Title: New smart beta index using the Rachev ratio under a non-normal return distribution

Authors: Rei Yamamoto; Naoya Kawadai

Addresses: Faculty of Science and Technology, Keio University, 3-14-1 Hiyoshi, Kohoku-ku, Yokohama, 223-8522, Japan ' Investment Development Department, Sumitomo Mitsui DS Asset Management, 2-5-1 Atago, Minato-ku, Tokyo, 105-6228, Japan

Abstract: In this paper, we focus on the 'Rachev ratio' proposed by Biglova et al. (2004) and propose a new smart beta index using it. This ratio has demonstrated its effectiveness as a performance measure; however, it is difficult to consider it to be a portfolio tool, particularly due to its non-convexity. Therefore, we propose a simple weighting method to construct a portfolio, transforming it into a new smart beta index. Moreover, we compare its performance with other smart beta indices in the global stock markets. The result of our empirical analysis, corroborate our contention that the proposed smart beta index using the Rachev ratio provides higher performance than other standard smart beta indices. Hence, we conclude that this smart beta is a new effective index that can be used in global stock markets.

Keywords: Rachev ratio; smart beta; non-normal distributions; global markets.

DOI: 10.1504/IJPAM.2021.115632

International Journal of Portfolio Analysis and Management, 2021 Vol.2 No.3, pp.238 - 248

Received: 27 Feb 2019
Accepted: 28 May 2019

Published online: 04 Jun 2021 *

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