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Article

Improving Factor Models

Mark Grinblatt and Konark Saxena
The Journal of Portfolio Management Special Issue Dedicated to Stephen A. Ross 2018, 44 (6) 74-88; DOI: https://doi.org/10.3905/jpm.2018.44.6.074
Mark Grinblatt
is Distinguished Professor of Finance at the UCLA Anderson School of Management in Los Angeles, CA, where he holds the Japan Alumni Chair in International Finance
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Konark Saxena
is a senior lecturer in the School of Banking and Finance at the University of New South Wales in Sydney, NSW, Australia
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Abstract

Factor-mimicking portfolios typically identify and weight well-diversified basis portfolios. Improving weightings of the basis portfolios so that they are more closely related to the optimal portfolio’s weights enhances the pricing accuracy of parsimonious factor models. In this article, the authors—one of whom was a student of Professor Stephen Ross at the Yale School of Management and later a Ross coauthor—show that this can be achieved with known ex post efficiency criteria, applied with common sense that recognizes when statistical biases are minimal. These alternatives to traditional weightings, such as equal long–short portfolios, help explain the returns of popular anomaly portfolios.

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The Journal of Portfolio Management: 44 (6)
The Journal of Portfolio Management
Vol. 44, Issue 6
Special Issue Dedicated to Stephen A. Ross 2018
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Improving Factor Models
Mark Grinblatt, Konark Saxena
The Journal of Portfolio Management Jun 2018, 44 (6) 74-88; DOI: 10.3905/jpm.2018.44.6.074

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Improving Factor Models
Mark Grinblatt, Konark Saxena
The Journal of Portfolio Management Jun 2018, 44 (6) 74-88; DOI: 10.3905/jpm.2018.44.6.074
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  • Article
    • Abstract
    • WEIGHTING FACTOR PORTFOLIO COMPONENTS
    • EXPLAINING 10 PROMINENT ANOMALIES
    • PRICING BASIS PORTFOLIOS
    • HOW MANY ZERO-WEIGHT BASIS PORTFOLIOS?
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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