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Market integration: A risk-budgeting guide for pure alpha investors


  • Caicedo-Llano, Juliana
  • Dionysopoulos, Thomas


A long-short beta neutral portfolio strategy is constructed based on earnings yields forecasts and a shrunk covariance matrix. Positions are modified with an innovative technique of time-varying risk budgeting based on an integration measure. We consider a set of 14 developed equity markets indexes for the period of January 1993 to August 2006 in local currencies. Our resulting market neutral strategy has an Information ratio of 1:2 compared to 0:8 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 also show the results taking into account transaction costs and the use of a single currency.

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  • Caicedo-Llano, Juliana & Dionysopoulos, Thomas, 2008. "Market integration: A risk-budgeting guide for pure alpha investors," Journal of Multinational Financial Management, Elsevier, vol. 18(4), pages 313-327, October.
  • Handle: RePEc:eee:mulfin:v:18:y:2008:i:4:p:313-327

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    References listed on IDEAS

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    Cited by:

    1. George Tzagkarakis & Juliana Caicedo-Llano & Thomas Dionysopoulos, 2016. "Time-Frequency Adapted Market Integration Measure Based on Hough Transformed Multiscale Decompositions," Computational Economics, Springer;Society for Computational Economics, vol. 48(1), pages 1-27, June.

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