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Strategies using risk factors

Hi All,

I would like to know what types of strategies can developed using APT and risk factors. Say I come up with some risk factors than explain the returns. What do I do next? I can think of following:

  1. Build a portfolio and eliminate all exposure to risk factors and it should be mean reverting.
  2. Take each stock and find the betas of risk factors. Compute a hedge portfolio for each stock and it should be mean reverting.

What else can be done with it? How do people use risk factors? Any ideas / suggestions really appreciated.

3 responses

Hi,
recently I 've been thinking about it. For you first point, you can try model the residual term with OU process(Ornstein–Uhlenbeck process), in which you can identify the unconditional mean that the sequence go around. If the sequence deviate the confidential band too much, then it is expected to revert back.
good luck,
Kevin
reference:
Yeo, J. and G. Papanicolaou (2017). Risk control of mean-reversion time in statistical arbitrage.Risk and Decision Analysis, Vol. 6(4), 263 – 290.

Thanks Kevin for the pointers!

Scanned the presentation:
http://cdar.berkeley.edu/wp-content/uploads/2018/01/statarbslideUCB.pdf
and will look at the paper:
http://math.stanford.edu/~papanico/pubftp/RDA_manuscript.pdf

In the concluding remarks slide of the presentation, I like the idea of it's all just 'Just "signal processing"' !
alan

Awesome find, Kevin and Alan with thanks!