Dynamic Factor Rotation Strategy: A Business Cycle Approach

Dohyoung Kwon
Additional contact information
Dohyoung Kwon: Department of Economics, Gachon University, 1342 Seongnamdaero, Sujeong-gu, Seongnam-si 13120, Korea

IJFS, 2022, vol. 10, issue 2, 1-12

Abstract: This study developed an investment framework to implement dynamic factor rotation strategies according to changes in economic conditions. I constructed a useful macro indicator that tracked real-time business cycles of the US economy and applied a trend-filtering method to the indicator to identify economic regimes based on the level and momentum change. I found that historical performance of individual equity factors greatly differed across economic regimes, and this heterogeneity can be exploited to build dynamic factor rotation strategies by shifting exposures toward effective factors according to the different regimes. The out-of-sample analysis showed that the regime-based dynamic approach outperformed the static benchmark in terms of absolute and risk-adjusted returns after accounting for transaction costs. The results have important implications for many pension funds and for institutional investors interested in factor investing and seeking to improve the long-term portfolio performance.

Keywords: equity factors; dynamic factor allocation; economic regimes; l 1 trend filtering; nowcasting (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.mdpi.com/2227-7072/10/2/46/pdf (application/pdf)
https://www.mdpi.com/2227-7072/10/2/46/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jijfss:v:10:y:2022:i:2:p:46-:d:841169

Access Statistics for this article

IJFS is currently edited by Ms. Hannah Lu

More articles in IJFS from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().