Title: Cross-sectional analysis through rank-based dynamic portfolios
Authors: Dominique Guegan - Universite Paris 1 - Pantheon-Sorbonne (France)
Monica Billio - University of Venice (Italy)
Ludovic Cales - Hendyplan (Luxembourg)
Abstract: The aim is to study the cross-sectional effects present in the market using a new framework based on graph theory. Within this framework, we represent the evolution of a dynamic portfolio, i.e. a portfolio whose weights vary over time, as a rank-based multivariate model where the predictive ability of each cross-sectional factor is described by a variable. Practically, this modeling permits us to measure the marginal and joint effects of different cross-section factors on a given dynamic portfolio. Associated to a regime switching model, we are able to identify phases during which the cross-sectional effects are present in the market.