Factor Timing

79 Pages Posted: 5 Apr 2017 Last revised: 31 Dec 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 Maryland - Robert H. Smith School of Business

Shrihari Santosh

University of Colorado at Boulder - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: December 22, 2019

Abstract

The optimal factor timing portfolio is equivalent to the stochastic discount factor. We propose and implement a method to characterize both empirically. Our approach imposes restrictions on the dynamics of expected returns which lead to an economically plausible SDF. Market-neutral equity factors are strongly and robustly predictable. Exploiting this predictability leads to substantial improvement in portfolio performance relative to static factor investing. The variance of the corresponding SDF is larger, more variable over time, and exhibits different cyclical behavior than estimates ignoring this fact. These results pose new challenges for theories that aim to match the cross-section of stock returns.

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, Factor Timing (December 22, 2019). 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 Maryland - Robert H. Smith School of Business ( email )

7621 Mowatt Ln
College Park, MD 20742
United States

HOME PAGE: http://https://serhiykozak.com

Shrihari Santosh

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

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