PT  - JOURNAL ARTICLE
AU  - Roy Henriksson
AU  - Joshua Livnat
AU  - Patrick Pfeifer
AU  - Margaret Stumpp
TI  - A Multi-Factor Strategy for Index Alpha Enhancement
AID  - 10.3905/jii.2019.9.4.067
DP  - 2019 Mar 31
TA  - The Journal of Index Investing
PG  - 67--79
VI  - 9
IP  - 4
4099  - https://pm-research.com/content/9/4/67.short
4100  - https://pm-research.com/content/9/4/67.full
AB  - Empirical studies suggest that the so-called “low volatility anomaly” is actually an artifact of skewness preferences—a tendency of investors to prefer stocks offering upside potential with low likelihood of loss. The authors argue that if skewness preferences underlie the low volatility anomaly, then a naïve low volatility strategy should be dominated by one that explicitly targets expected return skew. This article provides empirical evidence to that effect. It recommends a multi-factor alpha strategy that is based on avoiding index constituents that are perceived to have ex ante high relative skew. These findings have important implications for investors. Specifically, the authors demonstrate that portfolios constructed to avoid high expected skew stocks outperform both low volatility strategies and several widely used US and global capitalization-weighted indices.TOPICS: Analysis of individual factors/risk premia, performance measurement, portfolio construction