RT Journal Article
SR Electronic
T1 Sources of Outperformance in Equity Markets
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 170
OP 185
DO 10.3905/jpm.2004.170
VO 30
IS 4
A1 Carol Alexander
A1 Anca Dimitriu
YR 2004
UL https://pm-research.com/content/30/4/170.abstract
AB The general portfolio construction model described here is designed to replicate the first principal component of a group of stocks instead of a traditional benchmark, thus capturing only the common trend in stock returns. Reduction of the noise in stock returns facilitates the replication considerably, and the optimal portfolio structure is very stable. Analysis of the portfolio performance over different time horizons in European and U.S. equity markets reveals a time-varying structure. Throughout most of the period studied, the portfolio’s value component dominated the market and the volatility components, but during the volatile periods of the last few years the strategy earned a significant volatility premium. One explanation for the mean-reversion is behavioral; portfolio performance is influenced by the extent of investor herding toward the common trend in stock returns.