Cited By
View all- Taguchi RSakaji HIzumi KMurayama Y(2023)Constructing Sentiment Signal-Based Asset Allocation Method with Causality InformationNew Generation Computing10.1007/s00354-023-00231-441:4(777-794)Online publication date: 11-Sep-2023
The evolving causal structure of equity risk factors
Authors: 
Gabriele D'Acunto, Paolo Bajardi, 
Francesco Bonchi, 
Gianmarco De Francisci MoralesAuthors Info & Claims
Gabriele D'Acunto, Paolo Bajardi, Francesco Bonchi, Gianmarco De Francisci MoralesAuthors Info & ClaimsArticle No.: 5, Pages 1 - 8
Abstract
In recent years, multi-factor strategies have gained increasing popularity in the financial industry, as they allow investors to have a better understanding of the risk drivers underlying their portfolios. Moreover, such strategies promise to promote diversification and thus limit losses in times of financial turmoil. However, recent studies have reported a significant level of redundancy between these factors, which might enhance risk contagion among multi-factor portfolios during financial crises. Therefore, it is of fundamental importance to better understand the relationships among factors.
Empowered by recent advances in causal structure learning methods, this paper presents a study of the causal structure of financial risk factors and its evolution over time. In particular, the data we analyze covers 11 risk factors concerning the US equity market, spanning a period of 29 years at daily frequency.
Our results show a statistically significant sparsifying trend of the underlying causal structure. However, this trend breaks down during periods of financial stress, in which we can observe a densification of the causal network driven by a growth of the out-degree of the market factor node. Finally, we present a comparison with the analysis of factors cross-correlations, which further confirms the importance of causal analysis for gaining deeper insights in the dynamics of the factor system, particularly during economic downturns.
Our findings are especially significant from a risk-management perspective. They link the evolution of the causal structure of equity risk factors with market volatility and a worsening macroeconomic environment, and show that, in times of financial crisis, exposure to different factors boils down to exposure to the market risk factor.
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Index Terms
- The evolving causal structure of equity risk factors
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View all- Taguchi RSakaji HIzumi KMurayama Y(2023)Constructing Sentiment Signal-Based Asset Allocation Method with Causality InformationNew Generation Computing10.1007/s00354-023-00231-441:4(777-794)Online publication date: 11-Sep-2023
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