Custom v. Standardized Risk Models

Risks

Zura Kakushadze¹  Jim Kyung-Soo Liew² 

[1]Quantigic^® Solutions LLC, 1127 High Ridge Road #135, Stamford, CT 06905, USA

[2]

[3]The Johns Hopkins Carey Business School, 100 International Drive, Baltimore, MD 21202, USA

[4] E-Mail:

关键词: risk model;    multi-factor;    risk factor;    short horizon;    quant trading;    style;    industry;    specific risk;    factor risk;    portfolio optimization;   

DOI  :  10.3390/risks3020112

来源: mdpi

【 摘 要 】

We discuss when and why custom multi-factor risk models are warranted and give source code for computing some risk factors. Pension/mutual funds do not require customization but standardization. However, using standardized risk models in quant trading with much shorter holding horizons is suboptimal: (1) longer horizon risk factors (value, growth, etc.) increase noise trades and trading costs; (2) arbitrary risk factors can neutralize alpha; (3) “standardized” industries are artificial and insufficiently granular; (4) normalization of style risk factors is lost for the trading universe; (5) diversifying risk models lowers P&L correlations, reduces turnover and market impact, and increases capacity. We discuss various aspects of custom risk model building.

【 授权许可】

CC BY   
© 2015 by the authors; licensee MDPI, Basel, Switzerland.