Multifactor Evaluation of Style Rotation

A growing literature documents that various strategies of rotating across equity styles generate significant returns. However, the conventional risk adjustment regression is problematic in evaluating the gains from style rotation. In this paper, I propose a weight-based multifactor risk adjustment approach as a solution. When interpreted as a performance attribution procedure, this approach extends Sharpe's (1992) classic method by emphasizing factor loading rotation. I use a logit-based timing strategy as an example to show that the conventional procedure produces misleading results and the new method leads to the opposite conclusion