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Managing downside risk of low-risk anomaly portfolios

Hyuksoo Kim and Saejoon Kim

Finance Research Letters, 2022, vol. 46, issue PB

Abstract: In this paper, we present a novel risk-scaling strategy based on a measure of downside risk and investigate its performance on underlying portfolios that are formed on low-risk anomaly. The downside risk-scaling strategy addresses two challenges of the volatility-scaling strategy, namely, underestimation of and indirect management of downside risk. We demonstrate that our downside risk-scaled strategy improves the unscaled underlying low-risk anomaly strategy as well as outperforms volatility-scaled strategy in terms of risk-adjusted return and various performance metrics that are related to downside events.

Keywords: Conditional value-at-risk; Value-at-risk; Volatility scaling; Betting against beta (search for similar items in EconPapers)
JEL-codes: D81 G11 G17 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321003883

DOI: 10.1016/j.frl.2021.102388

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