Questions tagged [factor-investing]
The factor-investing tag has no usage guidance.
75 questions
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What are reasons not to do factor investing in equity markets?
Factor investing in equity markets is one of the hot topics of these days. Many manufacturers of investment products offer exposure to small cap, momentum, minvol, value and other pure factors or ...
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9
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1
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Are the causes of momentum uniform for various asset classes?
Is there any theory which is able to unify and/or falsify existing explanations on the causes of asset price/return momentum? The prevailing theory is that behavioral and cognitive biases lead to ...
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Intuition behind Fama-French factors
In the Fama-French 3-factor model the portfolio returns are explained by
the market
the SMB factor (Small [market capitalization] Minus Big) and
the HML factor (High [book-to-market ratio] Minus Low)...
- 13.8k
7
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1
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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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Interplay of statistical factors (PCA) and market factors (value, momentum, low vol, ...)
Is there any research done on the interplay between statistical factors (as a result of principle component analysis PCA) and the market factors (especially value, size, low vol, momentum, quality)?
...
- 13.8k
5
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1
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Is Low-Volatility expensive these days? How can we analyze this?
Low volatility investing became somewhat fashionable in recent years. In general there are two approaches to this:
Ranking stocks of a certain universe by either stand-alone volatility or by beta and ...
- 13.8k
5
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1
answer
2k
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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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4
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2
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Have any other factor "styles" which explain equity returns been uncovered?
I know this is an inherently broad question, so I will attempt to clarify what I mean by factor "styles". I am not looking for a compendium of "anomalies", per se, but rather for categorical themes ...
- 3,025
4
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1
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Definition of factor premium: against cap weighted index or against treasury bills?
How can we define a factor premium? In the book Berkin & Swedroe: Your Complete Guide to Factor-Based Investing
the authors start introducing the market bet premium and define it as the average ...
- 13.8k
4
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1
answer
470
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Holdings based style analysis
This question is not very technical.
I have a file with holdings (both for the fund and the benchmark) of a number of securities and need to do a style allocation analysis.
For these securities, I ...
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4
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2
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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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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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3
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3
answers
886
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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 ...
- 53
3
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1
answer
577
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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, ...
- 369
3
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1
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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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3
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1
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303
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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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3
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1
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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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3
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1
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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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3
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1
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181
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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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3
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0
answers
87
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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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3
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0
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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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3
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0
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125
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Regarding the post-facto predictability of stock market returns
Almost all of the research on equity factor investing deals with a priori predictability of the cross-section of stock market returns (i.e., models which use variables and data that would've have been ...
- 3,025
3
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0
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118
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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 ...
- 13.8k
2
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1
answer
137
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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. ...
- 107
2
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3
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532
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Systematic credit "liquidity provider" strategy
I was reading a piece published by Bloomberg today, where it says the following:
“A systematic process lends itself to providing liquidity rather than
taking it because our models have views on ...
- 1,910
2
votes
1
answer
109
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Factors not working
It is no secret that most systematic (quantitative) hedge funds have been doing poorly in 2016. Factor targeting strategies (momentum, value etc.) are all underperforming in most regions and sectors. ...
- 595
2
votes
1
answer
108
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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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2
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2
answers
1k
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What is factor timing?
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 ...
- 1,219
2
votes
1
answer
728
views
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 ...
- 23
2
votes
2
answers
818
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Backtesting with Stock Indices, how does one deal with it?
I was wondering how to backtest using stock indices. For example, the FTSE100 has had changes in its components over time. How does one go about testing a time period from i.e. 2000 - 2018, even if ...
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1
answer
2k
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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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2
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0
answers
115
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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 ...
- 21
2
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0
answers
388
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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 ...
- 173
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0
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216
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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 ...
- 21
2
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1
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318
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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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2
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0
answers
446
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Alpha decay for strong vs weak signals
Assuming you are computing alpha decay similarly to shown here (e.g., exponential decay of the information ratio with lagged signals).
I'm wondering whether it is preferable to treat strong vs weak ...
- 500
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0
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114
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explanation of factor tilts that uses mathematical notation
Can anyone provide a definition of "factor tilt" that uses mathematical notation?
Perhaps factor tilts are based on factor regression models. Let's say that our returns vector $\mathbf{y}_t$ can be ...
- 554
2
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1
answer
223
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Correct choice of SMB factor for regression models
I am currently conducting a performance analysis, where I use the 3-, 4-, and 5-factor models, hence
$R_{it}-R_{Ft}=\alpha+b_{i}RMRF+s_{i}SMB+h_{i}HML$
$R_{it}-R_{Ft}=\alpha+b_{i}RMRF+s_{i}SMB+h_{i}...
- 23
1
vote
1
answer
634
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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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1
vote
1
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314
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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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2
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257
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Factor-Based Equity Investing [closed]
What is the simplest way (process) to develop a factor-based investing strategy with STOCKS?
...
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1
vote
1
answer
258
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Realized variance as predictor that improves momentum strategy
In the paper "Momentum has its moments" (Pedro Barroso and Pedro Santa-Clara, 2012 - available free from Nova Business School), the authors claim that there is a way to avoid momentum crash (caused by ...
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1
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1
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751
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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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1
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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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1
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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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3
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378
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Insight on how factor models achieve dimensionality-reduction?
Going through the literature on factor models, I keep seeing the phrase "dimensionality reduction" and how factor models allow for the modelling of assets in high-dimensional cases, and I would ...
- 273
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1
answer
252
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implementation of risk managed momentum strategy
I read the paper "Momentum has its moments" (Pedro Barroso and Pedro Santa-Clara, 2012 - available free from Nova Business School), though i didn't fully understand something important, when speaking ...
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1
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0
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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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0
answers
76
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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 ...
- 11
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0
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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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