RT Journal Article
SR Electronic
T1 The Impact of Estimation Error on Latent Factor Model Forecasts of Portfolio Risk
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 147
OP 156
DO 10.3905/jpm.2017.43.5.147
VO 43
IS 5
A1 Stephen W. Bianchi
A1 Lisa R. Goldberg
A1 Allan Rosenberg
YR 2017
UL https://pm-research.com/content/43/5/147.abstract
AB In this article, the authors measure the impact of estimation error on latent factor model forecasts of portfolio risk and factor exposures. In markets simulated with a Gaussian return-generating process, the authors measure errors in forecasts for equally weighted and long-only minimum-variance portfolios constructed from a universe of 500 securities. They find that an estimation period of 250 days may be adequate to accurately forecast risk and factor exposures for an equally weighted portfolio. In contrast, the risk of a long-only minimum-variance portfolio is substantially underforecasted, even with an estimation period of 1,000 days. This underscores the importance of testing risk models on optimized portfolios.TOPICS: Analysis of individual factors/risk premia, portfolio construction