Investing in Systematic Factor Premiums

Abstract

In this paper we investigate and evaluate factor investing in the United States and Europe for equities and bonds. We show that factor-based portfolios generally produce comparable or better portfolios than market indices. We expand the analysis to other asset classes and factors, work with other optimization methods and add a basic liability structure. The results remain robust when we add real estate and commodities to equities and bonds. Also, the results are not dependent to the removal of a specific factor. Finally, we study the results for a worldwide investor who invests beyond the US and Europe. Over the longer term and with consistently applied factor diversification, factor investing appears to be advantageous.

Keywords: European data, factor investing, optimization, timing

JEL Classification: G11, G12, G15, G23