Abstract

http://ssrn.com/abstract=1457022
 
 

References (19)



 
 

Citations (4)



 


 



Efficient Bayesian Factor Mimicking: Methodology, Tests and Comparison


Wing Cheung


affiliation not provided to SSRN

Nikhil Mittal


affiliation not provided to SSRN

October 18, 2009


Abstract:     
When investment or hedging views are generated on a factor which is not directly investible, creating a quality factor proxy or mimicking portfolio becomes a basic implementation requirement. For fundamental factors, traditional factor-mimicking techniques include the Fama-French (FF) factor-ranking approach (Fama-French, 1993), and constrained optimisation that controls portfolio exposure to factors. In a seemingly different connection, Cheung (2009B) shows how to construct factor portfolios in the Augmented Black-Litterman (ABL) framework, which makes its intrinsic choice of factor-mimicking technique. In this paper, we test the performance of this technique, along with traditional techniques. Our results show that the ABL factor-mimicking technique is more efficient.

This article features: -
- A brief review of two families of traditional and the new ABL FM techniques;
- A simulation-based testing methodology that isolates the FM quality issue from peripheral risk model and view quality issues, thereby avoiding unnecessary joint tests; and
- Numerical comparison between these techniques, leading to concrete evidence that the ABL technique is more efficient.

Number of Pages in PDF File: 25

Keywords: factor mimicking, portfolio construction, Augmented Black-Litterman (ABL), factor tilt, Fama-French, factor ranking, factor risk model, optimisation, OLS, GLS

JEL Classification: C10, C11, C61, G11

working papers series





Download This Paper

Date posted: October 26, 2009 ; Last revised: April 25, 2012

Suggested Citation

Cheung, Wing and Mittal, Nikhil, Efficient Bayesian Factor Mimicking: Methodology, Tests and Comparison (October 18, 2009). Available at SSRN: http://ssrn.com/abstract=1457022 or http://dx.doi.org/10.2139/ssrn.1457022

Contact Information

Wing Cheung (Contact Author)
affiliation not provided to SSRN
Nikhil Mittal
affiliation not provided to SSRN ( email )
Feedback to SSRN


Paper statistics
Abstract Views: 1,489
Downloads: 413
Download Rank: 39,415
References:  19
Citations:  4

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.297 seconds