Arbitrage Portfolios

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We propose a new methodology for forming arbitrage portfolios that utilizes the information contained in firm characteristics for both abnormal returns and factor loadings. The methodology gives maximal weight to risk-based interpretations of characteristics’ predictive power before any attribution is made to abnormal returns. We apply the methodology to simulated economies and to a large panel of U.S. stock returns. The methodology works well in our simulation and when applied to stocks. Empirically, we find the arbitrage portfolio has (statistically and economically) significant alphas relative to several popular asset pricing models and annualized Sharpe ratios ranging from 1.31 to 1.66.
Publisher
OXFORD UNIV PRESS INC
Issue Date
2021-06
Language
English
Article Type
Article
Citation

REVIEW OF FINANCIAL STUDIES, v.34, no.6, pp.2813 - 2856

ISSN
0893-9454
DOI
10.1093/rfs/hhaa102
URI
http://hdl.handle.net/10203/285735
Appears in Collection
MT-Journal Papers(저널논문)
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