Optimal Timing and Tilting of Equity Factors
Financial Analysts Journal, 2019, Vol. 75(4), pp. 84-102
31 Pages Posted: 15 Dec 2018 Last revised: 23 Oct 2019
Date Written: October 21, 2019
Aiming to optimally harvest global equity factor premiums, we investigated the benefits of parametric portfolio policies for timing factors conditioned on time-series predictors and tilting factors based on cross-sectional factor characteristics. We discovered that equity factors are predictably related to fundamental and technical time-series indicators and to such characteristics as factor momentum and crowding. We found that such predictability is hard to benefit from after transaction costs. Advancing the timing and tilting policies to smooth factor allocation turnover slightly improved the evidence for factor timing but not for factor tilting, which renders our analysis a cautionary tale on dynamic factor allocation.
Keywords: asset allocation, factor investing, factor timing, factor tilting, parametric portfolio policy
JEL Classification: G11, D81, D85
Suggested Citation: Suggested Citation