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28 votes
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What are reasons not to do factor investing in equity markets?

This question goes to whether the historical returns to factors represent: Spurious results, overfitting, data mining... Mispricing Unexploitable effects Compensation for risk Case 1: Spurious ...
Matthew Gunn's user avatar
  • 6,954
6 votes

What are reasons not to do factor investing in equity markets?

To add another perspective see this current and very relevant article with many unique and original insights (Kritzman is one of my favorite authors anyway): Cocoma, Paula and Czasonis, Megan and ...
vonjd's user avatar
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6 votes
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Are Fama French Factors market neutral?

The factors are not constructed to be market neutral. The factors are constructed from 6 subportfolios sorted by book-to-market and size. You can read more about how the factors are constructed at ...
Tim Wilding's user avatar
  • 1,406
6 votes

characteristics of factor portfolios

Factor Portfolios are by-products of the cross-sectional regression techniques used to estimate style factor returns - the estimates of the return of a set of styles for a particular period. Style ...
Tim Wilding's user avatar
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5 votes
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Why exposure to the profitability factor increases investment premium?

As @skoestlmeier and @noob2 commented there's much research going on about the profitability anomaly. Firstly, there are different ways of measuring profitability. Novy-Marx (2013, JFE) uses gross ...
Kevin's user avatar
  • 16k
5 votes

Have any other factor "styles" which explain equity returns been uncovered?

A wonderful recent paper that might be of interest is Feng, Giglio, and Xiu's "Taming the Factor Zoo." First, the paper lists nearly 100 "factors" that have been proposed from 1965 through 2016. The ...
Helin's user avatar
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4 votes
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Definition of factor premium: against cap weighted index or against treasury bills?

All factor returns (including "passive" factors like equity premium, credit premium etc) should be assessed using the fairest possible basis for comparison - self-financing portfolios. For a passive ...
Chris Taylor's user avatar
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4 votes

How to test ESG score as a factor against traditional factors

Preliminary/Warning: A correlation test is not an appropriate method for analyzing potential risk-factors! Let's (very precisely) recall, what a risk-factor is (see Bali/Engle/Murray (2016), p.173f.),...
skoestlmeier's user avatar
  • 2,916
3 votes
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FF 6-month lag of the accounting variables

This is directly addressed by Fama/French themselves in their seminal 1992 paper The Cross-Section of Expected Returns, p. 429. The six month lag is the most common, but minimum gap between fiscal ...
skoestlmeier's user avatar
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3 votes
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Do Fama-French factor portfolios require optimization?

It is so not clear what you are trying to do, and I suggest you read Fama-French (1992, 1993) papers first before touching any data.(Read again if you have already, because you seem very confused). ...
MarcusAerlius's user avatar
3 votes
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How to orthogonalize Fama French factors?

The Fama-French factors follow from simple sorting procedures, so they do not explicitly control correlation. But if you have access to the underlying stocks, you could replace this sorting procedure ...
Enrico Schumann's user avatar
3 votes
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Systematic credit "liquidity provider" strategy

I think I understand what Gould means, (but maybe I'm mistaken, in which case all errors are mine). A market participant is usually acting in one of two modes: A market market provides liquidity. He ...
Dimitri Vulis's user avatar
3 votes

Realized variance as predictor that improves momentum strategy

You are right, the authors provide no strong justification for why their method works. They just show that "it would have worked well in the past". But we should be skeptical how well it will work in ...
nbbo2's user avatar
  • 11.4k
3 votes

Holdings based style analysis

I'm not exactly sure what you're asking, but since you tagged the question as factor-models, I'll assume you are modeling the next month's returns of stocks as a function of the factors: $$r_i = \...
lebelinoz's user avatar
  • 274
3 votes
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Is Low-Volatility expensive these days? How can we analyze this?

For example iShares has ETFs following MSCI Europe as well as MSCI Europe Minimum Volatility indices. The P/E ratio (as of 23.11.16) for MSCI Europe ETF was 16.87, while the figure for MSCI Europe ...
MGL's user avatar
  • 516
3 votes

Factors not working

In addition to momentum and value strategies you mentioned, some other common factor-based strategies are carry, trend (i.e. time-series momentum). As a very general (and subjective) answer, I ...
MGL's user avatar
  • 516
3 votes
Accepted

Low volatility in factor regression

The CAPM claims that only systematic risk matters (i.e. covariation with the market) to determine an asset's expected return. So the fact that low volatility stocks have returns that are not ...
Kevin's user avatar
  • 16k
3 votes

How can you use factor modelling to improve your current portfolio

Congratulations on trying to manage your portfolio better. That is wise. If you lose money, you may at least understand why you lost money. Ideally, you could also protect your portfolio against risk ...
kurtosis's user avatar
  • 2,900
3 votes
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Value factor from Ken French's library

If you just want the value factor, you want to download the "Fama-French 3 Factors" or "Fama-French 5 Factors" product. Those have the excess returns (i.e. return in excess of the ...
Matthew Gunn's user avatar
  • 6,954
3 votes
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How to correctly use Fama-French factors (from investment portfolio perspective)?

1. Portfolio construction stage 1.1 Yes, practitioners really use factor strategies, see style investing. Prominent examples are DFA and AQR. Both firms were co-founded by former PhD students of ...
Kevin's user avatar
  • 16k
3 votes

What is the definition of aggregate volatility, and how to compute it?

As mentioned in the comments, the paper defines how they compute it: "to proxy innovations on aggregate volatility, (vt+1−γv,t), we use changes in the VIX index from the Chicago Board Options ...
AKdemy's user avatar
  • 8,924
2 votes

Fama-French three-factor model vs four-factor (Carhart) and five-factor model

Why are you using only stock returns? Do you Mean you're using portfolios or individual stocks? The latter is a tough sell, and I wouldn't recommend it. Running regressions on portfolios is far more ...
FinancialEconomist's user avatar
2 votes
Accepted

Backtesting with Stock Indices, how does one deal with it?

You need to use the proper index constituents each point in time, recording index entrance, exit, splits, corporate actions etc. otherwise you will end up with sampling bias. If you are backtesting a ...
Vitomir's user avatar
  • 821
2 votes
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Factor-Based Equity Investing

Lots of different ways to do it that typically involve the following: (1) Identify starting universe. (2) Source and process underlying attribute data for each holding (for instance, for a low vol ...
Chris's user avatar
  • 1,643
2 votes

how do factor models in equity portfolio management add alpha?

By definition, they don't (assuming you're considering something in the vein of APT). The primary benefit of equity factor models in terms of portfolio risk is allowing you to decompose risk to ...
Chris's user avatar
  • 1,643
2 votes
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What is factor timing?

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 ...
JeanGuillaume's user avatar
2 votes

Why exposure to the profitability factor increases investment premium?

In addition to @KeSchn excellent answer i will provide the original intent by Fama/French as they proposed the "Profitability" factor in their 2015 paper "A five-factor asset pricing ...
skoestlmeier's user avatar
  • 2,916
2 votes

What is "signal" in quant investing?

As people in the comments noted, signal broadly refers to a trigger variable that denotes an investment decision. This is normally a boolean variable (i.e. 0 or 1) but could be continuous (0 to 1) or ...
Mike's user avatar
  • 241
2 votes

What are the most common ways that quantitative funds construct industry/style-neutral factor portfolios?

You are absolutely right about momentum strategies having loadings on industry. But that's also where the risk premium originates from - see this paper by Moskowitz and Grinblatt. In a broader sense, ...
perc-x's user avatar
  • 21
2 votes

What is the market share of MSCI Barra Equity Model?

The only reference I know of is from this 2018 JEF paper on "risk model crowding". Barra is believed to lead most providers with around a 50% market share. Bruno, S., Chincarini, L. B., &...
J-F's user avatar
  • 321

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