Can someone please explain the difference between return based attribution - holding based attribution - transaction based attribution? How does holding based attribution face timing effect?
In performance attribution, there’s three methods: returns-based attribution, holdings-based attribution and transaction-based attribution.
As the name says, we could attribute portfolio’s performance by regressing its historical returns or its holdings or analyzing its every single transactions.
Under holdings-based attribution method, you only know the holdings at the specific time and you probably observe a different holdings after three months or after a shorter interval.
To add to Okachiang’s reply, transactions based is the most accurate means of attribution because you can see the impact of each buy/sell transaction on the returns of the portfolio.
However, it is the most complex to perform.
Holdings-based attribution suffers from the timing effect because it is conducted looking at the portfolio’s holdings at a particular point in time.