 Constructing inverse factor volatility portfolios: A risk-based asset allocation for factor investingHidehiko Shimizu and Takayuki Shiohama International Review of Financial Analysis, 2020, vol. 68, issue C Abstract: In this study, we investigate risk-based asset allocation approaches for factor investing strategies by constructing a multifactor portfolio based on the inverse weighting method. We propose the inverse factor volatility (IFV) strategy, which is the simplified variant of a factor risk parity, assuming constant factor correlation. In IFV portfolio construction, the portfolio's weights are determined by using scaled inverse factor volatility treated as a proxy for a targeted exposure in the optimization. Based on daily stock and index returns on global markets from 2002 to the end of 2017, we implemented the empirical analysis of IFV portfolios among three stock markets: Japan, Euro, and the US. The results obtained reveal that the IFV portfolios significantly outperformed market capitalization weighted portfolios by successfully acquiring factor risk premiums. Keywords: Factor investing; Multifactor portfolio; Risk parity; Risk-based asset allocation; Smart beta (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:68:y:2020:i:c:s1057521919301371 DOI: 10.1016/j.irfa.2019.101438 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
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