The economic benefits of market timing the style allocation of characteristic-based portfolios
David Ardia, Kris Boudt & Marjan Wauters
| Abstract |
Many exchange traded funds track simple characteristic-based equity
portfolios such as the market capitalization, the fundamental value
or the inverse volatility portfolio. This paper provides theoretical
and empirical evidence for the economic benefits in exploiting the
timing-gains that result from the time-varying relative performance
of these characteristic-based portfolios. Under a factor model for
expected returns, we show that this dynamic portfolio allocation
can be efficient across the low-dimensional set of
characteristic-based portfolios. We assess the out-of-sample
performance on the S&P 100 universe over the period 1990–2013 and
show gains in stability and significant positive risk-adjusted
returns for the dynamic style portfolio. We conduct several
robustness tests and extensions confirming the benefits of dynamic
style allocation across characteristic-based portfolios. |
| Keywords |
Exchange traded funds; Factor models; Portfolio choice; Stock characteristics; Style investing |
| Citation | Ardia, D., Boudt, K., & Wauters, M. (2016). The economic benefits of market timing the style allocation of characteristic-based portfolios. The North American Journal of Economics and Finance, 37, 38-62. |
| Type | Journal article (English) |
| Date of appearance | 2016 |
| Journal | The North American Journal of Economics and Finance |
| Volume | 37 |
| Pages | 38-62 |
| URL | http://www.sciencedirect.com/science/article/pii/S1062940... |
| Related project | Dynamic proportion portfolio insurance, smart beta invest... |