Smart Beta Allocation and Macroeconomic Variables: The Impact of COVID-19

Matteo Foglia, Maria Cristina Recchioni and Gloria Polinesi
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Matteo Foglia: Risk-Management Department, Eurizon Capital SGR, 61264 Milan, Italy
Maria Cristina Recchioni: Department of Economic and Social Sciences, Università Politecnica delle Marche, 60121 Ancona, Italy
Gloria Polinesi: Department of Economic and Social Sciences, Università Politecnica delle Marche, 60121 Ancona, Italy

Risks, 2021, vol. 9, issue 2, 1-25

Abstract: Smart beta strategies across economic regimes seek to address inefficiencies created by market-based indices, thereby enhancing portfolio returns above traditional benchmarks. Our goal is to develop a strategy for re-hedging smart beta portfolios that shows the connection between multi-factor strategies and macroeconomic variables. This is done, first, by analyzing finite correlations between the portfolio weights and macroeconomic variables and, more remarkably, by defining an investment tilting variable. The latter is analyzed with a discriminant analysis approach with a twofold application. The first is the selection of the crucial re-hedging thresholds which generate a strong connection between factors and macroeconomic variables. The second is forecasting portfolio dynamics (gain and loss). The capability of forecasting is even more evident in the COVID-19 period. Analysis is carried out on the iShares US exchange traded fund (ETF) market using monthly data in the period December 2013–May 2020, thereby highlighting the impact of COVID-19.

Keywords: financial risk management; fintech risk management; factor-based model; smart beta; market timing activity (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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