Survey of Recent Research on Factors, Regimes and Robustness
March 24, 2015 - Big Ideas, Strategic Allocation
Why and how should investors pursue investment premiums associated with factors that explain performance differences among related assets (like common stocks)? In the January 2015 version of his paper entitled “Better Investing Through Factors, Regimes and Sensitivity Analysis”, Cristian Homescu summarizes recent research on: (1) factor-based investing; (2) enhancement of factor-based investing via regime switching models; and, (3) strategy robustness testing. Factor investing means systematic targeting of premiums associated with factors that explain an exploitable portion of return and risk differences among securities within one or several asset classes. Based on recent streams of research, he concludes that: