Portfolio turnover when IC is time-varying
Zhuanxin Ding (),
R. Douglas Martin () and
Chaojun Yang ()
Additional contact information
Zhuanxin Ding: Analytic Investors
R. Douglas Martin: University of Washington
Chaojun Yang: Shanghai Jiao-Tong University
Journal of Asset Management, 2020, vol. 21, issue 7, No 5, 609-622
Abstract:
Abstract We develop new formulas for the turnover and leverage of mean–variance optimal long–short market neutral portfolios, where active weights are obtained using a factor model conditional mean forecast and a conditional forecast error covariance matrix that reflects strategy risk. We show that for eight commonly used quantitative factors, the turnovers and leverages derived using our long–short formulas are quite close to what the practitioners actually implement. We further carry out extensive simulations for long-only active portfolios and develop a highly accurate empirical formula that relates long-only turnover to long–short turnover, a transfer coefficient, portfolio target tracking error, strategy risk and a benchmark choice coefficient. Our result shows that when the proper risk model is used in factor investing, the optimal portfolio’s turnover and leverage are well within reasonable practically implementable ranges even if no additional constraints are imposed.
Keywords: Turnover; Leverage; Factor model; Conditional mean forecast; Conditional forecast error covariance matrix; Transfer coefficient (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)
Downloads: (external link)
http://link.springer.com/10.1057/s41260-019-00145-1 Abstract (text/html)
Access to the full text of the articles in this series is restricted.
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:pal:assmgt:v:21:y:2020:i:7:d:10.1057_s41260-019-00145-1
Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/41260
DOI: 10.1057/s41260-019-00145-1
Access Statistics for this article
Journal of Asset Management is currently edited by Marielle de Jong and Dan diBartolomeo
More articles in Journal of Asset Management from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().