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Article

Risk Reduction in Style Rotation

M. Rodrigo Dupleich Ulloa, Daniel Giamouridis and Chris Montagu
The Journal of Portfolio Management Winter 2012, 38 (2) 44-55; DOI: https://doi.org/10.3905/jpm.2012.38.2.044
M. Rodrigo Dupleich Ulloa
is a vice president in Equities Quantitative Analysis, Europe, at Citi Global Markets in London, UK.
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  • For correspondence: rodrigo.dupleich@citi.com
Daniel Giamouridis
is an assistant professor in the Department of Accounting and Finance at Athens University of Economics and Business in Athens, Greece; a senior visiting fellow in the Faculty of Finance at Cass Business School, City University in London, UK; and a research associate at EDHEC-Risk Institute in Nice, France.
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  • For correspondence: dgiamour@aueb.gr
Chris Montagu
is a managing director and head of Global Quantitative Research, Europe, at Citi Investment Research in London, UK.
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  • For correspondence: chris.montagu@citi.com
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Abstract

Dupleich Ulloa, Giamouridis, and Montagu investigate the potential improvement in the implementation of style rotation strategies by techniques addressing estimation errors. They select two approaches that have recently stood out in the statistics and econometrics literature and have been applied to portfolio construction. One approach builds on regularization methods, addressing estimation error by focusing on the weights of the constructed portfolios.The second method pools forecasts that are obtained across different observation windows, thus focusing on minimizing estimation error in the moments of the return distribution that may arise due to structural breaks. The authors conclude that overall benefits are derived by foregoing naive approaches, which in their dataset can be as significant as an improvement in the Information Ratio of about 54%; that is, improving from 0.65 (naive) to approximately 1 (dynamic).

  • Copyright © 2012 Citi Investment Research & Analysis. All rights reserved. Not to be reproduced or redistributed without permission.
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The Journal of Portfolio Management: 38 (2)
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Risk Reduction in Style Rotation
M. Rodrigo Dupleich Ulloa, Daniel Giamouridis, Chris Montagu
The Journal of Portfolio Management Jan 2012, 38 (2) 44-55; DOI: 10.3905/jpm.2012.38.2.044

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Risk Reduction in Style Rotation
M. Rodrigo Dupleich Ulloa, Daniel Giamouridis, Chris Montagu
The Journal of Portfolio Management Jan 2012, 38 (2) 44-55; DOI: 10.3905/jpm.2012.38.2.044
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