Navigating the factor zoo around the world: an institutional investor perspective

Söhnke Bartram, Harald Lohre (), Peter F. Pope () and Ananthalakshmi Ranganathan ()
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Harald Lohre: Invesco Quantitative Strategies
Peter F. Pope: Bocconi University
Ananthalakshmi Ranganathan: Invesco Quantitative Strategies

Journal of Business Economics, 2021, vol. 91, issue 5, No 3, 655-703

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

Keywords: Asset pricing; Factor investing; Mispricing; Risk factor; Institutional investor; Transaction costs; Limits to arbitrage; Market efficiency; Anomaly (search for similar items in EconPapers)
JEL-codes: G11 G14 G15 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11573-021-01035-y

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