Essays in Factor Investing

Swade, Alexander and Shackleton, Mark and Nolte, Sandra (2024) Essays in Factor Investing. PhD thesis, Lancaster University.

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Abstract

This thesis advances the theory and practice of factor investing by exploring the rich set of developed factors to explain portfolio performances in the equity and multi-asset space. Chapter 1 characterizes the strong performance of equal-weighted (EW) portfolios in relation to their value-weighted counterparts by utilizing various factor models. Unsurprisingly, EW investing comes with a highly significant positive size factor exposure but is also found to benefit from short-term reversal effects while suffering from negative momentum exposure due to its acyclic rebalancing character. Given that EW investing effectively emerges as factor investing in disguise, it seems natural to adopt a direct factor investing approach. To this end, the literature has proposed a multitude of firm characteristics for explaining the cross-section of stock returns, yet Chapter 2 demonstrates only about 15 factors to be relevant for spanning the entire factor zoo from an alpha perspective. Whilst these salient factors change through time, they fall into persistent factor style categories. Further broadening the scope, the thesis moves on to explain the cross-section of asset classes through a macro factor lens. Specifically, Chapter 3 investigates macroeconomic factor allocation based on macro factor-mimicking portfolios that consider style factors and individual asset classes alike. Chapter 4 investigates such macro factor investing over a century of data, demonstrating it to be robust in different economic regimes. Incorporating business cycle-based macro and style factor views in a Black-Litterman fashion we additionally accommodate the notion of factor timing to improve upon a diversified macro factor risk-parity strategy.