The Economics of Factor Timing

61 Pages Posted: 5 Apr 2017 Last revised: 14 Jan 2019

See all articles by Valentin Haddad

Valentin Haddad

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

Serhiy Kozak

University of Michigan, Stephen M. Ross School of Business

Shrihari Santosh

University of Maryland - R.H. Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 17, 2018

Abstract

An optimal factor timing portfolio is equivalent to a conditional SDF. We use economic restrictions to determine and characterize both empirically. With these restrictions, we find that long-short equity factors are strongly and robustly predictable. A number of these portfolios have small or zero average price of risk, suggesting that the economic risks investors worry about conditionally are often very different from those they worry about on average. This manifests in the very different compositions of the conditional and unconditional SDFs. For bonds and foreign exchange strategies, long-short portfolios sorted on maturity or interest rate differential are also predictable.

Keywords: Predictability, Returns, Cross Section, Time Series, Equities, Bonds, Foreign Exchange

JEL Classification: G12, G14

Suggested Citation

Haddad, Valentin and Kozak, Serhiy and Santosh, Shrihari, The Economics of Factor Timing (June 17, 2018). Available at SSRN: https://ssrn.com/abstract=2945667 or http://dx.doi.org/10.2139/ssrn.2945667

Valentin Haddad

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Serhiy Kozak (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Shrihari Santosh

University of Maryland - R.H. Smith School of Business ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

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