Beta vs. characteristics: Comparison of risk model performances

Daehwan Kim

Journal of Empirical Finance, 2015, vol. 34, issue C, 156-171

Abstract: We compare the beta model (a.k.a. covariance model) and the characteristics model in terms of their ability to reduce portfolio risk. When global-minimum-variance portfolios (GMVPs) are constructed out of the 500 largest US stocks for the 30-year period between 1981 and 2011, the beta-model-based GMVPs achieve lower volatility than the characteristics-model-based GMVPs. For robustness check, we consider alternative specifications of the characteristics model, and find that the advantage of the beta model persists. To make our analysis complete, we also consider some hybrid models. The performance of some hybrid models is comparable to that of the beta model.

Keywords: Beta model; Characteristics model; Portfolio risk; Characteristics-matched benchmark; Industry-matched benchmark (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:34:y:2015:i:c:p:156-171

DOI: 10.1016/j.jempfin.2015.10.002

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