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

Bartram, Söhnke M. and Lohre, Harald and Pope, Peter F. and Ranganathan, Ananthalakshmi (2021) Navigating the factor zoo around the world : an institutional investor perspective. Journal of Business Economics, 91 (5). pp. 655-703. ISSN 0044-2372

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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.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Business Economics
Uncontrolled Keywords:
?? anomalyasset pricingfactor investinginstitutional investorlimits to arbitragemarket efficiencymispricingrisk factortransaction costsbusiness and international managementeconomics and econometrics ??
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Deposited On:
06 Oct 2021 14:10
Last Modified:
15 Jul 2024 21:58