What do robust equity portfolio models really do?

Characteristics of robust portfolios in a varied asset universe

“…Are robust portfolios more tilted towards factors in a varied asset universe? Kim et al (2013c) illustrate that, compared to MV, RB and RE lead the optimal portfolios to be more biased towards the fundamental factors in the equity universe. In this section, we investigate if similar behaviours can be found in an asset universe consisting of equities, fixed incomes, and commodities.…”

“…For the choice of uncertainty sets of RB and RE, we follow the approach described in Kim et al (2013c) for picking the confidence intervals (or regions) forμ. For the box uncertainty set U B δ (μ),μ = sample mean and…”

“…Similarly, D U (ω * ) being large implies that the out-of-sample performance varies much depending on the realization of μ T , thus ω * is not robust. This justifies D U as the measure for the performance insensitivity with respect to the parameter changes, thus we employ it as the † Note that compared with Kim et al (2013c) who conducted a similar test on the equity universe, the R 2 -values in table 2 are relatively small. This is due to the fact that the proxies of fundamental factors in this varied asset universe have less explanatory powers on the variability of individual asset returns compared with the Fama-French factors in the equity market.…”

“…However, the improved robustness comes with side effects. Kim et al (2013cKim et al ( , 2013d report that robust equity portfolios systematically bet more on the fundamental factors, and less on the idiosyncratic asset movements using the US stock market data. Kim et al (2013e) reinforce this by providing an analytical proof for the empirical finding.…”

“…The main objective of this study is to extend the findings of Kim et al (2013cKim et al ( , 2013d, which are conducted exclusively in the equity markets, to the varied asset universe. More specifically, we employ an asset universe consisting of equities, fixed incomes, and commodities, and find that the robust models can indeed improve the robustness, and also bet more on the factors.…”