61.5%) and has to be reduced by about 7.7% -> 53.8% return. So fx attribution here is about 7.7% for this particular asset. Please clarify in case I misunderstood anything about your question. ## Answer by Andre (score 0) https://quant.stackexchange.com/a/4776 Enhancing the Karnosky/Singer model with a good approach to temporal compounding will give you a good analysis for a Brinson-type attribution at the fund level. ## Answer by RndmSymbl (score 0) https://quant.stackexchange.com/a/25735 For all practical purpose you may want to take a look at the PortfolioAttribution code here: https://github.com/R-Finance/PortfolioAttribution
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