A Portfolio Perspective on the Multitude of Firm Characteristics

63 Pages Posted: 6 Nov 2017

See all articles by Victor DeMiguel

Victor DeMiguel

London Business School

Alberto Martin Utrera

Lancaster University - Lancaster University Management School

Francisco J. Nogales

Universidad Carlos III de Madrid - Department of Statistics; Institute of Financial Big Data UC3M-BS

Raman Uppal

EDHEC Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2017

Abstract

Hundreds of variables have been proposed to predict the cross-section of stock returns; see, for instance, Harvey, Liu, and Zhu (2015), McLean and Pontiff (2016), and Hou, Xue, and Zhang (2016). Our goal is to investigate which firm-specific characteristics matter jointly from a portfolio perspective; that is, from the perspective of an investor who cares not only about average returns but also about portfolio risk, transaction costs, and out-of-sample performance. To achieve our goal, we consider a dataset with 100 firm-specific characteristics and focus on three research questions. First, which characteristics are jointly significant from a portfolio perspective and why? Second, how does the answer to this question change with transaction costs? Third, can an investor identify ex-ante combinations of characteristics that result in good out-of-sample performance? We find only a small number of characteristics-six-are significant without transaction costs. With transaction costs, the number of significant characteristics increases to 15 because the trades in the underlying stocks required to rebalance different characteristics often net out. We show how investors can identify combinations of characteristics with abnormal out-of-sample returns net of transaction costs that are not fully explained by the Fama and French (2015) and Hou, Xue, and Zhang (2014) factors.

Keywords: Anomalies, out of sample performance, Risk, transaction costs

JEL Classification: G11

Suggested Citation

DeMiguel, Victor and Martin Utrera, Alberto and Nogales, Francisco J. and Uppal, Raman, A Portfolio Perspective on the Multitude of Firm Characteristics (November 2017). CEPR Discussion Paper No. DP12417. Available at SSRN: https://ssrn.com/abstract=3066029

Victor DeMiguel (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Alberto Martin Utrera

Lancaster University - Lancaster University Management School ( email )

Economics Department,
LUMS,
Bailrigg Lancaster, LA1 4YX
United Kingdom

Francisco J. Nogales

Universidad Carlos III de Madrid - Department of Statistics ( email )

Avda. de la Universidad, 30
Leganes, Madrid 28911
Spain
+34 916248773 (Phone)

HOME PAGE: http://www.est.uc3m.es/Nogales

Institute of Financial Big Data UC3M-BS ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Raman Uppal

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Centre for Economic Policy Research (CEPR)

90-98 Goswell Road
London, EC1V 7RR
United Kingdom

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