Factor Dispersions

60 Pages Posted: 1 Jul 2024

See all articles by Daniil Gerchik

Daniil Gerchik

Frankfurt School of Finance & Management

Vittorio Ruffo

Frankfurt School of Finance & Management

Lorenzo Schönleber

University of Turin - Collegio Carlo Alberto

Grigory Vilkov

Frankfurt School of Finance & Management

Date Written: February 29, 2024

Abstract

Dispersion strategies capture the difference in variance dynamics between a basket and its components. Even though smart-beta indices intend to load heavily on a particular factor, factor dispersions based on such baskets are exposed to risks of other factors and idiosyncratic variances. Analyzing factor dispersions through a linear factor model and equicorrelation representations, we recover driving forces behind dispersion dynamics and work out an attribution of a dispersion risk premium. As a balanced combination of systematic and idiosyncratic variance components, dispersion and its risk premium provide signals about future changes in systematic and alpha-based investment opportunities.

Keywords: dispersion, implied correlation, diversification, alpha, systematic strategy, timing

Suggested Citation

Gerchik, Daniil and Ruffo, Vittorio and Schönleber, Lorenzo and Vilkov, Grigory, Factor Dispersions (February 29, 2024). Available at SSRN: https://ssrn.com/abstract=4853747 or http://dx.doi.org/10.2139/ssrn.4853747

Daniil Gerchik

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany
60322 (Fax)

Vittorio Ruffo

Frankfurt School of Finance & Management ( email )

Lorenzo Schönleber (Contact Author)

University of Turin - Collegio Carlo Alberto ( email )

Piazza Albarello , 8
Turin
Italy

Grigory Vilkov

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.vilkov.net

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