ETF Risk Models

Zura Kakushadze and Willie Yu

Bulletin of Applied Economics, 2022, vol. 9, issue 1, 1-17

Abstract: We discuss how to build ETF risk models. Our approach anchors on i) first building a multilevel (non-) binary classification/taxonomy for ETFs, which is utilized in order to define the risk factors, and ii) then building the risk models based on these risk factors by utilizing the heterotic risk model construction of [Kakushadze, 2015b] (for binary classifications) or general risk model construction of [Kakushadze and Yu, 2016a] (for non-binary classifications). We discuss how to build an ETF taxonomy using ETF constituent data. A multilevel ETF taxonomy can also be constructed by appropriately augmenting and expanding well-built and granular third-party single-level ETF groupings.

Keywords: ETF; risk model; covariance; correlation; risk factor; optimization; growth; value; industry classification; quant; trading; stock; bond; equity; commodity; currency; volatility; real estate; alternatives; multi-asset; diversification; portfolio; credit rating; duration; maturity; market cap. (search for similar items in EconPapers)
JEL-codes: G00 G10 G11 G12 G23 (search for similar items in EconPapers)
Date: 2022
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