A Toolkit for Factor-Mimicking Portfolios

79 Pages Posted: 18 Mar 2019 Last revised: 15 Feb 2020

See all articles by Kuntara Pukthuanthong

Kuntara Pukthuanthong

University of Missouri, Columbia

Richard Roll

California Institute of Technology

Junbo L. Wang

Louisiana State University, Baton Rouge

Tengfei Zhang

Louisiana State University, Baton Rouge

Date Written: February 20, 2019

Abstract

We relate factor-mimicking portfolios (FMPs) to the beta-pricing model and propose that each FMP should minimize the mispricing component of its underlying factor. We also examine FMP construction when the underlying factor contains noise and offer a new method to resolve this issue. For both classical and our newly proposed methods, we recommend enhanced necessary criteria. FMPs of several macroeconomic factors constructed by our method satisfy these criteria. We find that equity returns are priced by consumption growth, inflation, and the unemployment rate; and corporate bond returns are priced by consumption growth, industrial production, and the default spread.

Keywords: Factor-Mimicking Portfolios, Non-Traded Factors, Risk Premia

JEL Classification: G10, G12, G11

Suggested Citation

Pukthuanthong, Kuntara and Roll, Richard W. and Wang, Junbo L. and Zhang, Tengfei, A Toolkit for Factor-Mimicking Portfolios (February 20, 2019). Available at SSRN: https://ssrn.com/abstract=3341604 or http://dx.doi.org/10.2139/ssrn.3341604

Kuntara Pukthuanthong

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: http://https://kuntara.weebly.com

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

Junbo L. Wang

Louisiana State University, Baton Rouge ( email )

Baton Rouge, LA 70803
United States

Tengfei Zhang (Contact Author)

Louisiana State University, Baton Rouge ( email )

2900 Business Education Complex
501South Quad Drive
Baton Rouge, LA 70803
United States

HOME PAGE: http://sites.google.com/view/tengfeizhang/home

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