quantitative equity investment management with time-varying factor sensitivities

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1、7QuantitativeEquityInvestmentManagementwithTime-VaryingFactorSensitivities∗YVESBENTZABSTRACTFactormodelsarewidelyusedinmoderninvestmentmanagement.Theyenableinvest-mentmanagers,quantitativetradersandriskmanagerstomodelco-movementsamongassetsinanefficientwaybyconcentratingth

2、ecorrelationstructureofassetreturnsintoasmallnumberoffactors.Becausethefactorsensitivitiescanbeestimatedbyregressiontechniquesthesefactorscanbeusedtomodeltheassetreturns.Unfortunately,thecorre-lationstructureisnotconstantbutevolvesintimeandsodothefactorsensitivities.Asare

3、sult,thesensitivityestimateshavetobeconstantlyupdatedinordertokeepupwiththechanges.Thischapterdescribesthreemethodsforestimatingtime-varyingfactorsensitivities.Themethodsarecomparedandnumerousexamplesareprovided.Thefirstmethod,basedonrollingregressions,isthemostpopularbuta

4、lsotheleastaccurate.Weshowthatthismethodcansufferfromseriousbiaseswhenthesensitivitieschangeovertime.Thesecondmethodisbasedonaweightedregressionapproachwhichovercomessomeofthelimitationsofthefirstmethodbygivingmoreimportancetorecentobservations.Finally,aKalmanfilter-basedst

5、ochasticparameterregressionmodelisdescribedthatoptimallyestimatesnon-stationaryfactorexposures.ThethreemethodshavebeenimplementedinthesoftwareprovidedontheCD-Romsothatreaderscanuseandcomparethemwiththeirowndataandapplications.7.1INTRODUCTIONAreyousatisfiedwiththeaccuracyof

6、yourfactorsensitivityestimates?Ifnot,perhapsthefollowingsituationwillsoundfamiliar...Afterdaysofcarefulanalysis,Johnhadconstructedalong–shortportfolioofstocks.John’sboss,however,feltuncomfortableaboutthepositionashefearedthattheexpectedoutperformance,i.e.thealpha,maytaket

7、imetomaterialiseandbeperturbedbyunwantedriskexposures.Johnupdatedtheriskmodelwiththelatestestimatesoffactorsensitivitiesandrantheoptimiserinordertoimmunisethepositionagainsttheseexposures.Aftermonitoringtheprofitandlossover∗Theinformationpresentedandopinionsexpressedherein

8、aresolelythoseoftheauthoranddonotnecessarilyrepresentthoseofCreditSuisseFirstBoston.AppliedQuant