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ETF Risk Models

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  • Zura Kakushadze
  • Willie Yu

Abstract

We discuss how to build ETF risk models. Our approach anchors on i) first building a multilevel (non-)binary classification/taxonomy for ETFs, which is utilized in order to define the risk factors, and ii) then building the risk models based on these risk factors by utilizing the heterotic risk model construction of https://ssrn.com/abstract=2600798 (for binary classifications) or general risk model construction of https://ssrn.com/abstract=2722093 (for non-binary classifications). We discuss how to build an ETF taxonomy using ETF constituent data. A multilevel ETF taxonomy can also be constructed by appropriately augmenting and expanding well-built and granular third-party single-level ETF groupings.

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  • Zura Kakushadze & Willie Yu, 2021. "ETF Risk Models," Papers 2110.07138, arXiv.org.
    • Handle: RePEc:arx:papers:2110.07138
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    References listed on IDEAS

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    1. Zura Kakushadze & Willie Yu, 2016. "Statistical Industry Classification," Journal of Risk & Control, Risk Market Journals, vol. 3(1), pages 17-65.
    2. Itzhak Ben‐David & Francesco Franzoni & Rabih Moussawi, 2018. "Do ETFs Increase Volatility?," Journal of Finance, American Finance Association, vol. 73(6), pages 2471-2535, December.
    3. Agapova, Anna, 2011. "Conventional mutual index funds versus exchange-traded funds," Journal of Financial Markets, Elsevier, vol. 14(2), pages 323-343, May.
    4. Zura Kakushadze, 2016. "Shrinkage=factor model," Journal of Asset Management, Palgrave Macmillan, vol. 17(2), pages 69-72, March.
    5. Zura Kakushadze & Willie Yu, 2019. "Machine Learning Risk Models," Papers 1903.06334, arXiv.org, revised Apr 2019.
    6. Timothy Krause & Sina Ehsani & Donald Lien, 2014. "Exchange-traded funds, liquidity and volatility," Applied Financial Economics, Taylor & Francis Journals, vol. 24(24), pages 1617-1630, December.
    7. Jeff Madura & Thanh Ngo, 2008. "Impact of ETF inception on the valuation and trading of component stocks," Applied Financial Economics, Taylor & Francis Journals, vol. 18(12), pages 995-1007.
    8. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    9. Zura Kakushadze & Willie Yu, 2016. "Statistical Risk Models," Papers 1602.08070, arXiv.org, revised Jan 2017.
    10. Zura Kakushadze, 2014. "4-Factor Model for Overnight Returns," Papers 1410.5513, arXiv.org, revised Jun 2015.
    11. Zura Kakushadze & Willie Yu, 2019. "Machine Learning Risk Models," Journal of Risk & Control, Risk Market Journals, vol. 6(1), pages 37-64.
    12. Zura Kakushadze & Willie Yu, 2016. "Multifactor Risk Models and Heterotic CAPM," Papers 1602.04902, arXiv.org, revised Mar 2016.
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