The Economic Benefits of Market Timing the Style Allocation of Characteristic-Based Portfolios

North American Journal of Economics and Finance, Vol. 37, pp. 38-62, 2016

47 Pages Posted: 27 Jun 2014 Last revised: 19 Sep 2016

See all articles by David Ardia

David Ardia

HEC Montreal - Department of Decision Sciences

Kris Boudt

Ghent University; Vrije Universiteit Brussel; Vrije Universiteit Amsterdam

Marjan Wauters

Vrije Universiteit Brussel (VUB)

Date Written: February 14, 2016

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: ETFs; Factor models; Market timing; Portfolio choice; Stock characteristics

JEL Classification: G11, G12, C22

Suggested Citation

Ardia, David and Boudt, Kris and Wauters, Marjan, The Economic Benefits of Market Timing the Style Allocation of Characteristic-Based Portfolios (February 14, 2016). North American Journal of Economics and Finance, Vol. 37, pp. 38-62, 2016, Available at SSRN: https://ssrn.com/abstract=2458851 or http://dx.doi.org/10.2139/ssrn.2458851

David Ardia

HEC Montreal - Department of Decision Sciences ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4
Canada

Kris Boudt

Ghent University ( email )

Sint-Pietersplein 5
Gent, 9000
Belgium

Vrije Universiteit Brussel ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Marjan Wauters (Contact Author)

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

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