Investing in the size factor
Investing in the size factor
This paper investigates the role of the size factor for constructing investment portfolios and proposes a dynamic extension that accommodates the risk-free asset and time-varying weights. These weights are determined by a set of state variables given by the term structure of sovereign interest rates, variables describing market risk aversion such as the VIX index and the CRB Industrial return, and indexes reflecting investor sentiment towards the economic outlook. The empirical section explores the suitability of these state variables and analyses the out-of-sample performance of size factors idiosyncratic to the U.S., U.K. and European financial markets that are compared against the dynamic version that optimizes the weights in each period. The results provide support to the different size factors except for periods of economic distress in which the optimal dynamic strategies are clearly superior.
performance evaluation, size factor, tactical assett allocation, trading strategies, g11, g19
85-100
Laborda, J.
57414daf-714a-4774-8c31-ff76c4100b80
Laborda, R.
2bdeacea-069f-48ee-a898-a3a9ca486142
Olmo, J.
706f68c8-f991-4959-8245-6657a591056e
2016
Laborda, J.
57414daf-714a-4774-8c31-ff76c4100b80
Laborda, R.
2bdeacea-069f-48ee-a898-a3a9ca486142
Olmo, J.
706f68c8-f991-4959-8245-6657a591056e
Abstract
This paper investigates the role of the size factor for constructing investment portfolios and proposes a dynamic extension that accommodates the risk-free asset and time-varying weights. These weights are determined by a set of state variables given by the term structure of sovereign interest rates, variables describing market risk aversion such as the VIX index and the CRB Industrial return, and indexes reflecting investor sentiment towards the economic outlook. The empirical section explores the suitability of these state variables and analyses the out-of-sample performance of size factors idiosyncratic to the U.S., U.K. and European financial markets that are compared against the dynamic version that optimizes the weights in each period. The results provide support to the different size factors except for periods of economic distress in which the optimal dynamic strategies are clearly superior.
Text
Investing in the size factor final.pdf
- Accepted Manuscript
More information
Accepted/In Press date: 8 May 2015
e-pub ahead of print date: 13 July 2015
Published date: 2016
Keywords:
performance evaluation, size factor, tactical assett allocation, trading strategies, g11, g19
Organisations:
Economics
Identifiers
Local EPrints ID: 390323
URI: http://eprints.soton.ac.uk/id/eprint/390323
ISSN: 1469-7688
PURE UUID: 2ed21801-ed55-4dca-93d9-ef320bb5cefd
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Date deposited: 23 Mar 2016 14:36
Last modified: 15 Mar 2024 03:46
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Contributors
Author:
J. Laborda
Author:
R. Laborda
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