Abstract

http://ssrn.com/abstract=2163486
 


 



Global CAPE Model Optimization


Adam Butler


RGMP - Darwin Investment Strategies

Mike Philbrick


Richardson GMP - Darwin Investment Strategies

Rodrigo Gordillo


Richardson GMP - Darwin Investment Strategies

Mebane T. Faber


Cambria Investment Management

October 18, 2012


Abstract:     
We use the Shiller CAPE Model proposed by Mebane Faber as a template for the exploration of a variety of portfolio optimization methods. By virtue of the Model's systematic allocation to the 'cheapest' markets with the highest theoretical risk premia, the model has the potential to extract high costs from 'behavioural taxes' related to the model’s extreme volatility and drawdown character. We apply several portfolio optimization techniques with the objective of maximizing portfolio Sharpe ratios and minimizing drawdowns, including dynamic volatility weighting, risk parity, target risk and minimum variance. Consistent with recent published research on robust portfolio optimization, return to risk ratios improve broadly, with the greatest impact achieved from procedures that manage positions and/or portfolios to an ex ante target volatility. A theoretical framework is also proposed.

Number of Pages in PDF File: 17

Keywords: CAPE, Shiller, Faber, Butler, Philbrick, Gordillo, GestaltU, Portfolio Optimization, Volatility, Risk Parity, Minimum Variance, Target Volatility, Risk Budget, Volatility Budget, Low Volatility Anomaly

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Date posted: October 18, 2012 ; Last revised: October 31, 2012

Suggested Citation

Butler, Adam and Philbrick, Mike and Gordillo, Rodrigo and Faber, Mebane T., Global CAPE Model Optimization (October 18, 2012). Available at SSRN: http://ssrn.com/abstract=2163486 or http://dx.doi.org/10.2139/ssrn.2163486

Contact Information

Adam Butler (Contact Author)
RGMP - Darwin Investment Strategies ( email )
145 King Street West
Suite 500
Toronto, Ontario M5H1J8
Canada
HOME PAGE: http://www.butlerphilbrick.com
Mike Philbrick
Richardson GMP - Darwin Investment Strategies ( email )
Brookfield Place
181 Bay Street, Suite 3200
M5J 2T3
Rodrigo Gordillo
Richardson GMP - Darwin Investment Strategies ( email )
Brookfield Place
181 Bay St., Suite 3200
Toronto, Ontario M4V1Z1
Canada
416-864-3597 (Phone)
HOME PAGE: http://www.darwinstrategies.com
Mebane T. Faber
Cambria Investment Management ( email )
2321 Rosecrans Ave
Suite 4270
El Segundo, CA 90245
United States
HOME PAGE: http://www.cambriainvestments.com
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