Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/167849 
Year of Publication: 
2015
Citation: 
[Journal:] Risks [ISSN:] 2227-9091 [Volume:] 3 [Issue:] 2 [Publisher:] MDPI [Place:] Basel [Year:] 2015 [Pages:] 112-138
Publisher: 
MDPI, Basel
Abstract: 
We discuss when and why custom multi-factor risk models are warranted and give source code for computing some risk factors. Pension/mutual funds do not require customization but standardization. However, using standardized risk models in quant trading with much shorter holding horizons is suboptimal: (1) longer horizon risk factors (value, growth, etc.) increase noise trades and trading costs; (2) arbitrary risk factors can neutralize alpha; (3) "standardized" industries are artificial and insufficiently granular; (4) normalization of style risk factors is lost for the trading universe; (5) diversifying risk models lowers P&L correlations, reduces turnover and market impact, and increases capacity. We discuss various aspects of custom risk model building.
Subjects: 
risk model
multi-factor
risk factor
short horizon
quant trading
style
industry
specific risk
factor risk
portfolio optimization
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Article
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