In the early ’90s, the quant forefathers (Fama and French) introduced their now-canonical factor models: first three, then five, and eventually seven, explaining much of the variation in US equity returns.
Looks great, thanks for sharing this research! Quick question though - to isolate the factor exposure, wouldn't it make more sense to formulate factor-weighted long/short portfolios (possibly clipping weights to avoid "over dominance'), instead of simple equal weighted?
Good question, thanks! Yes, this is in reality what we're doing, I thought I'd simplify it a bit to conform to the preconceptions that I thought people had.
In reality, all of our single-factor portfolios that you can track on the site are constructed by keeping all bins (and positions scaled according to the quantiles), not just the top/bottom.
You mentioned these are market neutral. I don't see how you are neutralizing them.
Just because you do quantiles or rank-weighted doesnt mean they are market neutral.
E.g. for a basic momentum factor, trading quantiles/rank-weight would make it momentum neutral, but not necesarily market neutral, since momentum and market returns can (and good chance are) correlated.
You mentioned these are market neutral. I don't see how you are neutralizing them.
Just because you do quantiles or rank-weighted doesnt mean they are market neutral.
E.g. for a basic momentum factor, trading quantiles/rank-weight would make it momentum neutral, but not necesarily market neutral, since momentum and market returns can (and good chance are) correlated.
Looks great, thanks for sharing this research! Quick question though - to isolate the factor exposure, wouldn't it make more sense to formulate factor-weighted long/short portfolios (possibly clipping weights to avoid "over dominance'), instead of simple equal weighted?
Good question, thanks! Yes, this is in reality what we're doing, I thought I'd simplify it a bit to conform to the preconceptions that I thought people had.
In reality, all of our single-factor portfolios that you can track on the site are constructed by keeping all bins (and positions scaled according to the quantiles), not just the top/bottom.
You mentioned these are market neutral. I don't see how you are neutralizing them.
Just because you do quantiles or rank-weighted doesnt mean they are market neutral.
E.g. for a basic momentum factor, trading quantiles/rank-weight would make it momentum neutral, but not necesarily market neutral, since momentum and market returns can (and good chance are) correlated.
You mentioned these are market neutral. I don't see how you are neutralizing them.
Just because you do quantiles or rank-weighted doesnt mean they are market neutral.
E.g. for a basic momentum factor, trading quantiles/rank-weight would make it momentum neutral, but not necesarily market neutral, since momentum and market returns can (and good chance are) correlated.