Factor Investing and Risk Management: Is Smart-Beta Diversification Smart?

Gregory Nazaire, Maria Pacurar and Oumar Sy

Finance Research Letters, 2021, vol. 41, issue C

Abstract: In this paper, we investigate the diversification benefits associated with factor investing in U.S. stock markets, using the dummy-variable framework for asset allocation. We find that beta-based investment strategies are primarily driven by beta-specific sources of return variation. At the same time, both betas and characteristics explain the variance of characteristic-based strategies, indicating that beta diversification is a more effective risk management tool than characteristic diversification. We also find that the correlations between the pure premiums of the 14 factor-based strategies considered are small, which suggests that diversification across smart-beta funds is beneficial. Monte Carlo simulations confirm these results.

Keywords: Betas; Characteristics; Factor investing; Risk management (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1544612320316688
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:41:y:2021:i:c:s1544612320316688

DOI: 10.1016/j.frl.2020.101854

Access Statistics for this article

Finance Research Letters is currently edited by R. Gençay

More articles in Finance Research Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().