Preprint Article Version 1 Preserved in Portico This version is not peer-reviewed

Improved Multifactor Portfolio Optimization Method through Empirical Research in South Korea

Version 1 : Received: 11 May 2022 / Approved: 12 May 2022 / Online: 12 May 2022 (10:44:13 CEST)

How to cite: Lee, D. Improved Multifactor Portfolio Optimization Method through Empirical Research in South Korea. Preprints 2022, 2022050169 (doi: 10.20944/preprints202205.0169.v1). Lee, D. Improved Multifactor Portfolio Optimization Method through Empirical Research in South Korea. Preprints 2022, 2022050169 (doi: 10.20944/preprints202205.0169.v1).

Abstract

Since financial institutions faced to fatal scenario like subprime mortgage crisis and COVID-19, the factor-based asset allocation methodology is noticed. Asset-only approach which make to consider restrictive risk volatility as individual assets had limitation of macro factor risk. For instance, an institution which allocated assets by asset-only approach cannot deal with the inflation crisis. We review the problem of the traditional modern portfolio approach that is used by Korean financial institutions. For reasonable investment of institution, we notice improved factor-based allocation approach. The first result of this paper is that Mean-variance approach as considered only return of asset recorded lower performance than multi factor-based portfolio in macro factor crisis. Second, we notice allocation model which can minimize probability passing the liability risk exposed macro factors to investment risk exposed macro factors. There are three steps in multi-macro factor-based asset allocation approach: discovering macro factors and mapping asset classes to individual macro factor. Second, define liability account and mapping as considering income and pay out of institution. Third, minimize correlation of fac-tor-based asset risk with liability volatility. Furthermore, using covariance return of assets to allocate makes Pareto improvement and supports to break Home-bias problems.

Keywords

asset allocation; risk factor; risk exposure; macro-factor

Subject

SOCIAL SCIENCES, Finance

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