Plamen Patev
I Shou University, No.1, Syuecheng Rd., Kaohsiung City 84001,Taiwan
Kaloyan Petkov
Tsenov Academy of Economics, Emanuil Chakarov N2, Svishtov, Bulgaria


3rd International Scientific Conference – EMAN 2019 – Economics and Management: How to Cope With Disrupted Times, Ljubljana – Slovenia, March 28, 2019, SELECTED PAPERS published by: Association of Economists and Managers of the Balkans, Belgrade, Serbia; Faculty of Management Koper, Slovenia; Doba Business School – Maribor, Slovenia; Integrated Business Faculty –  Skopje, Macedonia; Faculty of Management – Zajecar, Serbia, ISBN 978-86-80194-19-6, ISSN 2683-4510


Active investment has been established as one attractive approach for portfolio management. In order to achieve additional return – alpha, it requires investors to rebalance their portfolios often and to apply it for broader set of assets. However, as a result of such strategy portfolios could be exposed to an enormous turnover which leads to higher transaction costs. In many cases models with proven high-quality fail to provide the projected alpha because of alpha decaying caused by transaction costs of high turnover. Our paper is aimed to give more details about influence of stock-specific risk on turnover of active investments. We find that the ratio between target tracking error of the portfolio and stock-specific risk of an important factor in establishing the optimum turnover (and transaction costs). We investigate how this ratio is related with the turnover and how it influences the portfolio optimization process. We prove that changes in stock-specific risk causes managers to rebalance their portfolios in order to achieve their target tracking error. It is shown that these changes occur due to the non-linearity of stock volatility. We use GARCH model to measure the impact of short-term volatility shocks on the turnover of portfolio. Our findings confirm the importance of non-linear volatility for active portfolio turnover. Furthermore, we present empirical example for keeping turnover in desired level by adjusting the target tracking error of the factor portfolio.


turnover, non-linear risk, transaction costs, alpha.


[1] Grinold, R. (1994) “Alpha is Volatility Times IC Times Score.” The Journal of Portfolio Management, Vol. 20, No. 4, pp. 9-16.
[2] Qian, E., Sorensen, E. and Ronald H. (Fall 2007) “Information Horizon, Portfolio Turnover, and Optimal Alpha Models”, Journal of Portfolio Management, Vol. 32, No.2, pp. 12-20.
[3] Qian, E. and Hua, R. (2004) “Active Risk and Information Ratio.” The Journal of Investment Management, Vol 2, No. 3, pp. 20-34.
[4] Ye, J. (2008) “How Variation in Signal Quality Affects Performance.” Financial Analysts Journal, Vol. 64, No. 4, pp. 48-61.
[5] Ding, Z. and Martin, D. (2017) “The Fundamental Law of Active Management: Redux.” Journal of Empirical Finance, Vol. 43, No. 3, pp. 91-114.
[6] Patev, P. and Petkov, K. (2018) “Comparing Strategy Risk Models on the Taiwanese Stock Market”, Journal of Wealth Management, Vol. 21, No. 3, pp. 79-93.
[7] Ding, Z., Martin, D. and Yang, C. (2018) “Time Varying IC and Portfolio Turnover”, Unpublished paper, Available at SSRN:
[8] Bollerslev, T. (1986) „Generalized Autoregressive Conditional Heteroskedasticity”, Journal of Econometrics, Vol. 31. No.3, pp. 307–327.

Share this

Association of Economists and Managers of the Balkans – UdEkoM Balkan
179 Ustanicka St, 11000 Belgrade, Serbia

Udekom Balkans is a dynamic non-governmental and non-profit organization, established in 2014 with a mission to foster the growth of scientific knowledge within the Balkan region and beyond. Our primary objectives include advancing the fields of management and economics, as well as providing educational resources to our members and the wider public.

Who We Are: Our members include esteemed university professors from various scientific disciplines, postgraduate students, and experts from ministries, public administrations, private and public enterprises, multinational corporations, associations, and similar organizations.

Building Bridges Together: Over the course of nine years since our establishment, the Association of Economists and Managers of the Balkans has established impactful partnerships with more than 1,000 diverse institutions across the Balkan region and worldwide.

EMAN conference publications are licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.