Heterotic Risk Models

Zura Kakushadze

 

We discuss recently proposed heterotic risk models, which combine:

i) granularity of an industry classification;

ii) diagonality of the principal component factor covariance matrix for any sub-cluster of stocks; and

iii) dramatic reduction in the size of the factor covariance matrix via the Russian-doll risk model construction. This allows constructing out-of-sample stable short-lookback risk models for short-horizon/intraday equities trading strategies.

This allows constructing out-of-sample stable short-lookback risk models for short-horizon/intraday equities trading strategies.

The paper is available for download on SSRN: http://ssrn.com/abstract=2600798


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