TY - JOUR

T1 - Navigating the factor zoo around the world

T2 - an institutional investor perspective

AU - Bartram, Söhnke M.

AU - Lohre, Harald

AU - Pope, Peter F.

AU - Ranganathan, Ananthalakshmi

PY - 2021/7/31

Y1 - 2021/7/31

N2 - The literature on cross-sectional stock return predictability has documented over 450 factors. We take the perspective of an institutional investor and navigate this zoo of factors by focusing on the evidence relevant to the practicalities of factor-based investment strategies. Establishing a sound theoretical rationale is key to identifying “true” factors, and we emphasize the need to recognize data-mining concerns that may cast doubt on the relevance of many factors. From a practical investment perspective, much of the factor evidence documented by academics may be more apparent than real. The performance of many factors is dependent on the inclusion of small- and micro-cap stocks in academic studies, although such stocks would likely be excluded from the real investment universe due to illiquidity and transaction costs. Nevertheless, a parsimonious set of factors emerges in equities and other asset classes, including currencies, fixed income, and commodities. These factors can serve as meaningful ingredients to factor-based portfolio construction.

AB - The literature on cross-sectional stock return predictability has documented over 450 factors. We take the perspective of an institutional investor and navigate this zoo of factors by focusing on the evidence relevant to the practicalities of factor-based investment strategies. Establishing a sound theoretical rationale is key to identifying “true” factors, and we emphasize the need to recognize data-mining concerns that may cast doubt on the relevance of many factors. From a practical investment perspective, much of the factor evidence documented by academics may be more apparent than real. The performance of many factors is dependent on the inclusion of small- and micro-cap stocks in academic studies, although such stocks would likely be excluded from the real investment universe due to illiquidity and transaction costs. Nevertheless, a parsimonious set of factors emerges in equities and other asset classes, including currencies, fixed income, and commodities. These factors can serve as meaningful ingredients to factor-based portfolio construction.

KW - Anomaly

KW - Asset pricing

KW - Factor investing

KW - Institutional investor

KW - Limits to arbitrage

KW - Market efficiency

KW - Mispricing

KW - Risk factor

KW - Transaction costs

U2 - 10.1007/s11573-021-01035-y

DO - 10.1007/s11573-021-01035-y

M3 - Journal article

AN - SCOPUS:85105275902

VL - 91

SP - 655

EP - 703

JO - Journal of Business Economics

JF - Journal of Business Economics

SN - 0044-2372

IS - 5

ER -