Power Sorting

65 Pages Posted: 28 Aug 2023 Last revised: 30 May 2024

See all articles by Anastasios Kagkadis

Anastasios Kagkadis

University of Liverpool Management School; Lancaster University - Department of Accounting and Finance

Harald Lohre

Robeco Quantitative Investments; Lancaster University Management School

Ingmar Nolte

Lancaster University - Department of Accounting and Finance

Sandra Nolte (Lechner)

Lancaster University Management School

Nikolaos Vasilas

Lancaster University - Lancaster University Management School; Ultramarin

Date Written: May 22, 2024

Abstract

We propose a novel approach for constructing characteristic-based equity factors, termed “power sorting”. Power sorting exploits the non-linearities and asymmetries inherent in the characteristic-return relations, while it remains computationally simple and avoids excessive weights. We demonstrate that power sorting achieves consistently superior out-of-sample performance compared to traditional quantile sorting and other factor portfolio construction methods. Our results are pervasive across factors, robust through time, cannot be attributed to increased turnover or tail risk, and extend to multi-factor strategies. Finally, we show that power sorted versions of well-known asset pricing factor models outperform the original ones.

Keywords: Factor Investing, Portfolio Construction, Portfolio Weights, Power Sorting

JEL Classification: G10, G11, C52, C55

Suggested Citation

Kagkadis, Anastasios and Lohre, Harald and Nolte, Ingmar and Nolte (Lechner), Sandra and Vasilas, Nikolaos, Power Sorting (May 22, 2024). Available at SSRN: https://ssrn.com/abstract=4552208 or http://dx.doi.org/10.2139/ssrn.4552208

Anastasios Kagkadis

University of Liverpool Management School ( email )

Chatham St
Liverpool, L69 7ZH
United Kingdom

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster, LA1 4YX
United Kingdom

Harald Lohre

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3011 AG
Netherlands

Lancaster University Management School

Bailrigg
Lancaster LA1 4YX
United Kingdom

HOME PAGE: http://www.lancaster.ac.uk/lums/people/harald-lohre

Ingmar Nolte

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Sandra Nolte (Lechner)

Lancaster University Management School ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Nikolaos Vasilas (Contact Author)

Lancaster University - Lancaster University Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Ultramarin ( email )

Schönhauser Allee 43a
Berlin, BERLIN 10435
Germany

HOME PAGE: http://www.ultramarin.ai

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