Edward Qian's scientific contributions
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Publications (22)
Capital markets are interconnected. The low-volatility anomaly in equity markets can be partly attributed to changes in interest rates in fixed-income markets. The authors extend this contemporaneous relationship to serial relationships across time. They show that returns from the low-volatility anomaly in U.S. stocks have information about future...
"Upside participation and downside protection" is a popular motto for many investors. It has taken on much more significance in recent years, in the wake of the global financial crisis. But how do we define and evaluate strategies from the perspective of "upside participation and downside protection"? In this article, the authors present an analyti...
In contrast to factor-based smart beta, diversification-based smart beta assumes that, seemingly naively, all investments are the same in some dimension. The four possible dimensions - portfolio weight, expected return, risk-adjusted return, and risk contribution - lead respectively to four naïve beta portfolios: equally weighted, minimum-variance,...
Risk parity has become an accepted investment strategy, to some degree. Its main advantage is its use of risk allocation, as opposed to the capital allocation used by the traditional asset allocation approach. A balanced risk allocation provides true diversification; therefore risk parity should deliver better risk-adjusted return over time. Despit...
In this article, the authors propose a novel framework for building a factor-timing model. They introduce the concept of Akaike's information criterion for selecting conditioning variables and evaluating various factor-timing specifications. Balancing the tradeoff between in-sample precision and complexity of the problem is the central theme of the...
It is widely accepted that portfolio rebalancing adds diversification return to fixed-weight portfolios, but this is only true for long-only unleveraged portfolios. Qian provides analytical results regarding portfolio rebalancing and the associated diversification returns for different kinds of portfolios including long-only, long-short, and levera...
Not all value strategies are created equal; that is, correlations among different value strategies and among similar value strategies across markets are, in general, low. Thus, to preserve market neutrality and reduce exposure to volatility, investors need to augment value strategies and adopt a multi-strategy approach. Some exposures, however, are...
In this paper, we investigate the benefit and cost of constrained long/short portfolios by relaxing the no-short constraint on actively managed portfolios. Using a simulation under a variety of real-world assumptions, we demonstrate the net benefit of allowing shorting and various optimal amounts of shorting. We show how the maximum information rat...
The net value-added of an investment strategy has two parts: the expected value of the alpha skill, and the cost of implementation. The first part is positive and depends on the efficacy of a return forecasting model; the second is negative and depends on portfolio turnover and trading skills. The higher the former, and the lower the latter, the ha...
Due to a lack of clear financial interpretation, there are lingering questions in the financial industry regarding the concepts of risk contribution. This paper provides as well as analyzes risk contribution's financial interpretation that is based on expected contribution to potential losses of a portfolio. We show risk contribution, defined throu...
Application of a multifactor alpha model across a diverse range of stocks is a popular way to forecast security expected returns, but it is a one-size-fits-all approach. An alternative alpha-modeling approach represents a parsimonious way to model securities individually in order to capture idiosyncratic return behavior in different security contex...
Applying a multifactor alpha model across a diverse range of stocks is a popular approach to forecast securities' expected returns. This approach assumes that one single return-generating equation provides adequate alpha forecasts - that is, one-size-fits-all. In this paper, we extend prior empirical research by introducing an alternative alpha-mod...
Active portfolio managers often see themselves as assemblers of efficient portfolios that maximize information ratios through the value-added of their proprietary investment insights (alphas), but approaches to reconciling often-contradicting investment insights differ widely. A linear combination of different investment insights can be used to sup...
One of the underlying assumptions of the Fundamental Law of Active Management is that the active risk of an active investment strategy equates estimated tracking error by a risk model. We show there is an additional source of active risk that is unique to each strategy. This strategy risk is caused by variability of the strategy's information coeff...
An alternative approach to quantitative tactical asset allocation (TAA) is based on time series forecasting models and mean-variance optimization. The central concept is painwise TAA, and the correct metric for assessing forecast quality is the pairwise information coefficient. TAA using mean-variance optimization is generally equivalent to a linea...
Citations
... Fifth, our empirical results extend and enhance standard factor models-in particular, industry momentum (Moskowitz and Grinblatt 1999) and time-series momentum (Moskowitz, Ooi, Pedersen 2012). See Baltas (2015), Yang, Qian, and Belton (2019), and Baltas and Kosowski (2020) for other enhancements of time-series momentum based on risk-parity methods. ...
Reference: Enhanced Portfolio Optimization
... The convention is that if the average participation value is greater than one, the strategy is cyclical, and if that value is less than one, it turns to be defensive. However, with the average value of 1, the portfolio is termed as neutral, i. e., neither cyclical nor defensive (Sorensen et al., 2018). ...
... Recently, the DR was derived by Maseso and Martellini [21] from the stochastic portfolio theory under the name of excess growth rate. The concept of DR as well as its relationships to other diversification concepts have been extensively discussed in finance literature, see [10,17,27,4,7,23,20] and the references therein. In particular, the extensive empirical results reported in [21] shows that maximizing DR of a portfolio may lead to strong out-of-sample performance and hence results in competitive strategy in portfolio construction in certain market conditions. ...
... However, in practice, a highly leveraged portfolio may not be attainable as brokers may place limits on the amount of leverage allowed or borrowing can be difficult for some stocks. In addition to the borrowing cost, shortselling also requires more monitoring work in the process of trading due to the stock return's fat-tailed nature (Sorensen et al., 2007). Therefore, having a high portfolio leverage can be costly in terms of both finance and efforts. ...
Reference: Portfolio Selection with Regularization
... Consequently, a well-diversified portfolio in the sense the Sharpe diversification can be heavily exposed to systematic risk, which becomes important during financial crisis or bear market periods. Several empirical evidence show that the market portfolio which is a well-diversified portfolio of the Sharpe strategy performs poorly relative to the other well-diversified portfolios, in particular in the 2008-2009 financial crisis (see Bertrand and Lapointe, 2015;Chaves et al., 2011;Choueifaty and Coignard, Fall 2008;Lee, 2011;Qian et al., 2015). ...
... Smart beta is a novel investing ideology that integrates underlying factors such as size, low risk, profitability, value, investment, and momentum (Basu, 1977;Banz, 1981;Jegadeesh & Titman, 1993;Fama & French, 1996, 2012, 2015Frazzini & Pedersen, 2014). These funds are often expressed as "the vehicle to deliver factor investing" (BlackRock). ...
... The weights λ calculated using three diversification indices are almost equal to each other. We compare the mixed strategies of using five factor parity weights, the RW strategy and the mixed strategies of employing the weight λ obtained by diversification indices in Table 4. 9 The asset-class-based risk parity portfolio is constructed for λ = 0. All asset risk contributions are perfectly equal to 14.29%, but factor risk contributions are concentrated into two factors: equity risk(50.90%) ...
... As the concept of risk-parity took hold in the investment community through the 2008 banking crisis, [14] made a compelling case for risk-parity as an allocation strategy by focusing on the large risk allocation that popular 60-40 portfolios gave to equity markets. [8] defined the risk budgeting problem as a general case of the risk parity problem and presented theoretical results on the variance of the resulting portfolio -that it is in between the minimum variance and the corresponding weight budgeting portfolio. ...
... In the quite unrealistic case where the underlying population cross-sectional ICs are constant over time so that This is a very familiar result for the sample cross-correlation coefficient between two random variables based on an iid sample. See, for example, Casella and Berger (2016) and Qian et al. (2007). ...
... For the second limitation, the impact of portfolio turnover (or transaction cost) was studied by linking portfolio turnover with the deterioration of the information (or the signal) that is conveyed in the alpha model. In particular, building on the results by Qian, Sorensen and Hua ( [9] ), Ding, Martin and Yang ( [10]) showed that portfolio turnover for a mean variance portfolio is driven a so-called "alpha signal decay", which was defined as one minus the autocorrelation of the alpha signal. The turnover rate (TR) for such a portfolio can be found as: ...
Reference: Turnover-Adjusted Information Ratio
