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Comprehensive Equity Factor Timing

April 19, 2023 • Posted in Momentum Investing, Volatility Effects

Is timing of U.S. equity factors broadly and reliably attractive? In their March 2023 paper entitled “Timing the Factor Zoo”, Andreas Neuhierl, Otto Randl, Christoph Reschenhofer and Josef Zechner analyze effectiveness of 39 timing signals applied to 318 known factors. Factors include such categories as intangibles, investment, momentum, profitability, trading frictions and value/growth. Timing signals encompass momentum, volatility, valuation spread, characteristics spread, issuer-purchaser spread and reversal. Specifically, they:

  • Forecast monthly returns for each factor and each signal (12,402 timed factors).
  • Aggregate timing signals usingĀ partial least squares regression.
  • Construct multi-factor portfolios that are each month long (short) the fifth, or quintile, of factors with the highest (lowest) predicted returns.
  • Investigate composition of optimal factor timing portfolios, considering such properties such as turnover and style tilt.

Using monthly factor and signal data as available (different start dates) during 1926 through 2020, they find that: (more…)

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