I have had a great time chatting up the Butler & Philbrick crew lately, as they are putting out some of the best research on a consistent basis that I have seen anywhere.
We were exploring some different options on ways to construct global value portfolios of countries on a macro level, and as a result, here is a really fun paper:
We use the Shiller CAPE Model proposed by Mebane Faber as a template for the exploration of a variety of portfolio optimization methods. By virtue of the Model’s systematic allocation to the ‘cheapest’ markets with the highest theoretical risk premia, the model has the potential to extract high costs from ‘behavioural taxes’ related to the model’s extreme volatility and drawdown character. We apply several portfolio optimization techniques with the objective of maximizing portfolio Sharpe ratios and minimizing drawdowns, including dynamic volatility weighting, risk parity, target risk and minimum variance. Consistent with recent published research on robust portfolio optimization, return to risk ratios improve broadly, with the greatest impact achieved from procedures that manage positions and/or portfolios to an ex ante target volatility. A theoretical framework is also proposed.
Some more of their research here:
- Jekyll or Hyde market
- Mythbusters: Investor edition
- Mythbusters #2: Expert forecasts
- Mythbusters #3: Financial experts
- Volatility sizing for success
- Volatility harvesting and the importance of rebalancing