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Diversifying trends

Author

Listed:
  • Charles Chevalier
  • Serge Darolles

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

A new method is proposed for disentangling the systematic components from the idiosyncratic components of risk associated with trend-following strategies. A simple statistical approach combined with standard dimension reduction techniques enables to identify the common trending component of futures market prices. This methodology is applied to a large set of futures, covering all asset classes, to extract a common risk factor, called CoTrend. It is shown that common trends are higher for some cross-asset class pairs than for intra-asset class pairs, such as JPY/USD and Gold. This result is used to create sectors in a portfolio diversification context, especially for trend-following strategies. Additionally, the CoTrend factor helps understand arbitrage-based Hedge Fund strategies, which by essence are decorrelated from standard risk factors.

Suggested Citation

  • Charles Chevalier & Serge Darolles, 2024. "Diversifying trends," Post-Print hal-04659783, HAL.
    • Handle: RePEc:hal:journl:hal-04659783
    DOI: 10.1016/j.ecosta.2021.09.002
    as

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