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Variation in the Number of Significant Equity Factors

February 7, 2022 • Posted in Big Ideas, Equity Premium

Does the number of factors significantly predicting next-month stock returns vary substantially over time? If so, what accounts for the variation? In their December 2021 paper entitled “Time Series Variation in the Factor Zoo”, Hendrik Bessembinder, Aaron Burt and Christopher Hrdlicka investigate time variation in the statistical significance of 205 previously identified equity factors before, during and after the sample periods used for their discoveries. Specifically, they track 1-factor (market) alphas of each factor over rolling 60-month intervals over a long sample period. Their criterion for significance for each factor in each interval is a t-statistic of at least 1.96 (95% confidence that alpha is positive). Using monthly returns for all common stocks listed on NYSE, AMEX and NASDAQ exchanges having at least 60 continuous months of data as available during July 1926 (with alpha series therefore starting June 1931) through December 2020, they find that: (more…)

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