EDHEC-Risk paper on portfolio rebalancing benefits in equity markets accepted by JPM
Written on 10 Apr 2020.
We are pleased to enclose an EDHEC-Risk Institute research article published in the March 2020 issue of the Journal of Portfolio Management.
In this article "Measuring Portfolio Rebalancing Benefits in Equity Markets", authors Jean-Michel Maeso and Lionel Martellini, provide a thorough empirical analysis of the volatility pumping effect in equity markets and examine the conditions under which it can be maximized.
The authors’ main contribution to the understanding of the rebalancing premium is an effort to disentangle and separately measure the isolated impact of various components of the total effect. Using the Fama–French–Carhart four-factor model, they find that, after controlling for factor exposures, the average outperformance of the rebalanced strategy with respect to the corresponding buy-and-hold strategy remains substantial at an annualized level above 100 basis points over a 5-year time horizon for stocks in the S&P 500 universe.
They also find that size, value, momentum, and volatility are sorting characteristics that have a significant out-of-sample impact on the rebalancing premium.
TOPICS: Performance measurement, portfolio management/multi-asset allocation, portfolio theory, portfolio construction, equity portfolio management
KEY FINDINGS
• After controlling for factor exposures, the rebalanced strategy generates an average annual outperformance of more than 100 basis points with respect to the corresponding buy-and-hold strategy over a 5-year time horizon for the S&P 500 universe.
• The selection of small-cap, low book-to-market, past loser, and high-volatility stocks generates a higher out-of-sample rebalancing premium compared to random portfolios for time horizons from 1 year to 5 years.
• Serial correlation as a sorting characteristic does not allow maximization of the rebalancing premium out of sample for time horizons greater than 1 year.
You can access here the complete EDHEC-Risk Institute publication version of "Measuring Volatility Pumping Benefits in Equity Markets".
Jean-Michel Maeso has been a senior quantitative researcher at EDHEC-Risk Institute since October 2015. Previously, he spent 5 years in the financial industry specialising in research, development and implementation of investment solutions (structured products and systematic strategies) for institutional investors. He holds an engineering degree from the Ecole Centrale de Lyon with a specialisation in applied mathematics.
Lionel Martellini is a Professor of Finance at EDHEC Business School and the Director of EDHEC-Risk Institute. He is a former member of the faculty at the Marshall School of Business, University of Southern California, and has been a visiting fellow at the Operations Research and Financial Engineering department at Princeton University. Professor Martellini conducts research in a broad range of topics related to investment solutions for individual and institutional investors, equity and fixed-income portfolio construction, risk management and derivatives valuation. His work has been published in leading academic and practitioner journals and has been featured in major European and global dailies such as The Economist, The Financial Times and The Wall Street Journal. Professor Martellini has served as a consultant for large institutional investors, investments banks and asset management firms on a number of questions related to risk and asset allocation decisions, and is a regular speaker in seminars and conferences on these subjects.
About EDHEC
Operating from campuses in Lille, Nice, Paris, London and Singapore, EDHEC is one of the world’s top 15 business schools. Fully international and directly connected to the business world, EDHEC commands a strong reputation for research excellence and the ability to train entrepreneurs and managers capable of breaking new ground. EDHEC functions as a genuine laboratory of ideas and produces innovative solutions valued by businesses. The School’s teaching is inspired by its research work and a focus on “learning by doing”, all with the aim of equipping people with the skills to succeed in business.
