Characterizing the Tail-Risk of Factor Mimicking Portfolios

42 Pages Posted: 30 Jun 2019 Last revised: 7 Dec 2019

Date Written: June 27, 2019


By assuming that short-run returns are independent and identically distributed, it is straightforward to extrapolate short-run risks to longer horizons. However, by generalizing the variance-ratio test to include higher co-moments, we establish a significant and sizable intertemporal dependency in all higher moments of equity returns. The intertemporal dependency is strong enough to prevent the convergence to normally distributed returns, at least up to a five-year holding period. We also demonstrate that the intertemporal dependency is both horizon \emph{and} portfolio-specific. Consequently, the common practice of extrapolating the short-run risk by assuming independent and identically distributed returns will severely bias the expected long-run risk.

Keywords: intertemporal dependency, risk factors, skewness, kurtosis, bootstrap

JEL Classification: G11, G12, C22, C12, C15, C58

Suggested Citation

Johansson, Andreas, Characterizing the Tail-Risk of Factor Mimicking Portfolios (June 27, 2019). Available at SSRN: or

Andreas Johansson (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383

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