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Quantitative Stock Selection

Quantitative Stock Selection. April 27,2005. Agenda. Review of Original Model Industry Rescaling Extension of Dynamic Factors Introduction of Fractile Migration Possible Areas for Further Analysis. I. Review of Original Model. Factors & Subjective Scores. Heat Map: EW Returns.

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Quantitative Stock Selection

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  1. Quantitative Stock Selection April 27,2005

  2. Agenda • Review of Original Model • Industry Rescaling • Extension of Dynamic Factors • Introduction of Fractile Migration • Possible Areas for Further Analysis

  3. I. Review of Original Model

  4. Factors & Subjective Scores

  5. Heat Map: EW Returns

  6. II. Industry Rescaling

  7. Used North American Industry Classification System to Scale by Industry

  8. Rescaling increased return, 21.4% vs. 19.3% while decreasing standard deviation, 12.7% vs. 19.9%!!

  9. Overlay portfolio consistently produced positive alpha

  10. Takeaways about industry rescaling…. For our model • Intra-industry effects has historically been larger then inter-industry effect • Gets rid of huge anomaly in our out of sample data for 2003 • Can a middle ground or new weighting scheme be found to capture both inter and intra effects?

  11. III. Extension of Dynamic Variables

  12. Dynamic Model With Incremental Term Structure Varying Weights

  13. Improved Model Outperforms Over the Period…but Fails in 1999

  14. Overlay portfolio produced positive alpha in fifteen out of seventeen years

  15. Takeaways about dynamic factors… Examined a number of interaction variables: • Growth and Value Regimes • Credit Spreads • Term Structure of Interest Rates Incremental scoring adjustments using yield curve information added the most value to our model.

  16. Takeaway about dynamic factors… Time varying “dynamic” weights can be very useful in increasing the power of quantitative models: • More information • Interaction effects • Adaptive models However, finding a consistent model can be tricky: • Overfitting • Lots of noise

  17. IV. Introduction of Fractile Migration

  18. Preliminary Information • In-sample period: 01-Dec-87 thru 31-Dec-98 • Out-of-sample period: 01-Jan-99 thru 31-Dec-04 • Monthly return data • Based upon original model

  19. Count of Returns

  20. Average of Returns

  21. Average of Returns

  22. Fractile Stability & Turnover Implications

  23. Results & Conclusions • No substantial benefits for long portfolio via analysis of fractile migration … • … Short portfolio, however, tells a different story • Improvements in return, turnover, and transaction costs identified • For further review: • Is new short-portfolio sufficiently diversified? • w/r/t industry? • w/r/t market-cap? • etc.

  24. V. Possible Areas for Further Analysis

  25. Possible Areas for Further Analysis • Incorporate new research into a “supermodel” • Best positioning in an overall portfolio • Identification of additional / stronger signals for time-variation of factor weights • Factor interaction with its own turnover

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