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Factor neutral portfolios

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Abstract

In this paper, we consider the problem of constructing a factor neutral portfolio (FNP). This is a portfolio of financial assets that exhibits performance independent from a number of underlying factors. We formulate this problem as a mixed-integer linear program, minimising the time-averaged absolute value factor contribution to portfolio return. In this paper, we investigate both ordinary (least-squares, mean) regression and quantile regression, specifically median regression, to estimate factor coefficients. Computational results are given for constructing FNPs using stocks drawn from the Standard and Poor’s 500 index.

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Acknowledgments

The authors would like to acknowledge the comments made upon an earlier version of this paper by the referees.

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Authors and Affiliations

  1. Department of Mathematical Sciences, Brunel University, Uxbridge, UB8 3PH, UK

    C. A. Valle & J. E. Beasley

  2. Business School, Imperial College, London, SW7 2AZ, UK

    N. Meade

  3. JB Consultants, Morden, SM4 4HS, UK

    J. E. Beasley

Authors
  1. C. A. Valle
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  2. N. Meade
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  3. J. E. Beasley
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Correspondence to J. E. Beasley.

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Valle, C.A., Meade, N. & Beasley, J.E. Factor neutral portfolios. OR Spectrum 37, 843–867 (2015). https://doi.org/10.1007/s00291-015-0392-0

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