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Global portfolio management under state dependent multiple risk premia

Author

Listed:
  • Timotheos Angelidis

    (University of Peloponnese)

  • Nikolaos Tessaromatis

    (EDHEC Business School and EDHEC Risk Institute)

Abstract

In this paper, we assess the benefits from international factor diversification under a regime based portfolio construction framework that takes into account the dynamic changes in stock markets. We show that there are significant costs to investors who fail to (a) pursue an international diversification strategy using sources of return other than the market premium and (b) take into account the existence of regimes in portfolio construction and asset allocation. Short sale and tracking error constraints reduce but do not eliminate the gains from a dynamic global factor portfolio. Implementation through commercially available, investable factor indices to provide efficient and low cost building blocks to construct a dynamic diversified factor portfolio in practice preserves most of the benefits from state dependent portfolio construction.

Suggested Citation

  • Timotheos Angelidis & Nikolaos Tessaromatis, 2014. "Global portfolio management under state dependent multiple risk premia," Proceedings of Economics and Finance Conferences 0400966, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iefpro:0400966
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    Cited by:

    1. Paweł Sakowski & Robert Ślepaczuk & Mateusz Wywiał, 2016. "Applying exogenous variables and regime switching to multi-factor models on equity indices," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 47.
    2. Platanakis, Emmanouil & Sakkas, Athanasios & Sutcliffe, Charles, 2019. "Harmful diversification: Evidence from alternative investments," The British Accounting Review, Elsevier, vol. 51(1), pages 1-23.
    3. Pawe³ Sakowski & Robert Œlepaczuk & Mateusz Wywia³, 2016. "Cross-Sectional Returns With Volatility Regimes From A Diverse Portfolio Of Emerging And Developed Equity Indices," "e-Finanse", University of Information Technology and Management, Institute of Financial Research and Analysis, vol. 12(2), pages 23-35, October.
    4. Angelidis, Timotheos & Tessaromatis, Nikolaos, 2014. "Global Style Portfolios Based on Country Indices," MPRA Paper 53094, University Library of Munich, Germany.
    5. Paweł Sakowski & Robert Ślepaczuk & Mateusz Wywiał, 2016. "Can We Invest Based on Equity Risk Premia and Risk Factors from Multi-Factor Models?," Working Papers 2016-09, Faculty of Economic Sciences, University of Warsaw.
    6. Emmanouil Platanakis & Athanasios Sakkas & Charles Sutcliffe, 2017. "Should Portfolio Model Inputs Be Estimated Using One or Two Economic Regimes?," ICMA Centre Discussion Papers in Finance icma-dp2017-07, Henley Business School, University of Reading.
    7. Francesco Chincoli & Massimo Guidolin, 2017. "Linear and nonlinear predictability in investment style factors: multivariate evidence," Journal of Asset Management, Palgrave Macmillan, vol. 18(6), pages 476-509, October.

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    More about this item

    Keywords

    Diversification benefits; Factor returns; Regime Switching Models.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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