Compensated and Uncompensated Risks In Global Factor Investing

38 Pages Posted: 13 Jul 2020 Last revised: 14 Jul 2020

See all articles by Sina Ehsani

Sina Ehsani

Northern Illinois University

Michael Hunstad

Northern Trust Asset Management

Manan Mehta

Northern Trust Asset Management

Date Written: June 19, 2020

Abstract

Global equity risk factors that are constructed by sorting stocks on firm characteristics associated with expected returns contain embedded region and sector exposures. We show that these positions lead to uncompensated volatility. Hedging out both region and sector exposures simultaneously increases the Sharpe ratio of the typical global factor by 50%. Hedged factors, individually or in a model, always subsume their non-hedged counterparts. Our results have implications for international asset pricing and portfolio management.

Keywords: International Equity Factors, Asset Pricing Models, Portfolio Management, Sector-Neutral factors

JEL Classification: G11, G12, G15

Suggested Citation

Ehsani, Sina and Hunstad, Michael and Mehta, Manan, Compensated and Uncompensated Risks In Global Factor Investing (June 19, 2020). Available at SSRN: https://ssrn.com/abstract=3631222 or http://dx.doi.org/10.2139/ssrn.3631222

Sina Ehsani (Contact Author)

Northern Illinois University ( email )

Chicago, IL 60115
United States

Michael Hunstad

Northern Trust Asset Management ( email )

50 South LaSalle Street
Chicago, IL 60603
United States

Manan Mehta

Northern Trust Asset Management ( email )

50 South LaSalle Street
Chicago, IL 60603
United States

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