Quantitative Equity Portfolio Management: Modern Techniques and Applications

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ISBN 9781584885580
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Features

  • Presents the analytical insights of quantitative model building and provides a consistent framework that associates quantitative methods to equity portfolios
  • Employs theoretical, numerical, and empirical approaches to various examples and problems
  • Provides empirical back-test results to connect investment theory with historical investment performance
  • Describes the mathematical approach for model construction, particularly multi-factor models
  • Allows students to construct factors from raw data with the inclusion of quantitative factor definitions
  • Summary

    Quantitative equity portfolio management combines theories and advanced techniques from several disciplines, including financial economics, accounting, mathematics, and operational research. While many texts are devoted to these disciplines, few deal with quantitative equity investing in a systematic and mathematical framework that is suitable for quantitative investment students. Providing a solid foundation in the subject, Quantitative Equity Portfolio Management: Modern Techniques and Applications presents a self-contained overview and a detailed mathematical treatment of various topics.

    From the theoretical basis of behavior finance to recently developed techniques, the authors review quantitative investment strategies and factors that are commonly used in practice, including value, momentum, and quality, accompanied by their academic origins. They present advanced techniques and applications in return forecasting models, risk management, portfolio construction, and portfolio implementation that include examples such as optimal multi-factor models, contextual and nonlinear models, factor timing techniques, portfolio turnover control, Monte Carlo valuation of firm values, and optimal trading. In many cases, the text frames related problems in mathematical terms and illustrates the mathematical concepts and solutions with numerical and empirical examples.

    Ideal for students in computational and quantitative finance programs, Quantitative Equity Portfolio Management serves as a guide to combat many common modeling issues and provides a rich understanding of portfolio management using mathematical analysis.

    Table of Contents

    INTRODUCTION: BELIEFS, RISK, PROCESS
    Beliefs
    Risks
    Quantitative Investment Process

    PORTFOLIO THEORY
    Distributions of Investment Returns
    Optimal Portfolios
    Capital Asset Pricing Model (CAPM)
    Characteristic Portfolios

    RISK MODELS AND RISK ANALYSIS
    Arbitrage Pricing Theory and APT models
    Risk Analysis
    Contribution to Value at Risk

    EVALUATION OF ALPHA FACTORS
    Alpha Performance Benchmarks-The Ratios
    Single Period Skill: Information Coefficient
    Multi-Period Ex Ante Information Rati


  • Empirical Examples

    QUANTITATIVE FACTORS
    Value Factors
    Quality Factors
    Momentum Factors

    VALUATION TECHNIQUES AND VALUE CREATION Valuation Framework
    Free Cash Flow
    Modeling Business Economics of a Firm
    Cost of Capital
    Explicit Period, Fade Period, and Terminal Value
    Multi-Path Discounted Cash Flow Analysis

    MULTI-FACTOR ALPHA MODELS
    Single-Period Composite IC of a Multi-Factor Model
    Optimal Alpha Model-An Analytical Derivation
    Factor Correlation versus IC Correlation
    Composite Alpha Model with Orthogonalized Factors
    Fama-Macbeth Regression and Optimal Alpha Model

    PORTFOLIO TURNOVER AND OPTIMAL ALPHA MODEL
    Turnover of Fixed-Weight Portfolios
    Turnover Due to Forecast Change
    Turnover of Composite Forecasts
    Information Horizon and Lagged Forecasts
    Optimal Alpha Model under Turnover Constraint
    Small Trades and Turnover

    ADVANCED ALPHA MODELING TECHNIQUES
    Contextual Modeling
    Mathematical Analysis of Contextual Modeling
    Empirical Examination of Contextual Approach
    Sector versus Contextual Modeling
    Modeling Nonlinear Effects

    FACTOR TIMING MODELS
    Calendar Effect-Behavioral Reasons
    Calendar Effect-Empirical Results
    The Earning Season Effect
    Macro Timing Models

    PORTFOLIO CONSTRAINTS AND INFORMATION RATIO
    Sector Neutral Constraint
    Long-Short Ration of Unconstrained Portfoli

  • Long-Only Portfolios
    The IR of Long-Only and Long-Short Portfolios

    TRANSACTION COSTS & PORTFOLIO IMPLEMENTATION
    Components of Transaction Costs
    Optimal Portfolios with Transaction Costs-Single Asset
    Optimal Portfolios with Transaction Costs-Multi Asset
    Portfolio Trading Strategies
    Optimal Trading Horizon
    Optimal Trading Strategies-Portfolios of Stocks
  • Editorial Reviews

    "This book is a must have for quantitative equity managers and it provides a step-by-step illustration of how to build a superior, repeatable investment process. By combining academic research with practical implementation considerations, the book outlines the theoretical foundation of various market anomalies such as value, momentum, quality, calendar effect, and analyzes their actual performance with real world portfolios under institutional setting. The book can also serve as a valuable text and reference for students and academic researchers in the field. With rigorous mathematical analytics, the book goes beyond the traditional efficient frontier paradigm. For example, the objective of maximizing information ratio as a performance measure extends traditional academic research settings to make it more practically relevant. This results in some subtle yet critical analytical insights regarding quantitative factors and strategies. In addition, the mathematical treatment of the nonlinear factor effect and contextual factor model is intuitive and based on fundamental understanding of the market dynamics."
    -Li Jin, Assistant Professor of Finance, Harvard Business School, Boston, Massachusetts, USA

    "Quantitative Equity Portfolio Management sets a new standard for comprehensive assessments of quantitative techniques. The authors' experience as practitioners brings to light critical issues of implementation, such as transaction costs and turnover, which have not previously achieved sufficient attention. Overall, the depth, rigor, and elegance of the authors' approach to the topic make it a valuable resource for investment professionals everywhere."
    -Bruce MacDonald, Director, Asset Allocation and Risk Analysis, University of Virginia Investment Management Company, Charlottesville, USA

    "Fans of Grinold and Kahn's standard text Active Portfolio Management will love the new book Quantitative Equity Portfolio Management by Qian, Hua, and Sorensen. It reflects the latest, most up-to-date thinking on portfolio theory, risk and alpha modeling, transaction costs, and multiperiod strategies. The authors are expert, proven practitioners of the art and active researchers in the field, and have provided an essential handbook covering both theory and many practical implementation issues not available in existing books. This is a must-have addition to the bookshelf of professional portfolio managers and students of portfolio management alike. I also expect this book will inspire faculty in quantitative finance and financial engineering to add more quantitative portfolio management to the usual option pricing material that students learn on their way to careers in the investments industry."
    -Alec N. Kercheval, Associate Professor, Director of Financial Mathematics, Florida State University, Tallahassee, USA

    "… a superb book for the sophisticated investment practitioner. It brings together rigorous derivation and practical insight across the complete spectrum of topics needed for an intelligent investment process. Most importantly, it brings forward detailed methodologies for dealing with subtle, but critical subjects such as alpha decay and optimal trading strategies that are beyond the scope of other texts. For many of us in the field, our only regret about the book will be that we did not write it."
    -Dan diBartolomeo, President, Northfield Information Services, Inc., Boston, Massachusetts, USA