Investing in the size factor Articles uri icon

authors

  • LABORDA HERRERO, JUAN
  • LABORDA HERRERO, RICARDO
  • OLMO, JOSÉ

publication date

  • July 2015

start page

  • 85

end page

  • 100

issue

  • 1

volume

  • 16

International Standard Serial Number (ISSN)

  • 1469-7688

Electronic International Standard Serial Number (EISSN)

  • 1469-7696

abstract

  • This paper investigates the role of the size factor for constructing investment portfolios and proposes a dynamic extension that accommodates the risk-free asset and time-varying weights. These weights are determined by a set of state variables given by the term structure of sovereign interest rates, variables describing market risk aversion such as the VIX index and the CRB Industrial return, and indexes reflecting investor sentiment towards the economic outlook. The empirical section explores the suitability of these state variables and analyses the out-of-sample performance of size factors idiosyncratic to the US, the UK and European financial markets that are compared against the dynamic version that optimizes the weights in each period. The results provide support to the different size factors except for periods of economic distress in which the optimal dynamic strategies are clearly superior.

subjects

  • Business

keywords

  • performance evaluation; size factor; tactical asset allocation; trading strategies