Journal
JOURNAL OF ECONOMIC DYNAMICS & CONTROL
Volume 117, Issue -, Pages -Publisher
ELSEVIER
DOI: 10.1016/j.jedc.2020.103960
Keywords
Factor investing; Market anomalies; Dynamic asset allocation; Portfolio choice; Return predictability; Stochastic volatility
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Anomaly-based long/short benchmarks are typically built from portfolios double-sorted on size and one additional characteristic, applying simple fixed-weights schemes. Characteristic-based portfolios show significant time variations of their abnormal returns (alphas) and market exposures (betas). While timing alphas is challenging, a long-term risk-averse investor benefits from implementing dynamic weighting schemes that account for the time variation of the betas of the portfolios. Particularly for long investment horizons, significant out-of-sample Sharpe ratio improvements and utility gains with respect to fixed-weights factor benchmarks are recorded using portfolios sorted on size, value, operating profitability, investment and momentum. (C) 2020 Elsevier B.V. All rights reserved.
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