Risk models vs characteristic models from an investor’s perspective

Risk models vs characteristic models from an investor’s perspective PurposeThe purpose of this paper is to analyze the implications of the risk versus characteristic debate from the perspective of a mean-variance investor.Design/methodology/approachExpected returns and the variance-covariance matrix are estimated based on various characteristic and risk models and evaluated for the purpose of mean-variance portfolios.FindingsReturn estimates from characteristic models are most informative to investors. Risk-factor models provide the most informative estimates of the risk. A mean-variance investor should rely on combinations of the two model types.Originality/valueAlthough the risk vs characteristic debate is a binary academic debate, our findings from an investor's perspective suggest to make use of the best of both worlds. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Risk Finance Emerald Publishing

Risk models vs characteristic models from an investor’s perspective

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1526-5943
DOI
10.1108/JRF-10-2018-0163
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this paper is to analyze the implications of the risk versus characteristic debate from the perspective of a mean-variance investor.Design/methodology/approachExpected returns and the variance-covariance matrix are estimated based on various characteristic and risk models and evaluated for the purpose of mean-variance portfolios.FindingsReturn estimates from characteristic models are most informative to investors. Risk-factor models provide the most informative estimates of the risk. A mean-variance investor should rely on combinations of the two model types.Originality/valueAlthough the risk vs characteristic debate is a binary academic debate, our findings from an investor's perspective suggest to make use of the best of both worlds.

Journal

The Journal of Risk FinanceEmerald Publishing

Published: Mar 18, 2019

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