Risk models vs characteristic models from an investor’s perspective

Christian Fieberg, Armin Varmaz and Thorsten Poddig

Journal of Risk Finance, 2019, vol. 20, issue 2, 201-222

Abstract: Purpose - The purpose of this paper is to analyze the implications of the risk versus characteristic debate from the perspective of a mean-variance investor. Design/methodology/approach - Expected returns and the variance-covariance matrix are estimated based on various characteristic and risk models and evaluated for the purpose of mean-variance portfolios. Findings - Return estimates from characteristic models are most informative to investors. Risk-factor models provide the most informative estimates of the risk. A mean-variance investor should rely on combinations of the two model types. Originality/value - Although the risk vs characteristic debate is a binary academic debate, our findings from an investor's perspective suggest to make use of the best of both worlds.

Keywords: Asset allocation; Characteristic model; German stock market; Risk-factor model; G11; G12 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:jrf-10-2018-0163

DOI: 10.1108/JRF-10-2018-0163

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