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.


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[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.

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