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Dynamic Factor Weights

Dynamic Factor Weights. Red Devil Partners Joon Seong Choi, Youngjun Yoo, Richard Park, YK Kim. Overview. Our purpose is to develop a stock selection strategy in order to outperform S&P 500. Our analysis includes both fixed and dynamic factor weights. Source Data. Steps.

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Dynamic Factor Weights

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  1. Dynamic Factor Weights Red Devil Partners Joon Seong Choi, Youngjun Yoo, Richard Park, YK Kim

  2. Overview • Our purpose is to develop a stock selection strategy in order to outperform S&P 500. • Our analysis includes both fixed and dynamic factor weights.

  3. Source Data

  4. Steps • Specify list of factors • Univariate screens • Identify 5 fractiles for each factor • Choose significant portfolios • Optimize weights for portfolios with S&P500 volatility • Compare fixed weight strategy and dynamic weight strategy

  5. Factor Returns

  6. Identified factors • Factors (1m lagged) - Cashflow to Price - Debt to Equity - Market Capitalization - Price to Book

  7. Factor Screen Cashflow to Price(5) : value weighted Debt to Equity(5) : value weighted Market Cap(1) : equal weighted Price to Book(5) : equal weighted

  8. Optimization: fixed weights • Form a portfolio with same volatility of S&P500

  9. Dynamic weight strategy Add dummy variables 3 months S&P500 momentum In negative momentum, buy more portfolio with negative correlation with S&P500 (Price to book (5))

  10. Optimization: dynamic weights • Form a dynamic portfolio with same volatility of S&P500

  11. Results

  12. Conclusion Multi-factor model strategy outperforms universe return (e.g. S&P500) Dynamic weight strategy outperform fixed weight strategy Future consideration: Transaction cost should be considered to evaluate strategies

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