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Sources of outperformance in equity markets
journal contribution
posted on 2023-06-08, 12:22 authored by Carol AlexanderCarol Alexander, Anca DimitriuThe general portfolio construction model described here is designed to replicate the first principal component of a group of stocks instead of a traditional benchmark, thus capturing only the common trend in stock returns. Reduction of the noise in stock returns facilitates the replication considerably, and the optimal portfolio structure is very stable. Analysis of the portfolio performance over different time horizons in European and U.S. equity markets reveals a time-varying structure. Throughout most of the period studied, the portfolio’s value component dominated the market and the volatility components, but during the volatile periods of the last few years the strategy earned a significant volatility premium. One explanation for the mean-reversion is behavioral; portfolio performance is influenced by the extent of investor herding toward the common trend in stock returns.
History
Publication status
- Published
Journal
Journal of Portfolio ManagementISSN
0095-4918Publisher
Institutional Investor IncExternal DOI
Issue
4Volume
30Page range
170-185Department affiliated with
- Business and Management Publications
Full text available
- No
Peer reviewed?
- Yes