The following thesis, in collaboration with Professor Dennis Marco Montagna and Doctor Carlo Alberto Grecchi, has the purpose of treating, as a master’s thesis, a comprehensive equity portfolio analysis which, through factor allocation, investigates the properties of the Factor Risk Parity portfolio. In the first chapter, it is presented an overview of academic literature concerning Factor Investing and Risk Parity Investing. Indeed, they are considered forerunners of Factor Risk Parity Investing and their contribution has been crucial for its theorizing. In particular, the chapter exposes the history of these approaches, their specific features and the correspondent portfolio construction techniques, together with their drawbacks. The second chapter presents a review of the academic literature about Factor Risk Parity portfolio. As first, it will be presented the history which led to the birth of this approach as well as its main features. Successively, it will be examined the multitude of factors introduced by researchers over the years and it will be described the procedure to select the most relevant factors. It will be presented the construction technique of this portfolio together with some practical issues. The chapter will then expose a review about factor timing as well as about the potential introduction of a green factor in the next future. Then, it will be explained the potential drawbacks of Factor Risk Parity. In the third chapter, it will be introduced and analyzed the seven MSCI Single Factor Indexes, three defensive and four cyclical, which will represent the building blocks of the successively implemented portfolios. After a theoretical overview of academic research, these factors’ statistics will be computed and their results will be examined and compared in both Developed and Emerging Markets over different time frames. For Developed Markets the study will focus, at the beginning, on the period starting in 1999 and concluding on 2023. This time period will then be reduced to 2001-2023 to make it comparable with Emerging Markets Indexes and, as last, both Developed and Emerging Markets Indexes will be restricted to the period 2019-2023 to carry out a comparison taking into account also the Size factor. In the last chapter, the previously presented MSCI Single Factor Indexes will be combined to build three portfolios: a Factor Risk Parity portfolio, an Inverse Volatility portfolio and an Equal Weighted portfolio. The research will compute the year-by-year statistics of these portfolios and will compare them in Developed and Emerging Markets. This comparison will vert on the intervals 2003-2023 and 2019-2023, focusing on the crisis periods which characterized these timeframes. To make a further step, it will be built the six-factor version of these portfolios that excludes Size. The year-by-year performances of these portfolios will be compared both with their seven-factor version in Developed Markets and with the correspondent portfolios in Emerging Markets, assessing the consistency of the Size factor in these areas for these portfolios.
La seguente tesi, realizzata in collaborazione con il Professor Dennis Marco Montagna e il Dottor Carlo Alberto Grecchi, ha lo scopo di affrontare, in veste di tesi di laurea magistrale, un’analisi di portafoglio azionario che, attraverso un processo di factor allocation, approfondisca le proprietà del portafoglio di Factor Risk Parity. Nel primo capitolo, sarà presentata una panoramica della letteratura accademica in merito al Factor Investing e al portafoglio di Risk Parity. Tali portafogli, infatti, sono considerati i precursori del Factor Risk Parity Investing e il loro contributo ´e stato cruciale nel tempo per la teorizzazione di tale approccio. In particolare, il capitolo esporrà la storia di ciascuno di questi stili di investimento, le loro caratteristiche distintive e le tecniche di costruzione dei corrispondenti portafogli, verranno inoltre esposte anche le criticit´a connesse a ciascun approccio. Il secondo capitolo esporrà una revisione della letteratura accademica in merito al portafoglio di Factor Risk Parity. In prima istanza, verrà presentata la storia che ha portato alla nascita di questo approccio, nonchè le principali caratteristiche che lo rendono unico nel mondo degli investimenti. Successivamente, saranno esaminati i numerosi fattori proposti dai ricercatori accademici nel corso degli anni e verrà descritta la procedura per selezionare i fattori più rilevanti. Sarà presentata la tecnica di costruzione del portafoglio di Factor Risk Parity e saranno esaminati alcuni temi in merito alla sua implementazione pratica. Il capitolo esporrà quindi una panoramica inerente il Factor Timining ed esaminerà la possibile introduzione di un Green Factor in futuro. Successivamente, saranno esposte le possibili criticità connesse al portafoglio di Factor Risk Parity. Nel terzo capitolo, verranno presentati e analizzati i sette MSCI Single Factor Indexes, tre difensivi e quattro ciclici, che saranno utilizzati come elementi costitutivi dei portafogli implementati nel capitolo quarto. Dopo una panoramica teorica delle principali caratteristiche di tali fattori, saranno esposti i risultati statistici dell’analisi delle serie storiche corrispondenti a ciascuno di essi e i loro risultati saranno oggetto di comparazione sia nei Mercati Sviluppati che in quelli Emergenti su diversi periodi temporali. Per i Mercati Sviluppati, lo studio si concentrerà, inizialmente, sul periodo dal 1999 al 2023. Questo periodo verrà successivamente ridotto a 2001-2023 per renderlo confrontabile con i risultati ottenuti per i Mercati Emergenti e, infine, sia per gli Indici dei Mercati Sviluppati che per quelli dei Mercati Emergenti l’analisi si concentrerà sul periodo 2019-2023 per effettuare uno studio comparativo che tenga conto anche del fattore Size. Nell’ultimo capitolo, gli MSCI Single Factor Indexes, presentati in precedenza, verranno utilizzati per la creazione di tre portafogli: un portafoglio di Factor Risk Parity, un portafoglio di Inverse Volatility e un portafoglio Equal Weight. Saranno calcolate anno per anno le statistiche di questi portafogli e si genererà un confronto tra i risultati ottenuti nei Mercati Sviluppati e quelli ottenuti nei Mercati Emergenti. Tale confronto si baserà sui periodi 2003-2023 e 2019-2023, dando particolare enfasi ai momenti di crisi che sono stati attraversati in questi archi temporali. Al fine di ampliare ulteriormente il lavoro di tesi, verrà creata la versione a sei fattori di ciascuno di tali portafogli, esclusiva del fattore Size. Le performance anno per anno di questi portafogli saranno confrontate sia con la loro versione a sette fattori nei Mercati Sviluppati sia con i corrispondenti portafogli nei Mercati Emergenti, approfondendo la coerenza e la rilevanza del fattore Size per i tre portafogli esaminati in ciascuna di queste aree.
A comprehensive equity portfolio analysis through factor allocation
BIANCHI, ALESSANDRO
2022/2023
Abstract
The following thesis, in collaboration with Professor Dennis Marco Montagna and Doctor Carlo Alberto Grecchi, has the purpose of treating, as a master’s thesis, a comprehensive equity portfolio analysis which, through factor allocation, investigates the properties of the Factor Risk Parity portfolio. In the first chapter, it is presented an overview of academic literature concerning Factor Investing and Risk Parity Investing. Indeed, they are considered forerunners of Factor Risk Parity Investing and their contribution has been crucial for its theorizing. In particular, the chapter exposes the history of these approaches, their specific features and the correspondent portfolio construction techniques, together with their drawbacks. The second chapter presents a review of the academic literature about Factor Risk Parity portfolio. As first, it will be presented the history which led to the birth of this approach as well as its main features. Successively, it will be examined the multitude of factors introduced by researchers over the years and it will be described the procedure to select the most relevant factors. It will be presented the construction technique of this portfolio together with some practical issues. The chapter will then expose a review about factor timing as well as about the potential introduction of a green factor in the next future. Then, it will be explained the potential drawbacks of Factor Risk Parity. In the third chapter, it will be introduced and analyzed the seven MSCI Single Factor Indexes, three defensive and four cyclical, which will represent the building blocks of the successively implemented portfolios. After a theoretical overview of academic research, these factors’ statistics will be computed and their results will be examined and compared in both Developed and Emerging Markets over different time frames. For Developed Markets the study will focus, at the beginning, on the period starting in 1999 and concluding on 2023. This time period will then be reduced to 2001-2023 to make it comparable with Emerging Markets Indexes and, as last, both Developed and Emerging Markets Indexes will be restricted to the period 2019-2023 to carry out a comparison taking into account also the Size factor. In the last chapter, the previously presented MSCI Single Factor Indexes will be combined to build three portfolios: a Factor Risk Parity portfolio, an Inverse Volatility portfolio and an Equal Weighted portfolio. The research will compute the year-by-year statistics of these portfolios and will compare them in Developed and Emerging Markets. This comparison will vert on the intervals 2003-2023 and 2019-2023, focusing on the crisis periods which characterized these timeframes. To make a further step, it will be built the six-factor version of these portfolios that excludes Size. The year-by-year performances of these portfolios will be compared both with their seven-factor version in Developed Markets and with the correspondent portfolios in Emerging Markets, assessing the consistency of the Size factor in these areas for these portfolios.È consentito all'utente scaricare e condividere i documenti disponibili a testo pieno in UNITESI UNIPV nel rispetto della licenza Creative Commons del tipo CC BY NC ND.
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https://hdl.handle.net/20.500.14239/3464