Dynamic Risk Management of Equity Market Factors

38 Pages Posted: 14 Nov 2019 Last revised: 24 Dec 2019

See all articles by Roger G Clarke

Roger G Clarke

Ensign Peak Advisors

Harindra de Silva

Analytic Investors, Inc.

Steven Thorley

BYU Marriott School of Business

Date Written: November 11, 2019


Managing the inter-temporal risk of multi-factor portfolios adds to performance in addition to the utility investors gain from controlling how much risk they are exposed to over time. We derive a simple closed-form formula for security weights in optimal multi-factor portfolios with an active risk budget. We test the risk control of five factors; value, momentum, small size, low beta, and profitability, and the optimal multi-factor portfolio. Our empirical research on the large-cap U.S. equity market over the last 54 years (1966 to 2019) allows for transparent performance attribution and replication of the process in other markets and time periods. We conclude that for the U.S. equity market, more active factors are better than less if each factor sub-portfolio is pure and anchored to the passive benchmark. Dynamic management of multi-factor portfolio exposures controls the level of active risk over time and increases realized performance.

Keywords: Factor Investing, Risk Management

JEL Classification: G11

Suggested Citation

Clarke, Roger G and de Silva, Harindra and Thorley, Steven, Dynamic Risk Management of Equity Market Factors (November 11, 2019). Available at SSRN: https://ssrn.com/abstract=3486035 or http://dx.doi.org/10.2139/ssrn.3486035

Roger G Clarke

Ensign Peak Advisors ( email )

60 East South Temple
4th Floor
Salt Lake City, UT 84111
United States

Harindra De Silva

Analytic Investors, Inc. ( email )

555 West 5th Street
50th Floor
Los Angeles, CA 90013
United States
213-688-3015 (Phone)
213-688-8856 (Fax)

Steven Thorley (Contact Author)

BYU Marriott School of Business ( email )

616 TNRB
Brigham Young University
Provo, UT 84602
United States
801-378-6065 (Phone)
801-378-5984 (Fax)

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