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I see the use of factor timing here and there, yet it is impossible for me to understand what it is about.

Could someone explain what people mean about timing a factor, maybe through the use of a simple linear regression model?

Does it mean predicting / forecasting the factor's next move? It sounds like a buzzword to me...

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  • $\begingroup$ what else should it mean in your opinion? did you see it used in any other way? where? which? $\endgroup$
    – vonjd
    Commented Sep 12, 2019 at 6:04
  • $\begingroup$ I can't see any other meaning, but I could be wrong, that's why I am asking this question. $\endgroup$
    – JejeBelfort
    Commented Sep 12, 2019 at 6:09
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    $\begingroup$ Well, I think that this is the meaning... $\endgroup$
    – vonjd
    Commented Sep 12, 2019 at 6:46

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In my opinion, factor timing is a field of active management where, indeed, you try to anticipate the performances of factors.

For instance, growth stocks will outperform during economic expansion but will behave badly during crisis.

So, yes, it seems very attractive, but not so many people are able to generate performances from it.

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Well, you may consider factor timing under the ambit of Active management if you are placing active bets on various factors and individual securities together or you can take it to be under passive management if you are simply making factor bets without predicting the future moves of any individual securities. Explanation: Factor timing as the name suggests is the art and science of timing the factors which affect your portfolio, there are loads of factors which may affect a portfolio. Say if you have a combined fixed Income and equity securities portfolio then some of the primary factors that would affect your portfolio would be- 1. Interest rate 2. creditworthiness of the portfolio securities 3. growth rate 4. inflation 5. currency movement 6. volatility

Now, that you have identified the factors that primarily affect your portfolio, you will have to understand them in relation to your portfolio and from an isolated perspective so that you may take a call on their direction of movement and the time frame associated with the movement. There are single factor portfolio which allows for placing a bet on a single factor alone, in this portfolio the effects of all other factors are muted by using a long-short portfolio construction framework.

If you are using linear regression then you may play with the factors by manipulating the betas associated with those factors.

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