Factor Timing

Valentin Haddad, Serhiy Kozak and Shrihari Santosh

No 26708, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The optimal factor timing portfolio is equivalent to the stochastic discount factor. We propose and implement a method to characterize both empirically. Our approach imposes restrictions on the dynamics of expected returns which lead to an economically plausible SDF. Market-neutral equity factors are strongly and robustly predictable. Exploiting this predictability leads to substantial improvement in portfolio performance relative to static factor investing. The variance of the corresponding SDF is larger, more variable over time, and exhibits different cyclical behavior than estimates ignoring this fact. These results pose new challenges for theories that aim to match the cross-section of stock returns.

JEL-codes: G0 G11 G12 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-fmk and nep-ore
Note: AP
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Citations: View citations in EconPapers (6)

Published as Valentin Haddad & Serhiy Kozak & Shrihari Santosh, 2020. "Factor Timing," The Review of Financial Studies, vol 33(5), pages 1980-2018.

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