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- Title
Mitigating the Hidden Risks of Factor Investing.
- Authors
Arnott, Rob; Kalesnik, Vitali; Wu, Lillian
- Abstract
Several hidden risks of factor investing can lead to investor disappointment; even diversified baskets of factors are prone to sharp drawdowns and prolonged periods of underperformance. Accordingly, the authors explore a variety of techniques to improve the risk-adjusted returns of individual factors and factor portfolios. Introducing a new two-step volatility management method that adjusts the length of the estimation window to scale factor returns, the authors find that this technique is effective in improving both risk-adjusted returns and the trade-off between performance improvement and turnover characteristics. Ultimately, coupling this novel two-step approach with an optimization technique that captures both volatility and correlation information leads to improved risk-adjusted performance, lower volatility of volatility, and improved kurtosis and drawdown characteristics.
- Publication
Journal of Portfolio Management, 2023, Vol 49, Issue 2, p111
- ISSN
0095-4918
- Publication type
Academic Journal
- DOI
10.3905/jpm.2022.1.454