Equity Factors G. Simon Universit Paris Dauphine 2019-2020 Equity - - PowerPoint PPT Presentation

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

Equity Factors

• G. Simon

Université Paris Dauphine

2019-2020

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

Outline

1

Introduction

2

Factor Theory

3

The Dark Side of Equity Factors

4

Some Famous Equity Factors

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

Focus of the present course

Equity Factors Factor : identifiable sources of risk that drive financial assets’ returns. They are both risk drivers, and potential sources of performance. Why ? Increasing interest for factors and the burst of investable products in the last years are the main motivation for this course.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

From passive to active management

A bit of history...

1952 : Markowitz. Foundations of Modern Portfolio Theory (MPT). Concept of diversification. 1960s : CAPM : Treynor, Sharpe, Lintner, Mossin. At equilibrium, an efficient portfolio is a combination of a risk-free asset with an

• ptimal portfolio.

Its weights are only determined by market capitalization of the stocks. CAPM is not reducible to mean-variance. Self-fulfilling theory. Minimal turnover portfolio.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

From passive to active management

A bit of history...

The notion of index : Index : designed to tell an economic story and to aggregate in one single number the economic perspectives of a market, a sector or a geographical area. First index ever : the DJTA (Dow Jones Transportation Average, still active today) in 1884. DJIA (Dow Jones Industrial Average) equity index : 1896. 1928 : non-trivial weighting of Dow indices. Standard & Poor’s elaborated its first index in 1923 - S&P500 equity index in 1957. 1975 : first indexed mutual fund (Vanguard). Becomes investable. 1993 : SPY, first ETF (Exchange Traded Fund) to replicate the S&P500 index. NB : SPY is now the most-traded security in the world - ETFs : worldwide asset

• f $3 trillions.
• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

From passive to active management

Some definitions

CAPM : helps to formalize the theory. Investors have different constraints and different views : this generates trading. Initially : investing in the index = passive investment. The notion of passivity has evolved and now recovers the notion of investing easily, at cheap cost.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

From passive to active management

Empirical observations (1)

Market-cap indices are not the unique option for the random investor. Their optimality is questioned : Thompson et all. (2006). Existence of constraints and biases : short-selling, impact, taxes, regulation, etc. Those constraints and frictions make the CAPM only theoretical.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

From passive to active management

Empirical observations (1)

Market-cap indices are not the unique option for the random investor. Their optimality is questioned : Thompson et all. (2006). Existence of constraints and biases : short-selling, impact, taxes, regulation, etc. Those constraints and frictions make the CAPM only theoretical. Haugen, Baker (1991) : market-capitalization indices are “inefficient investments”. An uncompensated risk remains - for a given level of return, there are portfolios with lower risk. This is not at odds with market efficiency in itself.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

From passive to active management

Passive investment - some definitions (again)

Passive investment ? Gander et al. (2012) : A great capacity and a sufficient liquidity ; a possible replication in a systematic and objective way ; the index that is built must represent something.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

From passive to active management

Passive investment - some definitions (again)

Passive investment ? Gander et al. (2012) : A great capacity and a sufficient liquidity ; a possible replication in a systematic and objective way ; the index that is built must represent something. Lo (2016) - “A portfolio strategy that satisfies three properties” : “a strategy that is transparent, investable, and systematic i.e. completely rule-based and without any discretionary intervention” ; an index should have an informational purpose (to wrap economic insights)... ...and a benchmarking purpose to serve as a reference for active managers. Traditional indices may be called “static” and sophisticated ones “dynamic”.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

From passive to active management

Empirical observations (2)

But is it possible to beat the market ? Not everyone ! it is still a debate (see Perold (2007)). An investor dynamically managing its portfolio to produce a better performance than passive indices, has naturally been called an active manager. This notion of active management evolves in time and style. Debate on whether it is profitable or not : Carhart (1997) : no added skills in mutual fund performance. Brinson (1986) : market timing and security picking accounts for less than 10% of institutional portfolio return. Hendricks (1993) : there is some !

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

From passive to active management

Alpha and Beta

For a given benchmark, using OLS : Ri,t − Rf ,t = α + β(RM,t − Rf ,t) + ǫt beta is the sensitivity of the return time-series towards the market ; alpha is deduced as the idiosyncratic premium of the financial asset. alpha should be equal to zero in the CAPM. In the case of a fund, alpha is a proxy of the extra-performance of the fund manager.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

Active management and the financial industry

From Style Boxes to ETFs (1)

1990 : Morningstar’s Style Boxes. Understand the differences btw equity managers and classify their investment style. Sort the holdings of stocks if companies are classified as value or growth... ... plus small, mid or big market capitalization. Crossing each of the three buckets to form 9 boxes. However, for each style, no benchmark available at that time. ☛ Russell created Style Boxes indexes, relayed by investable products through ETFs some years after. Helped investors to diversify their assets, without any dogmatic view on what was considered or not as passive at the time.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

Active management and the financial industry

From Style Boxes to ETFs (2)

The idea of creating style ETFs (investable products) backed by theoretical indices described by a style of management has been a discrete, yet crucial shift in the industry. easy access to potential out-performance ; cheap cost - simple, clear, transparent ; rule-based, accessible to any investor, independently from its sophistication ; 1st bridge between traditional market-cap indices, and pure alpha.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

Active management and the financial industry

Generating alpha is a hard task

Hedge Funds have a high degree of attrition, even when the market is up. All things equal, after three years of activity, 50% of the funds may have shut down. For living funds,the fact that fund managers are skilled with extra performance is unclear and not robust. Cremers, Petajisto (2009) :

in some situations, managers may add value ; funds that deviate largely from the benchmark outperform the benchmark after costs... ...as opposed to less actively managed funds.

MSCI (2014) :

80% of active excess returns are obtained through exposure of portfolios to factors.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

Active management and the financial industry

Some intuition on factors

Style boxes : first attempt of factor investing without knowing it. Start for the identification of more generic sources of risk than market. Factors, as style portfolios, used to spot style/drivers of risk. Historically, on equities - but factors are on all assets : equities, bonds, real estate, commodities etc.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

Active management and the financial industry

Some intuition on factors

Style boxes : first attempt of factor investing without knowing it. Start for the identification of more generic sources of risk than market. Factors, as style portfolios, used to spot style/drivers of risk. Historically, on equities - but factors are on all assets : equities, bonds, real estate, commodities etc. In their simplest expression, factors are simply portfolios of securities : Factors are the sources of common exposures among asset classes. Factors are built by grouping assets along shared characteristics. Those characteristics are statistical, macroeconomic, fundamental, descriptive, etc. Factors should be elementary, non-idiosyncratic sources of returns that shape asset returns and their risk profile.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

Active management and the financial industry

From Factors to Smart Beta

Passive investing is gradually shifting from a market-cap definition to a broader extend encompassing factors in a rule-based, transparent way, with low implementation costs.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

Active management and the financial industry

From Factors to Smart Beta

Alpha created by skilful managers is a relative concept across time. The more sources of risk exposure are identified, the harder it is to appear as performing. Leaves space for talented managers to generate performance through an active management. Generated performance is always a function of what is easy to identify or to generate “at a cheap cost”. Traditional alpha component of portfolio returns are now understood as a compensation for identified risk exposures and non-diversifiable risk. ☛ This builds a space for strategies/indices whose risk is compensated by expected returns.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

Active management and the financial industry

ETPs asset growth

Source : Morningstar (2019)

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

Active management and the financial industry

Timeline of asset growth

2000 : beginnings, with ETFs tilting towards Size and Value. 2003 : 1st Smart Beta ETF. 2005 : 1st fundamental-weighted Smart Beta ETF. 2011 : 1st volatility-allocated Smart Beta ETF. 2013 : Smart Beta ETF around $ 350 billions. 2014 : Smart Beta ETF around $ 530 billions. 2016 : 70prcts of institutional investors planning or using factor-related strategies. 2017 : AUM doubled since 2010. 2020 : Passive Investing represents roughly 15% of the total AUM. Smart Beta represents 1500 investable products for $ 800 billions AUM, 10% of the total AUM.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References From passive to active management Active management and the financial industry

Conclusion

Take-Home Message

⋆ ⋆ ⋆ Take-Home Message Factors have become a deep trend in the asset management industry and powerful investing tools. It is not possible to disentangle theoretical definitions of factors from the trends in financial industry. We may understand at this point factors as being a very crude proxies of transparent, publicly known and long-standing strategies... ...but also as risk engines explaining the cross-section of equity returns. Factors are both a research tool and an easy access to rule-based investing.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Briefly...

Factors have first identified on equities... ...but apply on all asset classes. ☛ A factor is the expression of characteristics creating a link between a set of stocks that helps to explain their returns and their risks. Go one step further theoretically. Explain how the industry uses those factors.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Lessons from the CAPM

CAPM and APT

For many years, CAPM was the only anchoring model to explain returns. CAPM : first time where risk is measured as a factor exposure. The cross-section of returns is essentially driven by the market. 1976 : Ross’ Arbitrage Pricing Theory (APT).

generalizes CAPM by assuming that the risk premium is a linear function the relative risk premia of factors. Yet those factors are unidentified.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Lessons from the CAPM

Factors ?

Accumulation of evidences since the 1970s made that many effects were at odds with the theory. There is not only one factor that can capture the risk. Basu (1977) : Value Banz (1981) : Size “Anomalies” came before factors.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Lessons from the CAPM

Take-home message

⋆ ⋆ ⋆ Take-Home Message Market factor is central when studying stocks’ returns. It defines the core origin of systemic risk that cannot be diversified away. Optimal for the investor, to hold the market portfolio than any other portfolio. Yet the systematic risk that any stock bares is multidimensional and directly linked to its factor exposure... those factors remaining to be identified.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Lessons from the CAPM

Some elementary CAPM theory

Merton (1973) : CAPM relates returns Ri,t of individual assets to the returns RM,t of the market portfolio. Rf ,t the risk-free rate. Then : Ri,t = Rf ,t + βi (RM,t − Rf ,t) + ǫi,t. βi is the stock’s sensitivity to the market portfolio ; ǫi,t is a centered noise usually assumed to be Gaussian.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Lessons from the CAPM

Alpha and Beta

A proper econometric way of stating this relationship is the following : Ri,t = α + Rf ,t + β (RM,t − Rf ,t) + ǫt, (1)

ABC

Vocabulary It defines the terminology around alpha and beta. In an equilibrium model, α should be zero. For a given benchmark, beta is the sensitivity of the returns wrt the market. The terminology extends when a stock return time series is replaced by a mu- tual fund investment time serie. In this case, the alpha is a proxy of the extra- performance generated by the fund manager.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Lessons from the CAPM

Empirical facts to have in mind

⋆ ⋆ ⋆ Take-Home Message

1

Portfolio’s volatility is a decreasing function of the number of stocks (Evans and Archer (1968)) but reaches rapidly a limit. ☛ The risk of a market portfolio can be approximated and reproduced with

• nly 8-10 securities !

2

R2 is clearly an increasing function of N.

With 2 stocks, the average R2 is around 40%. For 50 stocks, the average R2 is around 90%.

3

As the number of assets in the portfolio grows, the exposure to market factors explains most of the performance.

4

Fisher and Lorie (1970) : 30 stocks in a portfolio allows to similar level of diversification of 95% than the Benchmark.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Factor Theory

What are we looking for ?

It remains a question : do we have any clue on what we are looking for ? But the intuition guides us towards a setting such that : the model is parsimonious and involves as few parameters as possible ; the model is stable : from one period to an other or from an asset to an other, the parameters do not vary greatly ; the model avoids to get colinear factors : any additional factor should bring new information and must bring as few redundancy as possible. Factors are random variables but not necessarily returns ! [Meucci (2014)]

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Factor Theory

Main Equation

If we have to write a factor model in a linear form, the most general form is given by Equation 2 : Ri,t = αi + β′

i Ft + ǫi,t.

(2) Ft = (F1,t, ..., FK,t) are the K factors. Ft may be time dependent but not asset-dependent. βi is a matrix/vector, representing the sensitivity of returns wrt the factors. β is called factor loadings of factor betas. ǫ is an idiosyncratic perturbation. The dimensions of the objects depend on the assumptions and the type of model.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Factor Theory

Assumptions

The factors are stationary ... ...with fixed unconditional moments that we note E[Ft] = mf and Cov[Ft] = Ωf . mf is naturally a vector of size K. Ωf is a K × K symmetric, real-valued matrix. ǫ are assumed to be uncorrelated to any factor component. ǫ are serially uncorrelated for a given asset, and uncorrelated at the same period between two different assets. cov(ǫi,t, ǫj,t′) = σ2

i δ(i = j)δ(t = t′).

∆ the N × N diagonal matrix ∆ = diag(σ2

1, ..., σ2 N).

The covariance matrix of all the assets is a N × N matrix that we note Ω.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

The landscape

Macroeconomic factors : related to the context of utilisation rather in the econometric technique ; realizations of Ft are assumed to be observed : macroeconomic time-series mainly ; estimation involve classical econometric tools ;

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

The landscape

Macroeconomic factors : related to the context of utilisation rather in the econometric technique ; realizations of Ft are assumed to be observed : macroeconomic time-series mainly ; estimation involve classical econometric tools ; Statistical factors : factors as by-product of the statistical study of the covariance matrix of returns ; factors emerge directly from the observation of past returns of assets ; neither the betas, neither the factors are observed. Both emerge due to assumptions on R or on the covariance structure.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

The landscape

Macroeconomic factors : related to the context of utilisation rather in the econometric technique ; realizations of Ft are assumed to be observed : macroeconomic time-series mainly ; estimation involve classical econometric tools ; Statistical factors : factors as by-product of the statistical study of the covariance matrix of returns ; factors emerge directly from the observation of past returns of assets ; neither the betas, neither the factors are observed. Both emerge due to assumptions on R or on the covariance structure. Fundamental factors : focus on ex-ante information, on characteristics like sector, country, industry, or financialstatements (income, revenues, assets, etc). stocks characteristics help to build the risk drivers (= two other models). One type of model assumes that the betas are observed... ... the other use characteristics to estimate first factors, before estimating betas. Factors remain initially unobserved.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Inputs / Outputs

Factor Model Inputs Outputs Macroeconomic Stocks’ returns and Stocks’ betas macroeconomic variables Statistical Stocks’ returns Statistical factors and stocks’ betas Fundamental Stocks’ returns, characteristics, Fundamental factors financial statements... (opt : stocks’ betas)

Table – Description of the different type of factors (see Connor (1995))

Time-series regression (asset fixed, varying time) when the time-series of factors are observed. Cross-sectional regression (fixed period, assets and their characteristics do vary in the regression) when the characteristics are observed.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Remember...

Connor (1995) : ⋆ ⋆ ⋆ Take-Home Message “The 3 types of factor models are not necessarily inconsistent. In the absence

• f estimation error and with no limits on data availability, the three models are

simply restatements or (to use a technical term from factor modelling) rotations

• f one another. (...) In this eclectic view of the world, the three factor models are

not in conflict and all can hold simultaneously.”. Do not forget that factor models are only attempts to find proxies of unobser- vable risk drivers. Ex-ante, no model is better than an other. Only the ex-post explanatory power of the regressions plus the available data may help to choose.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Macroeconomic Factors

We observe R and F in Equation 2. F are K time-series common to all the stocks for each regression. Examples : interest rates, market risk, industrial production, money growth, inflation measures, commodities’ prices, housing or unemployment data, etc. Goal : assess the impact of shocks on those variables on assets’ returns. Tool : linear regression (OLS). CAPM is such an example with Market returns as a factor !

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Macroeconomic Factors

We observe R and F in Equation 2. F are K time-series common to all the stocks for each regression. Examples : interest rates, market risk, industrial production, money growth, inflation measures, commodities’ prices, housing or unemployment data, etc. Goal : assess the impact of shocks on those variables on assets’ returns. Tool : linear regression (OLS). CAPM is such an example with Market returns as a factor ! We have : Ω = BΩFB′ + ∆ where B = (β1, ..., βN)′ is this time a N × K matrix. See Chen et al. (1986) for stocks, and Lo (2008) for Hedge Funds.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Macroeconomic Factors

Ang (2014) : macro factors are responsible for the main part of the variation of stocks returns, nearly 60% of the market premium (the equity risk premium). The challenge is to identify the potential sources of macro risk. This makes that macro factors are not really tradable in practice. Macro variables released at very low frequency : limited use in practice. Impossible to get an arbitrary exposure to macro factors only with stocks. More efficient to capture an exposure to macro factors with other financial assets.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Statistical Factors

Only the asset returns are used and the factors and the loadings are inferred directly from the data. “Factor Analysis” or PCA : we only deal with PCA here. Advantage : needs only returns. Drawback : they are only the reflection of phenomenons observed in the past. If no stationarity (or estimaiton timespan too long) when compared to the resilience

• f the factor, no use for them.
• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Statistical Factors - Principal Component Analysis

Ω the covariance of assets. Find a real-valued vector of size N, we look for a portfolio v1 : maxv1v ′

1Ωv1

such that v1 is with v ′

1v1 = 1. The second component is again a real-valued vector of size

N obtained through : maxv2v ′

2Ωv2

with again v ′

2v2 = 1 but with the additional condition that v ′ 1v2 = 0.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Statistical Factors - Principal Component Analysis

The proportion of variance that the K first principal components do explain is simply (K

i=1 λi)/(N i=1 λi) where the λ are the eigenvalues of Ω sorted in descending order.

Once the K eigenvectors v1, .., vK are recovered, those v are homogeneous to portfolios then this mean that we have not recovered factors yet. Therefore Ft can be estimated by stacking the vi.Rt quantities for i = 1, ..., K. This gives us an estimation of ˆ Ft and classical econometric methods (OLS again) may be applied asset by asset.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Fundamental Factors with observable betas

Asset specific characteristics are used to recover the factors. Stock characteristic are often slow (financial statements) or never changing (belonging to a sector, an industry, a geographical zone). Assumes that the loadings ie the betas are fixed and depending on the assets. The βi will be built/observed thanks to the assets characteristics, the factors remaining to be estimated. T regressions will be repeated to estimate the factors period by period. This approach is the one chosen by BARRA Inc. - the BARRA model. Heavily discussed e.g. in Grinold and Kahn (2000). The professional model uses a lot of proprietary transformations and adjustments. The industry of the stock is e.g. translated into sparse betas with as many betas as industries with 0-1 dummies depending on whether the stock belongs in the industry or not.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Fundamental Factors with estimated factors - Fama French

Fama and French (1992) acts as a little revolution at the beginning of the 90s. Identified systematic, persistent and interpretable sources of risk which could be qualified as persistent drivers of returns. In addition to the market, two other explanatory factors :

Size... Value... ...as returns of Size-based and Value-based portfolios.

New : not a one-by-one effect, but a collective construction. Known, famous, widespread. Canonical way to explain and analyze returns... ...but does not explain why such premia do exist.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Fundamental Factors with estimated factors - Fama French

⋆ ⋆ ⋆ Take-Home Message You may hear often from the Fama and French model. Keep in mind the general message but do not consider as essential the fine details of the experimental setting construction. Indeed, what Fama and French built the papers (the message stays the same yet the setting changes through time and publications) is really sepcific. So it should be taken as it is, with its peculiarities and its theoretical breakthroughs. But remember, it is basically an empirical asset pricing model. And as they recall it in Fama and French (2015), this kind of model “works backward” and is mainly designed to “capture patterns in average returns” and dissect “the relation between average returns” and explanatory variables.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Fundamental Factors with estimated factors - Fama French

The portfolio construction is really specific. First : They use portfolios (it explains partly the high R2). They use the market beta and size to stratify their stocks universe. They split the universe in N buckets along beta and in turn, N buckets along the second variable for each. Left with N × N portfolios (let’s call them regression portfolios). This stratification is used in order to account for the estimation biases.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Fundamental Factors with estimated factors - Fama French

Second : in order to build regression models, they need now explanatory variables that will be in turn, portfolio returns (not the same portfolios). Those portfolio returns and market returns, included in the model, are the same for each regression. They build six portfolios, with a kind of style boxing. Divide the universe in 2 categories along size (small and big, so respectively S and B) where the breakpoint is the median value of the NYSE market. For each small and big category, they split the two sub-portfolios in three, along Value with 3 buckets where breakpoints are the 0.30 and 0.70 quantiles of the book to price ratio. So 6 portfolios can be defined : SV, SN, SG, BV, BN and BG. Each portfolio as a basket of securities has aggregated returns. The two factors SMB and HML are then computed as return time-series where : SMB = (1/3)[(R(SV ) + R(SN) + R(SG)) − (R(BV ) + R(BN) + R(BG))] HML = (1/2)[(R((SV ) + R(BV ))) − (R(SG) + (BG))]

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Fundamental Factors with estimated factors - Fama French

Again, those returns are observable for each time period. For each regression portfolio i, the regression model that Fama and French state is a time-series one fir each i : Ri,t = βiRM,t + βSMB

i

SMBt + βHML

i

HMLt + ǫi,t (3) where the coefficients are determined through classical OLS with i.i.d. perturbations ǫ.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Fundamental Factors with estimated factors - Fama French

Final remarks : it is an equilibrium model. One pitfall is that in practice, the betas are not constant. The coefficients β in Equation 3 do not determine in isolation the exposure of the returns with respect to the factors. Fama and French did not claim that Size and Value are risk factors per se. Size and Value are proxies for the unobservable risk factors affecting the commonality of stocks’ returns. They do not provide the economic rationale to explain why those two precise factors catch this pattern at the time they wrote the paper. “Size and Value remain arbitrary indicator variables that, for unexplained economic reasons, are related to risk factors in returns”. The factors, made of portfolio returns, provide “combinations of two underlying unknown risk factor or state variables”. Fama and French (1995)

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Fundamental Factors with estimated factors - Fama French

Remark : To be fairly honest, there is an other test in the Fama and French papers. In a second step, the out-of-sample returns (at the stock level) are regressed once again on the estimated betas of Equation 3. The aim of this second regression helps to determine the final premium. This is called (we take a lot of shortcuts) a Fama-McBeth regression, as it uses the framework of Fama and MacBeth (1973) to which we refer. The problem is that, alike with the CAPM, Size or HML do predict the returns, but the betas on those characteristics do not predict the returns (it does not work so well, indeed). The problem is still open.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

The three types of factor models

Fama French, the follow-up

Carhart (1997), Jegadeesh and Titman (1993) : add the momentum factor. In 2015, Fama and French (2015) end with a 5-factors model.

add a Quality and Investment factor ; reluctant to add Momentum (arg : speed of variation at odds with risk premium nature) ; 5 factors are then Market, Size, Value, Profitability (aka Quality) and Investment.

• ne key finding is that Value appears as redundant and facultative.

AQR (2014) 6 factors’ model : Market, Size, Value, Quality, Investment, Momentum. Hou et al. (2014) q-factor model : Market, Size, Investment and Quality is enough.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Open questions

What should be a factor ?

Cochrane (2011) : talk about a factor zoo. It describes well the profusion of research of candidates. What should be a factor ?. Dimson et al. (2017) : “A factor must be persistent over time, pervasive across markets, robust to different definitions, intuitive to common sense, and investable at resaonable cost”. Some researchers have tried to define the guidelines that allow to determine whether a given anomaly should be named as a factor or not.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Open questions

What should be a factor ?

Ang (2014) defines four essential features for a factor to be elected as so.

1

It “should have an intellectual foundation, be justified by academic research”.

2

It should “have exhibited significant premia, expected to persist in the future”.

3

A factor candidate should “have return history available for bad times”.

4

A last requirement is that it should be “implementable in liquid, traded instruments”.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Open questions

What should be a factor ?

Ang (2014) defines four essential features for a factor to be elected as so.

1

It “should have an intellectual foundation, be justified by academic research”.

2

It should “have exhibited significant premia, expected to persist in the future”.

3

A factor candidate should “have return history available for bad times”.

4

A last requirement is that it should be “implementable in liquid, traded instruments”. ⋆ ⋆ ⋆ Take-Home Message The common features of a factor is that a factor must be persistent, robust, universal, and backed by some theory. However, what we could identify (economically or statistically) is only the projec- tion on the observable/estimated variables of unobservable, true risk drivers.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Factors and the financial industry

So many terms...

MSCI uses the term Risk Premia Indices. MorningStar employs Strategic Beta for equivalent products. Russel uses Smart Beta. SPDR markets Advanced Beta. EDHEC monitor the performance of Smart Factor Indices. This needs some clarification...

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Factors and the financial industry

ARP or Smart Beta ?

An excellent reading : Hamdan et al. (2016). Smart Beta : refers to the long only implementation of factors ; no leverage and mainly offered through mutual funds or ETFs ; question : how to allocate a -1/+1 signal in Long-Only ? Needs a risk budgeting method or alternative weightings. Arnott et al. (2016) : Smart Beta are now widely used, not only to refer to passive strategies, but also to refer to any systematic or automated strategy.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Factors and the financial industry

ARP or Smart Beta ?

An excellent reading : Hamdan et al. (2016). Smart Beta : refers to the long only implementation of factors ; no leverage and mainly offered through mutual funds or ETFs ; question : how to allocate a -1/+1 signal in Long-Only ? Needs a risk budgeting method or alternative weightings. Arnott et al. (2016) : Smart Beta are now widely used, not only to refer to passive strategies, but also to refer to any systematic or automated strategy. Alternative Risk Premia (ARP) : refers to the long-short implementation of factors ; universal and are not confined to equities ; alternative comes in opposition to the traditional risk premium, namely the market.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Factors and the financial industry

Risk Premium or Anomaly ?

A risk premium is the reward for holding a portfolio that represents an identified risk.... ...whereas the associated risk of an anomaly is more difficult to highlight. Blin et al. (2017) : a true risk premium should deliver positive excess returns on the long term... ...and should be backed by either by an economic or by a behavioural rationale. An ARP should bring a more direct access to the underlying risk premium, and so a decreased correlation to traditional investments. They should therefore bring another dimension to the diversification of classical portfolios, even in the multi-asset case. The last thing is that an ARP should be investable and scalable (after trading costs). Cochrane (1999) : in the case of a risk premium, investors may not trade it, then contributing to the persistence to the high reward associated to it. Alternatively, any easy arbitrage should be traded as soon as it is detected, making the anomaly to disappear.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Factors and the financial industry

The importance of portfolio construction

Depends on the needs of the final investor (LO, LS ?) Specific exposition to a given factor ? Which rule as a risk-budgeting technique ? Do we want to control for the effect of other factors or not ? Beware of the beta bias ! The particular case of Size. ☛ Simply adding the factors does not mean less risk through diversification ! Beware of third-order risk and extreme events...

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

Factors and the financial industry

The performance puzzle

Hamdan et al. (2016) : one main difference between traditional and alternative risk premia is that it is very difficult to identify their performance that is “dependent on several parameters, such as the asset universe, scoring method, weighting approach and trading implementation” which explains the profusion of factor discovery attempts, that are more or less papers where academics compare their various backtests. Factor strategies have very different return distribution features, that really depend on the strategy. Ex : Momentum. The factor is known for having the simplest definition and corresponds probably to a behavioural bias. In spite of its simplicity, the average return of the factor is high, but “there are relatively long periods over which momentum experiences severe losses or crashes”. The return distribution is strongly asymmetric.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

“Is Smart Beta Really Smart ?” “Smart beta portfolios have been the object of considerable marketing

• hype. They are more a testament to smart marketing rather than smart
• investing. (...) As smart beta funds become increasingly popular, the

results are likely to be disappointing.”

Malkiel (2014) - Is Smart Beta Really Smart ? - JoPM (2014)

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Focus of the present course

What is the probability that a factor is the result of pure data mining ? What is the real performance of factors ? What are the real implementation costs ? What is crowding ?

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

So many factors...

“Publish or perish”

Banz, Basu, Fama, French... a fruitful research. Steady increase of attempts of factor discoveries. This kind of research has always been the core activity of HF/speculative boutiques... ...yet, this research is unpublished. What changed is that academics try to publish potential new anomalies. The incentive is now to be “the one that discovered a given factor”.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

So many factors...

“...and the cross subsection of expected returns”

☛ Number of factors published in reference academic journals as reported in the appendix of Harvey et al. (2016) - 314 “newly discovered factors”.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

So many factors...

Data snooping / p-hacking

Chordia et al. (2017) : p-hacking - when reproduced in an other framework, the statistical significance of the results disappear. Hou et al. (2017b) : over 447 factors or anomalies, 65% and 85% are not statistically significative. Green et al. (2013) : 94 cross-sectional equity factors (1980 - 2014). Only 12 out

• f 94 were significant.

Chordia et al. (2017) : generates 2.1 million trading strategies ( !)... only 17 strategies “survive the statistical and economic thresholds”. Hou et al. (2017a) : provides a study on 447 factors ; 2/3 fail. ☛ Research made on many strategies but only the profitable one are presented. A funny example by Novy-Marx (2014) : to forecast stocks expected returns, excellent explanatory power of variables such as planets or weather reports.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

So many factors...

Alpha decay

An other problem is to evaluate whether the true ones remain profitable after they are published. McLean, Pontiff (2016) : very famous now.

The performance of strategies decreases after their publication. Unable to replicate the performance of 12 factors from an initial set of 97. After publication, the performance is divided by a factor 2 ! Factor premia are boosted by a factor of 26% because of data snooping. After a factor is discovered and published, the relative premium falls drastically.

Many more find the same decrease in the profits of anomaly-trading... ... and relates after-publication decay with the trading of those anomalies by institutional investors. E.g. : the January effect discovered in the 1970s is now documented to have disappeared.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

So many factors...

Disappointing performance (1)

An other question is the question of the effectiveness of the performance of factor strategies. Arnott et al. (2019) : in the last 15 years, the performance of famous factors has largely decreased... ...since then, no equity factor except the market has been able to perform. Feng et al. (2019) :

study 99 factors from 1980 to December 2016 ; confirms the weakness of the performance stability ; many factors appear statistically not significant ; recently discovered factors appear redundant wrt previously identified factors.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

So many factors...

Disappointing performance (2)

The other aspect is the timing and the identification of the source of performance. Malkiel (2014) : perf. of Smart Beta strategies depends on the economic conditions and risk-budgeting procedures. Novy-Marx, Velikov (2016), Arnott et al. (2019), Malkiel (2014), Hou et al. (2017b) :

factor-related strategies may have long-standing periods of strong negative performance... ...heavy drawdowns... ...and non-Gaussian nature of the returns’ distribution. Many factors seem to be exposed to micro-cap stocks that may in some situations, drive the performance.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Implementation Costs

Introduction

A major criticism against factor strategies : huge replication costs. Any strategy is, in practice, costly. Lower bound : market. True question : after taking those costs into account, are the net returns still profitable ?

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Implementation Costs

Introduction

A major criticism against factor strategies : huge replication costs. Any strategy is, in practice, costly. Lower bound : market. True question : after taking those costs into account, are the net returns still profitable ? Several typologies of costs do exist. Understand how orders are executed :

• ver the counter orders : price is directly negotiated with another market

participant ; delegate execution to a broker that can guarantee a defined execution price. The risk is transferred by the client to the broker who executes the trades ; trade and execute on the markets. This needs expertise and a heavy infrastructure. See Lehalle and Laruelle (2013) e.g. which give detailed insights on execution alternatives.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Implementation Costs

Estimating costs

Direct costs : compensation for every participant involved in a trade but their estimation is not an issue ; commissions, brokerage fees, exchange fees and taxes ; shorting fees (locates).

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Implementation Costs

Estimating costs

Direct costs : compensation for every participant involved in a trade but their estimation is not an issue ; commissions, brokerage fees, exchange fees and taxes ; shorting fees (locates). Indirect costs : are subtle to evaluate and measure ; variable part of execution costs, which is not known in advance. Largest part of the execution cost for large trades. Ex : bid-asks spreads. Linked to the liquidity of the market, depend on the asset and the exchange. Already materialized in prices and not paid separately. After the trade, it is not possible to observe the effective cost. Market impact costs described as “the price to pay for obtaining liquidity”. Parametric academic models hopefully already exist.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Implementation Costs

Factor costs

Two excellent papers tackle this issue : Patton, Weller (2019) and Brière et al. (2019). Two main approaches : The first approach :

use proprietary trading data to analyze costs for a single firm ; not representative of the random trader, provide at least “a lower bound on the implementation costs of factor strategies”.

The second approach :

uses quotes and broad market-trading data to estimate trading costs for idiosyncratic stocks ; studies “extrapolate price impact estimates from small trades to large factor portfolios

• r ignore price impact costs entirely”.

☛ Results are mixed...

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Implementation Costs

Pessimistic figures

Keim (2003) : Momentum is destroyed by trading costs. Stanzl et al. (2016) : rather than billions, the authors find capacities around... millions, at best hundreds of millions for Size. Chen and Velikov (2017) :

120 potential market anomalies ; an average investor should expect at best small profits from those anomalies with costs ; half of the gains disappear simply after publication of a factor. The costs make the

• ther half vanish :(

Patton, Weller (2019) : confirm the tendency of Momentum to be less profitable in realistic trading. Momentum strategies harvest no profit. Size is maybe the only factor strategy that has some potential, that can resist a bit to trading costs, unlike Value.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Implementation Costs

Optimistic figures

Cost is in bp per trade : Paper Size Value Momentum Korajczyk and Sadka (2004)

• 200

Novy-Marx, Velikov (2016) 48 60 780 Frazzini et al. (2018) 154 146 351 Brière et al. (2019) 64 123 862

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Crowding

Cro...what ? (1)

Very trendy topic but a nightmare for investors. Lack of a true definition. Aims at describing market states where investors invest in the same stocks in similar proportions. Is everybody doing the same thing ?

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Crowding

Cro...what ? (1)

Cycle : factor is discovered, published ; more and more money comes in the market along this strategy, and the factor becomes crowded ; the mispricings are arbitraged away, decreasing the results of the “original” factor. ☛ A factor is said to be crowded when it is so famous that everyone is playing it. One hope : varying the implementations of factor investing should help to decrease trade correlation.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Crowding

General intuition

The links that crowding shares with performance and trading costs are ambiguous. Difficult to disentangle from alpha decay. Crowding from strategies, from portfolios or trades ? Static or dynamic ?

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Crowding

Static crowding ?

Static ? ↔ positions probably not a problem ; market : driven by all trades, liquid enough to absorb synchronized actions ; more a concern for alternative strategies, either they are played long or long-short ; a risk however exists when short positions are accumulated. Short squeeze. “There is a significant overlap of portfolio positions and allocations as a result of crowded trades which, in total, add up to a significant share of a stock’s free-float market capitalization”. MSCI (2015)

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Crowding

Dynamic crowding ?

Dynamic ? ↔ synchronized trades to replicate a factor, investors try individually to maintain a given exposure to a precise portfolio, this generates similar trades ; synchronized trades increase the apparent impact of each investor ; cumulating them to lead to an over-valuation of the valuation of stocks, decreasing future performance ; collective, unseen herding makes that every single investor underestimates the real impact of trades and the capacity of its very own strategy. “Commonality in trading does not by itself necessarily point to crowding”. MSCI (2015)

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References So many factors... Implementation Costs Crowding

Crowding

Measures

No real consensus. More likely that nobody on the market has a clear view on what is going on with crowding. Returns-based metrics : needs to have at hand a strategy that with an explicit portfolio ; this can be done at the investor level or in a conceptual way, but without disclosure

• f other agents ;

capture overall market activity on stocks’ trading, of all agents. Example : correlation ; difference in returns ; cumulative performance ; etc. Holding-based metrics : data : ideal theoretically ; mutual fund flows, 13F, or short data ; identify stocks with excess, or massive investments wrt their market cap ; identify measure changes in ownership structure, who is buying or holding what ; identify also costs of shorting, over-utilisation and shorting squeezes ; mostly static and does not account for investors’ movements or intentions to trade.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Main factors

Objectives

Describe the factors that are the most representative in the equity literature. Our choice for only some of them : Value, Momentum, Size, Low Vol, and Quality. Factor or anomaly ? Description, features, proxy variables... Explanations : risk ? or behavioural ?

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Main factors

Assets

☛ Ranking of Smart-Beta Exchange Traded Products in the US by theme, as of end of 2018 - Source : Morningstar (2019)

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Main factors

Value

Since when ? 1977 Who ? Basu (1977) Computation ? Spots stocks whose market value does not reflect the fundamental value ; capture the excess returns of stocks with typically low book value over market cap. Interpretation ?

Risk : Stocks’ prices move because of exogenous news or shocks. Shocks driven by systematic risk on the business cycle. Value firms are said to be riskier in bad times (more mature businesses, costly reversibility) Fama, French (1992), Berk et al. (1999) : Value stocks related to financial distress. Behavioural : factor appear because of errors in the expectations of investors, attracted by more glittering strategies (see Lakonishok et al. (1994)). Investors too pessimistic when evaluating value companies, creating then an undervaluation of Value companies. Value firms in this framework are not riskier but only cheaper since simply mis-valued.

☛ Anomaly (positive skew ? - not very robust - outlier in Lempérière et al. (2015)).

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Main factors

Value - Scorecard

☛ Flat ranking of Book Value (trailing 12-months Total Equity) over Market Cap (100d rolling mean, lag 20d).

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Main factors

Momentum

Since when ? 1993 Who ? Jegadeesh, Titman (1993), Carhart (1997) Computation ? Past winners are the future winners. UMD as Up Minus Down. Typically computed as the mean of total returns over a long period of typically 3, 6 or 12 months, with the last month excluded most of the time. Interpretation ?

Risk : available in Lempérière et al. (2015), but of higher order than volatility. Negative skew. Driven by the skewness of winning stocks (long leg) due to the 5% largest events contributing to losses equivalent to 20% of the gains (made by the 95% other events !) Reward for baring tail risk and crashes probability ? Behavioural : Barberis, Thaler (2003) : under- or over-reaction of investors to news,

• ver-confidence and biases.

If investors are too conservative, it takes too much time to realize that they are herding or already losing too much. Momentum exacerbates such moves.

☛ Risk Premia.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Main factors

Momentum - Scorecard

☛ Ranking of mean over 220 days, lagged by 20 days, of the total returns (price and dividend returns).

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Main factors

Size

Since when ? 1981 Who ? Banz (1981), Roll (1981) Computation ? Small firms have excess returns with respect to big firms. The size of the firm is generally measured through the measure of the market capitalization or through traded volume in dollars (Ciliberti et al. (2019)). Interpretation ?

Risk :Fama, French (1993) : small firms are riskier ! (less mature, less financial power, less developed activities). Less robust to systemic risk and market shocks, sometimes past poor performers. Fama, French (1993, 1996) : sometimes linked to financial distress. Price of liquidity ? Behavioural : similar to those used for Value. Errors in expectations of investors losing focus, attracted by glittering strategies. Lakonishok et al. (1994) : investors under-react to news and miss information on small stocks, less catching eye compared to glamorous stocks. Lempérière et al. (2015) : Size shows a strong negative measure of skewness.

☛ Risk Premia (with caution).

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Main factors

Size - Scorecard

☛ Ranking of the average over 250 days, lagged by 20 days, of the market capitalisation in dollars.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Main factors

Low Vol

Since when ? 1975 Who ? Haugen, Heins (1975), Haugen, Baker (1991) Variables ? Stocks with low volatility have higher returns ! At odds with CAPM theory. See Blitz, Van Vliet (2011). Usually stocks with low beta, high market capitalization, higher dividends. Computation ?

Risk : None. Behavioural : Barberis, Huang (2008) again. Most common behavioural explanation is the lottery effect : investors like small risks and big gains. Highly volatile stocks have frequent losses, but can also deliver exceptional gains with a non-zero probability. Investors are ready to pay more for such stocks, under-valuating in the mean time low risk stocks. “Irrational preference for volatility stocks”. Also : low risk (boring) stocks are underlooked wrt others : investors loose focus,

• ver-confidence, etc.

Alternatively : pension funds that need to regular cash flows.

☛ Anomaly.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Main factors

Low Vol - Scorecard

☛ Inverse ranking of the standard deviation over 250 days, lagged by 20 days.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Main factors

Quality

Since when ? 2000 Who ? Piotroski (2000), Novy-Marx (2013). However, Benjamin Graham, one pioneer of Value investing was already aware of Quality investing that he considered as an

• ther side of Value.

Computation ? Spot companies with low debt, stable income, materialized by high levels of cash-earnings, stable growth in dividends, strong balance-sheet, etc. Interpretation ?

Risk : None Behavioural : The explanation for the long-standing power of the anomaly is hard to give. Asness et al. (2019) : OK if Quality stocks have higher prices, yet why do they have high returns ? Mistakes, errors in expectations, loss of focus, preference for lottery-like stocks, etc.

☛ Anomaly.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Main factors

Quality - Scorecard

☛ Ratio of the Operating Cash-Flow divided by Total Assets. Trailing 12-months in dollars plus flat ranking.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Correlation and statistical properties

Objectives

Understand the correlation and the links between factors is of utmost importance. Correlations, expositions do change over time. “Market betas of factors vary widely over time. The value factor typically correlates negatively with the market. During the GFC, however, it correlated positively and significantly with the market, performing poorly as the markets tumbled and soaring as the stock markets rebounded. (...) Investors need to understand correlations. Many investors mistakenly believe they can diversify away most of the risks in factor investing by creating a portfolio of several

• factors. In periods of market stress, most diversification benefits can vanish as the factors

begin moving in unison. An understanding of how factors behave in different environments (...) and of how correlations change through time, is essential.” Arnott et al. (2019)

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Correlation and statistical properties

Relative Volatility

☛ Relative volatility of the factors for an unconditional unit risk on all the simulation. WW, 2004-2019.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Correlation and statistical properties

Correlations

☛ Correlations between factors, hedged (right panel) and un-hedged (left panel). WW, 2004-2019.

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Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Correlation and statistical properties

Dynamic Beta

☛ Dynamic Beta of factor strategies with respect to the market. WW, 2004-2019.

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Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Correlation and statistical properties

Hedged or Unhedged ?

☛ Comparison of the performance Hedged and Unhedged versions of Long-Short factors. WW 2004-2019.

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Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Correlation and statistical properties

Skewness

☛ Skewness computation procedure of Lempérière et al. (2015) for the various factors. In legend, the skewness value is given by Maximum Likelihood estimation.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References Presentation of main factors Correlation and statistical properties

Correlation and statistical properties

Take-Home Messages

⋆ ⋆ ⋆ Take-Home Message Value is anti-correlated with Momentum and Quality. Momentum is the most likely to be a true risk premium. Quality is a top-performing factor. Size is very difficult to implement in a robust portfolio construction, leads to weak results... ...but is more or linked to any other factor. Hedging the market beta is crucial - portfolio construction is key.

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

Outline

1

Introduction From passive to active management Active management and the financial industry

2

Factor Theory Lessons from the CAPM Factor Theory The three types of factor models Factors and the financial industry

3

The Dark Side of Equity Factors So many factors... Implementation Costs Crowding

4

Some Famous Equity Factors Presentation of main factors Correlation and statistical properties

5

References

• G. Simon

Equity Factors

Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

References I

Amihud, Mendelson - Asset pricing and the bid-ask spread - Journal of Financial Economics, 17 (2) - (1986) Ang, Goetzmann, Schaefer - Evaluation of active management of the Norwegian Government Pension Fund - Global - Report to the Norwegian Ministry of Finance - (2009) Ang - Asset Management : A Systematic Approach to Factor Investing - Oxford University Press - (2014) AQR - Our Model Goes to Six and Saves Value From Redundancy Along the Way - https://www.aqr.com/Insights/Perspectives/ Our-Model-Goes-to-Six-and-Saves-Value-From-Redundancy-Along-the-Way

• (2014)

Arnott, Beck, Kalesnik - How Can Smart Beta Go Horribly Wrong ? - Research Affiliates Working Paper - (2016)

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Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

References II

Arnott, Harvey, Kalesnik, Linnainmaa - Alice’s Adventures in Factorland : Three Blunders That Plague Factor Investing - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3331680 - (2019) Asness, Frazzini, Pedersen - Quality Minus Junk - Review of Accounting Studies, 24 (1) - (2019) Banz - The relationship between return and market value of common stocks - Journal of Financial Economics, 9 (1) - (1981) Barber, Odean - All That Glitters : The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors - Review of Financial Studies, 21 (2) - (2008) Barberis, Thaler - A survey of behavioral finance - Handbook of the Economics of Finance, Elsevier, Chap.18 - (2003) Barberis, Huang - Stocks as Lotteries : The Implications of Probability Weighting for Security Prices - American Economic Review, 98 (5) - (2008)

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Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

References III

Basu - Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios : A Test of the Efficient Market Hypothesis - The Journal of Finance, 32 (3) - (1977) Bender, Brett Hammond, Mok - Can Alpha Be Captured by Risk Premia ? - The Journal of Portfolio Management, 40 (2) - (2014) Berk, Green, Naik - Optimal investment, growth options, and security returns - The Journal of Finance, 54 (5) - (1999) Blin, Lee, Teiletche - Alternative risk premia investing : from theory to practice - Unigestion Technical Report - (2017) Blitz, Van Vliet - Dynamic strategic asset allocation : Risk and return across economic regimes - Journal of Asset Management, 12 (5) - (2011) Bouchaud, Potters, Laloux, Ciliberti, Beveratos, Yves Lempérière, Simon - Deconstructing the Low-Vol anomaly - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2670076 - (2016)

• G. Simon

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Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

References IV

Brière, Lehalle, Nefedova, Raboun - Stock Market Liquidity and the Trading Costs

• f Asset Pricing Anomalies -

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3380239 - (2019) Brinson, Hood, Beebower - Determinants of Portfolio Performance - Financial Analysts Journal, 42 (4) - (1986) Carhart - On Persistence in Mutual Fund Performance - The Journal of Finance, 52 (1) - (1997) Chen, Roll, Ross - Economic forces and the stock market - Journal of Business, 59 (3) - (1986) Chen, Velikov - Accounting for the Anomaly Zoo : A Trading Cost Perspective - Working Paper - (2017)

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Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

References V

Chordia, Goyal, Saretto - p-Hacking : Evidence from Two Million Trading Strategies

• https:

//www.baylor.edu/business/lonestarconference/doc.php/292031.pdf - (2017) Ciliberti, Sérié, Simon, Lempérière, Bouchaud - The Size Premium in Equity Markets : Where Is the Risk ? - The Journal of Portfolio Management - (2019) Cochrane - Portfolio Advice for a Multifactor World - Economic Perspectives, 23 (3)

• (1999)

Cochrane - Presidential Address : Discount Rates - The Journal of Finance, 66 (4) - (2011) Connor - The Three Types of Factor Models : A Comparison of Their Explanatory Power - Financial Analysts Journal, 51 (3) - (1995) Cremers, Petajisto - How Active Is Your Fund Manager ? A New Measure that Predicts Performance - Review of Financial Studies, 22 - (2009)

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Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

References VI

Dichev - Is the Risk of Bankruptcy a Systematic Risk ? - The Journal of Finance, 53 (3) - (1998) Dimson, Marsh, Staunton - Factor-based investing : the long-term evidence - The Journal of Portfolio Management, 43 (5) - (2017) Evans, Archer - Diversification and the Reduction of Dispersion : An Empirical Analysis - The Journal of Finance, 23 (5) - (1968) Fama, MacBeth - Risk, Return, and Equilibrium : Empirical Tests - The Journal of Political Economy, 81 (3) - (1973) Fama, French - The cross-section of expected stock returns - The Journal of Finance, 47 (2) - (1992) Fama, French - Common risk factors in the returns on stocks and bonds - Journal of Financial Economics, 33 (1) - (1993)

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Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

References VII

Fama, French - Size and Book-to-Market Factors in Earnings and Returns - The Journal of Finance, 50 (1) - (1995) Fama, French - Multifactor Explanations of Asset Pricing Anomalies - The Journal

• f Finance, 51 (1) - (1996)

Fama, French - A Five-Factor Asset Pricing Model - Journal of Financial Economics, 116 (1) - (2015) Feng, Giglio, Xiu - Taming the Factor Zoo : A Test of New Factors - http://www.nber.org/papers/w25481 - (2019) Fisher, Lorie - Some Studies of Variability of Returns on Investments in Common Stocks - The Journal of Business, 43 (2) - (1970) Frazzini, Israel, Moskowitz - Trading Costs - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3229719 - (2018)

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Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

References VIII

Gander, Leveau, Pfiffner - Categorization of Indices : Do All Roads Lead to Rome ?

• Journal of Index Investing, 3 (3) - (2012)

Green, Hand, Zhang - The Remarkable Multidimensionality in the Cross Section of Expected US Stock Returns - https://pdfs.semanticscholar.org/0b3f/ d0250975db6a559052bbd3ec07fce245f3bb.pdf - (2013) Grinold, Kahn - Active Portfolio Management : A Quantitative Approach for Producing Superior Returns and Controlling Risk - McGraw-Hill - (2000) Hamdan, Pavlowsky, Roncalli, Zheng - A Primer on Alternative Risk Premia - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2766850 - (2016) Harvey, Liu, Zhu - ... and the Cross-Section of Expected Returns - Review of Financial Studies, 29 (1) - (2016) Haugen, Heins - Risk and the Rate of Return on Financial Assets : Some Old Wine in New Bottles - The Journal of Financial and Quantitative Analysis, 10 (5) - (1975)

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Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

References IX

Haugen, Baker - The efficient market inefficiency of capitalization-weighted stock portfolios - The Journal of Portfolio Management, 17 (3) - (1991) Haugen, Baker - Low Risk Stocks Outperform within All Observable Markets of the World - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2055431 - (2012) Hendricks, Patel, Zeckhauser - Hot Hands in Mutual Funds : Short-Run Persistence

• f Relative Performance, 1974-1988 - The Journal of Finance, 48 (1) - (1993)

Hou, Xue, Zhang - Digesting Anomalies : An Investment Approach - The Review of Financial Studies, 28 (3) - (2014) Hou, Xue, Zhang - A Comparison of New Factor Models - Working Paper - (2017) Hou, Xue, Zhang - Replicating Anomalies - Working Paper - (2017) Jegadeesh, Titman - Returns to Buying Winners and Selling Losers : Implications for Stock Market Efficiency - The Journal of Finance, 48 (1) - (1993)

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Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

References X

Keim - The Cost of Trend Chasing and The Illusion of Momentum Profits - Working Paper - (2003) Korajczyk, Sadka - Are Momentum Profits Robust to Trading Costs ? - The Journal

• f Finance, 59 (2) - (2004)

Lakonishok, Shleifer, Vishny - Contrarian Investment, Extrapolation, and Risk - The Journal of Finance, 49 (5) - (1994) Lehalle, Laruelle - Market Microstructure in Practice World Scientific Publishing - (2013) Lempérière, Deremble, Nguyen, Seager, Potters, Bouchaud - Risk Premia : Asymmetric Tail Risks and Excess Return - https://arxiv.org/abs/1409.7720 - (2015) Lo - Where Do Alphas Come From ? : A Measure of the Value of Active Investment Management - Journal of Investment Management, 6 (2) - (2008)

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Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

References XI

Lo - What is an Index ? - The Journal of Portfolio Management, 42 (2) - (2016) Malkiel - Is Smart Beta Really Smart ? - The Journal of Portfolio Management, 40 (4) - (2014) McLean, Pontiff - Does Academic Research Destroy Stock Return Predictability ? - The Journal of Finance, 71 (1) - (2016) Morningstar - A Global Guide to Strategic-Beta Exchange-Traded Products 2019 - https: //www.morningstar.com/content/dam/marketing/shared/pdfs/Research/A_ Global_Guide_To_Strategic_Beta_Exhange-Traded_Products.pdf? - (2019) MSCI - Lost in the Crowd ? Identifying and Measuring Crowded Strategies and Trades - https://www.researchgate.net/publication/288826709_Lost_in_ the_Crowd_Identifying_and_Measuring_Crowded_Strategies_and_Trades - (2015)

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Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

References XII

Merton - An Intertemporal Capital Asset Pricing Model - Econometrica, 41 (5) - (1973) Novy-Marx - The other side of value : The gross profitability premium - Journal of Financial Economics, 108 (1) - (2013) Novy-Marx - Understanding Defensive Equity - Working Paper - (2014) Novy-Marx, Velikov - A Taxonomy of Anomalies and Their Trading Costs - Review

• f Financial Studies - (2016)

Patton, Weller - What You See is Not What You Get : The Costs of Trading Market Anomalies - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3034796 - (2019) Perold - Fundamentally Flawed Indexing - Financial Analysts Journal, 63 (6) - (2007)

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Introduction Factor Theory The Dark Side of Equity Factors Some Famous Equity Factors References

References XIII

Piotroski - Value investing : The use of historical financial statement information to separate winners from losers - Journal of Accounting Research, 38 - (2000) Roll - A Possible Explanation of the Small Firm Effect - The Journal of Finance, 36 (4) - (1981) Stanzl, Chen, Watanabe - Price Impact Costs and the Limit of Arbitrage - Yale School of Management Working Paper - (2006) Thompson, Baggett, Wojciechowski, Williams - Nobels for nonsense - Journal of Post Keynesian Economics, 29 (1) - (2006) Vassalou, Wing - Default Risk in Equity Returns - The Journal of Finance, 59 (2) - (2004)

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