Risk optimizations on basis portfolios: The role of sorting

Boris Fays, Nicolas Papageorgiou and Marie Lambert

Journal of Empirical Finance, 2021, vol. 63, issue C, 136-163

Abstract: This paper investigates the mean–variance and diversification properties of risk-based strategies executed on style or basis portfolios. We show that the performance of these risk strategies is highly sensitive to the sorting procedure used to form the basis assets. Whereas the extant literature provides mixed support for the outperformance of smart beta strategies based on scientific diversification, our designed strategies outperform both the market model and multifactor model. Our testing framework is based on bootstrapped mean–variance spanning tests and shows valid conclusions when controlling for multiple testing, transaction costs, and luck from random basis portfolio construction rules. Economically, our results are supported by diversification-based properties.

Keywords: Bootstrap; Mean–variance efficiency; Portfolio sorting; Risk-based optimization; Smart beta; Style investing (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/S0927539821000487
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:empfin:v:63:y:2021:i:c:p:136-163

DOI: 10.1016/j.jempfin.2021.06.002

Access Statistics for this article

Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().