Questions tagged [factor-investing]
The factor-investing tag has no usage guidance.
75 questions
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Signal Quintile Performance
I’m currently backtesting the performance of a signal (top - bottom quintile). The signal shows positive performance over monthly, quarterly, and annual rebalance horizons. However, the performance ...
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Fundamental factor models: what to move to the LHS
My question is simple: what is the best practice in moving known variables to the LHS of Fundamental Factor Model regression?
I am seeing different approaches.
$R_{it}=\alpha_i + \beta_{i,1} f_{1,t}+ ...
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JKP data and French library data [duplicate]
I am currently using the JKP factor dataset (https://jkpfactors.com/) to test a large number of factors.
Their data has information on 153 factors, but no CAPM beta.
This dataset only supports returns....
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Does fama-french factors apply 1-day delay between their portfolio formation and the trade? If so, why?
I'm currently replicating fama-french 5 factors using price and financial data.
I applied 1-day delay in calculating daily portfolio returns of factors, which assumes June-end portfolio to be traded ...
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Clarifying the Fundamental Difference Between Growth and Value Stocks
The more I think about the fundamental difference between growth and value stocks the more confused I am. Both strategies seem to exploit market mispricing: growth investors target underestimated ...
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Calculating factor attribution to performance from factor exposures?
The process I have followed so far is that I have filtered out the relevant style factors (momentum, growth, value, etc.) for a portfolio using Lasso regression and then done an OLS to calculate the ...
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Factor investing for traders
Can factor investing be used for short term trading ? If yes how macroeconomic and style will be different from long term ?
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PCA factors not uncorrelated
I ran into an interesting case recently. I am trying to construct a set of uncorrelated factors for a statistical factor model. I have started with picking a certain amount of assets (indices) which I ...
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Combination of factors
Let's say I have 10 factors and I want to find a combination (basically sum of exposures) of factors (of any length) from this set which has max sharpe. Is there an easy way to find this out rather ...
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Why cannot Fama-MacBeth regression identify a zero-mean factor with explanatory power?
Imagine a factor perfectly explain the return of all the stocks in a universe, and the factor has a zig-zag shape around zero (as shown by the image).
Since the factor perfectly explain the return of ...
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How to calculate Fama French & Momentum factor returns during Covid recession using their data website?
We know that Covid Recession lasted during the months of March & April 2020. Using Fama French data, how do you calculate returns for factors such as ...
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French and Fama - Alpha vs Residuals (Error)
When running a regression to empirically test models like CAPM or the Fama and French Model, why do we test the statistical significance of the intercept? Do we ignore the residual error?
Why not ...
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What is the definition of aggregate volatility, and how to compute it?
I am quoting the following sentence from Andrew Ang's paper "The Cross-Section of Volatility and Expected Returns". Can someone explain how aggregate volatility is defined and how to compute ...
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Unhedged factor models in trading
Suppose I have a factor model that takes in unemployment and GDP as $X_1, X_2$ respectively in estimating the fair price of asset $Y$. Say I observe that the market price of $Y$ has deviated ...
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Any document about general backtesting algorithm and data structure
(Note there are similar questions, with different focuses at this forum, but my focus is more on the general concept, if any, about backtesting (for stocks) and sources of information where I can go ...
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How momentum factor is calculated?
I got following code from the Quantopian Lecture about factor investing. Following is calculating momentum factor. Earlier in the lecture, instructor told that, we will sort the securities based on ...
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Aggregation of (cross-sectional) Factor model
Suppose I have a large factor model for security returns, i.e. I have a vector $\mathbf{Y}(t) \in \mathbb{R}^{P}$, with factor loadings $\mathbf{\beta} \in \mathbb{R}^{P \times K}$ over a set of $K$ ...
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2 methods for estimating factor return - differences between those 2 methods
I have a question for estimating factor return. I’ve found that there seems to be 2 methods for estimating factor return.
First, with return of an asset i(r_i) and factor loadings such as PER, EPS, ...
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factor evaluating methodology with factor return and factor exposure
studying with a factor model, I get confused more and more as I think about factor exposure and factor return
The concept (or mechanism) I get used to is evaluating a factor's Long Short Return(Q1-Q5) ...
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How to correctly use Fama-French factors (from investment portfolio perspective)?
I have several questions regarding Fama-French and other (for instance, BAB) equity return factors for practical purposes (portfolio construction, portfolio risk analysis, portfolio return analysis). ...
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Value factor from Ken French's library
I'm after returns of the Value factor (book-to-market) from Ken French's library. Based on the description, I'm guessing it's this one: ...
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how should I update a return factor's orthogonalization parameters?
We have constructed a return factor for a Fama-French-Carhart type factor model which adds a "BMG" factor for climate risk exposure (see open-climate-investing)
This BMG factor is ...
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characteristics of factor portfolios
In the paper Characteristics of Factor Portfolios (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1601414), when it discusses pure factor portfolios, it says that simple style factor portfolios ...
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What is the market share of MSCI Barra Equity Model?
My understanding is that MSCI/Barra's model has a very large market share in funds and banks, but I cannot find out how large is the exact market share.
Is there any data on this, or can someone ...
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How do we know if an additional factor has improved the predictive power of a Fama French 3 factor equity model?
We're building a multi-factor model for climate risk by adding an additional factor for carbon risk on top of a Fama and French 3 factor model. This is open source at https://github.com/opentaps/open-...
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What are the most common ways that quantitative funds construct industry/style-neutral factor portfolios?
For instance, consider momentum strategies. Naive portfolio construction will likely load on large style/industry return components, which increases portfolio risk dramatically.
How do quant funds ...
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How to implement a factor model from scratch?
Imagine we have price-volume data set and fundamental data set which gives us all the info we need (e.g,. OHLC, earnings, dividends etc.) for stocks listed in a market for long time period. I.e., you ...
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Fama and French HML and SMB factors
I am investigating the Fama and French model using a Bayesian selection procedure laid out by Barillas and Shanken (2018). When I plot the cumulative probabilities of each factor, I notice that for ...
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Cash Flows from Operations in Compustat
I'm trying to replicate Piotroski's F-Score (2000) for my PhD. In the paper, one of the components to F-Score is CFO / Assets from Compustat. However, item 308 (...
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Novy-Marx Profitability "Excess" returns - What does Excess mean here?
I am reading Novy-Marx's paper titled "The other side of value: The gross profitability premium".
Throughout the paper, he mentions excess returns in several tables, but I cannot find any ...
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Equity risk factors with daily rebalancing
I am building some well known equity factors on the S&P for research purposes. It means those are going to be used for general evaluation purposes but do not need to be replicable. Would it be a ...
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Fama Macbeth regression with rolling window
I am confused about how to run fama macbeth regressions for portfolios with rolling window. For example if I have 25 portfolios and time period is 50 years(monthly), rolling window period is 5 years. ...
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Underperformance of low vol factor after US presidential election, comeback of Value
My question is about factor investing. In most equity markets (Europe, US) the factors momentum and low volatility have outperformed the cap weighted indices in the last couple of years while the ...
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SML Interpretation
I follow this paper and estimated two different asset pricing models via systems of deep neural networks. Both models have the exact same input: firm-specific features for 10'000 (unique) US stocks ...
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What is "signal" in quant investing?
Can somebody explain (and give examples) of "signals" in quant investing? What are those? What does this word mean?
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Fama-French Factors in €
I am having a bit of a problem with currency conversion issues. What I do: I sort European stocks based on their book-to-market ratio, each year I form a portfolio (equal-weight) with the 10 stocks ...
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Simulation of price ratios
How to go about simulations of variables like price-to-book or dividend yield? Basically I would like to do a simulation based testing of an investing strategy (other than historical simulation). It’s ...
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How can you use factor modelling to improve your current portfolio [closed]
Firstly let me apologise if this has been asked on on here before - I went through some of the factor modelling post on here but I've struggled to find the answers. I am new to the quant world and I ...
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Low volatility in factor regression
Let's say we are working with the standard Fama-French 3 factor model and we want to add a low volatility factor. Is it alright to add a low volatility risk premium in a model such as the CAPM or FF3. ...
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Why exposure to the profitability factor increases investment premium?
I'm a DIY investor that attempts to put together his market portfolio, tilted to increase factor exposure. Currently, I'm trying to do it based on the French-Fama 5-factor model.
This model contains ...
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FF 6-month lag of the accounting variables
I have a fairly short and straightforward question. I am running a dynamic optimization strategy and therefore need to construct the FF5 characteristics. I am using COMPUSTAT quarterly accounting data....
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Why do we regress with respect to premiums in factor models like FF?
Factor investing can be explained by factor models, via the factors exposures. For example Fama-French observed that Size and Book-to-Ratio were systematic risks of a portfolio and consequently they ...
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Fama Macbeth and Momentum factor
I am working on a Fama MacBeth regression with excess returns on the LHS and Size, Value an Momentum factors on the RHS. In literature, the Momentum factor is often definded as the cumulative past 6 ...
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Do Fama-French factor portfolios require optimization?
I am going to perform factor crowding analysis for my dissertation and I am struggling to build factor portfolios from the S&P 500 in r.
I built my dataset from the S&P 500 and I am able to ...
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How to orthogonalize Fama French factors?
The Fama French factors (e.g. size, value) are not orthogonal to each other, so when e.g. you want to create a diversified portfolio of factor mimmicking portfolios (factor investing), the correlation ...
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Are Fama French Factors market neutral?
I was wondering whether the famous fama-french factors such as e.g. SMB and HML are market neutral? I know that they are long-short factors in the sense that the net investment is essentially zero, ...
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how do factor models in equity portfolio management add alpha?
This is a general question on how fund managers use factor models to add alpha. I understand how a risk model can tell you what factors a portfolio has exposure to. But can a risk model actually tell ...
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Fama-Macbeth Regression: Weird Risk Premia
I just conducted a Fama-Macbeth regression where in the first step I calculated a time-series regression for each individual stock to get three betas (for mkt-rf, smb, hml) for each stock. Then I ran ...
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How to test ESG score as a factor against traditional factors
I have created my own ESG scoring system. I would like to test it as a factor against the traditional factors (growth, Value, quality, size etc)
In essence a correlation test.
Could anyone please ...
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Are these factor returns are to low?
I have just found a statistics summary of different MSCI factors (based on the Barra Global Total Market Equity Model for Long-Term Investors (GEMLT)).
I wonder why the annual returns are so low ...
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