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Factor Investing for the Long Run

Abraham Lioui and Andrea Tarelli

Journal of Economic Dynamics and Control, 2020, vol. 117, issue C

Abstract: Anomaly-based long/short benchmarks are typically built from portfolios double-sorted on size and one additional characteristic, applying simple fixed-weights schemes. Characteristic-based portfolios show significant time variations of their abnormal returns (alphas) and market exposures (betas). While timing alphas is challenging, a long-term risk-averse investor benefits from implementing dynamic weighting schemes that account for the time variation of the betas of the portfolios. Particularly for long investment horizons, significant out-of-sample Sharpe ratio improvements and utility gains with respect to fixed-weights factor benchmarks are recorded using portfolios sorted on size, value, operating profitability, investment and momentum.

Keywords: Factor investing; Market anomalies; Dynamic asset allocation; Portfolio choice; Return predictability; Stochastic volatility (search for similar items in EconPapers)
JEL-codes: E32 G11 G12 G17 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jedc.2020.103960

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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