The Anomality of Betas and the Impact on the Continuation Effect: An Approach of Eliminating the Special Risk of Anomality

Abstract

The possibility to minimize volatility, while maximizing returns, is the use of an optimized buy long/sell short strategy that takes into account, that the market model is kinky. The equation of the market model - extendet by a parameter gamma - seems to be more qualified for this reason. An approximately self-financing momentum portfolio that is long having stocks with a high Treynor ratio of past returns and short having stocks with a low Treynor ratio of past returns can minimize the portfolio's variance by using a zero factor risk. The following approach shows formulas for weightening the configuration of stocks to reach a zero beta and zero gamma for the zero factor risk of the momentum portfolio. It is shown that the calculated marginal probability of ruin for empirical time series and tests is low and allows investments in leveraged portfolios.

Note: Downloadable Document is in German.

Keywords: market neutrality, alpha strategy, risk insurance, avoiding ruin

JEL Classification: G11, G22, G23, G31