Dynamic Indexes: Equity Rotation and Factor Timing

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Kaiser, L. (2017). Dynamic Indexes: Equity Rotation and Factor Timing. Paper presented at the Citi's Annual Global Quant Conference, Budapest (Hungary).


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It is well-known that factor premiums, identified as contributing to portfolios risk and return, are time-varying and conditional on market phases. Thereon, this paper builds on Fernholz's [1989] diversity-weighted indexing approach to derive a systematic and transparent method to dynamically adjust a portfolios factor exposure over time. The empirical results show that resulting portfolios correspond to a factor rotation, whilst demonstrating favorable after-cost properties regarding risk-adjusted returns, downside deviation, concentration and tracking error. Additionally, introduced method limits extreme positions in certain assets by encompassing portfolios with an implicit active risk constraint such that a natural upper and lower weight bound exists. Given these properties and following the definition by Lo [2016], this approach lends itself for the construction of (dynamic) index funds based on its transparent, systematic and investable outcome.



  • Lehrstuhl für Betriebswirtschaftslehre, Bank- und Finanzmanagement
  • Institut für Finance

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