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Equity style allocation: a nonparametric approach

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>05/2016
<mark>Journal</mark>Journal of Asset Management
Issue number3
Volume17
Number of pages24
Pages (from-to)141-164
Publication statusPublished
Original languageEnglish

Abstract

In this article we provide a framework to assist with style allocation in Asian equity funds. We implement a nonparametric methodology to capture short-term stable time-varying relationships of otherwise long-term unstable relationships between numerous macroeconomic variables and style returns. We find that a nonparametric forecasting methodology produces positive performance after allowing for transaction costs, while the equivalent parametric forecasts are negative. The model can be implemented through tilting a funds style exposure to enhance performance. Even in the context of a long-only fund, the style exposures of the proposed model can be implemented as long–short exposures relative to a benchmark. Because the model is presented as a self financing market-neutral model, its implementation can be leveraged directly in a market-neutral fund or indirectly as (leveraged) style exposures in a long-only fund.