Work

When Factors Do Not Span Their Basis Portfolios

Year: 2018

Type: article

Abstract: To price assets with a parsimonious set of factor-mimicking portfolios, one typically identifies and weights well-diversified basis portfolios. Traditional weightings lead to factor-mimicking portfolios that are unlikely to price even the basis portfolios from which they are formed. We offer a method to combine basis portfolios into a single factor-mimicking portfolio that is closely linked to the optimal portfolio. In practice, this method improves the pricing accuracy of parsimonious factor models, even for anomaly portfolios formed from characteristics that are distinct from those underlying the basis portfolios.

Source: Journal of Financial and Quantitative Analysis

DOI: 10.1017/s0022109018000376

Authors: Mark Grinblatt, Konark Saxena

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3124033262

FWCI: 1.98

Cites: 56

Cited by: 21

Related to: 10