Market Integration: A Risk Budgeting Guide for Pure Alpha Investors

21 Pages Posted: 6 Mar 2007

See all articles by Juliana Caicedo-Llano

Juliana Caicedo-Llano

Universit´e d’Evry-Val-d’Essonne

Thomas Dionysopoulos

AXIANTA Research and Avenir Finance Investment Managers

Date Written: November 25, 2006

Abstract

A long-short portfolio strategy is constructed based on earnings yields forecasts and a shrunk covariance matrix. Positions are modied with an innovative technique of time-varying risk budgeting based on an integration measure. We consider a sample of 14 developed equity markets indexes for the period 01:1993 to 08:2006.

Our resulting market neutral strategy has an information ratio of 1,2 compared to 0,6 for a strategy without risk budgeting. We rely on a Principal Components Analysis to extract the factors with which we build an integration measure and we relate these factors to the framework of an asset pricing model. We have also used a shrinkage method to correct the covariance matrix ensuring a better risk measurement and robustness in our optimizations. And we forecast expected returns with forward earning yields.

Keywords: Market Integration, Long-Short, Covariance, Shrinkage, risk budgeting, Portfolio Selection, Principal Components

JEL Classification: C61, G11, G15

Suggested Citation

Caicedo-Llano, Juliana and Dionysopoulos, Thomas, Market Integration: A Risk Budgeting Guide for Pure Alpha Investors (November 25, 2006). Available at SSRN: https://ssrn.com/abstract=967989 or http://dx.doi.org/10.2139/ssrn.967989

Juliana Caicedo-Llano (Contact Author)

Universit´e d’Evry-Val-d’Essonne ( email )

Boulevard François Mitterrand
Évry, 91000
France

Thomas Dionysopoulos

AXIANTA Research and Avenir Finance Investment Managers ( email )

United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
533
Abstract Views
2,325
rank
58,502
PlumX Metrics