RT Journal Article
SR Electronic
T1 A Multi-Factor Strategy for Index Alpha Enhancement
JF The Journal of Index Investing
FD Institutional Investor Journals
SP 67
OP 79
DO 10.3905/jii.2019.9.4.067
VO 9
IS 4
A1 Roy Henriksson
A1 Joshua Livnat
A1 Patrick Pfeifer
A1 Margaret Stumpp
YR 2019
UL https://pm-research.com/content/9/4/67.abstract
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