19 Pages Posted: 20 Sep 2000
Date Written: February 1998
We use an iterative relocation algorithm to identify factors in common stock returns. The benefit of the approach is that factors are portfolios of assets with non-negative weights. As a result, they are readily interpreted in terms of their characteristics of the underlying securities. The positive portfolio factors have comparatively high explanatory power in sample and out-of-sample. We find evidence of a size factor and factors identified with certain industries. Factors extracted from the mutual fund universe perform marginally better than factors from the universe of equities.
Suggested Citation: Suggested Citation
Brown, Stephen J. and Goetzmann, William N. and Grinblatt, Mark, Positive Portfolio Factors (February 1998). NBER Working Paper No. w6412. Available at SSRN: https://ssrn.com/abstract=226160