Time-Series Variation in Factor Premia: The Influence of the Business Cycle

29 Pages Posted: 24 May 2019

See all articles by Christopher Polk

Christopher Polk

London School of Economics

Mo Haghbin

OppenheimerFunds

Alessio de Longis

OppenheimerFunds, Inc.

Date Written: April 24, 2019

Abstract

Factor cyclicality can be understood in the context of factor sensitivity to aggregate cash-flow news. Factors exhibit different sensitivities to macroeconomic risk, and this heterogeneity can be exploited to motivate dynamic rotation strategies among five commonly established factors: size, value, quality, low volatility and momentum. A timely and realistic identification of business cycle regimes, using leading economic indicators and global risk appetite, can be used to construct long-only factor rotation strategies with information ratios nearly twice as large as static multifactor strategies. Results are statistically and economically significant after accounting for transaction costs, capacity and turnover.

Keywords: Factor investing, factor rotation, dynamic multifactor, global macro, business cycles, risk premia, factor tilting, factor timing, asset allocation

JEL Classification: G11, G12, G23

Suggested Citation

Polk, Christopher and Haghbin, Mo and de Longis, Alessio, Time-Series Variation in Factor Premia: The Influence of the Business Cycle (April 24, 2019). Available at SSRN: https://ssrn.com/abstract=3377677 or http://dx.doi.org/10.2139/ssrn.3377677

Christopher Polk

London School of Economics ( email )

United Kingdom

HOME PAGE: http://personal.lse.ac.uk/polk/

Mo Haghbin (Contact Author)

OppenheimerFunds ( email )

2 World Financial Center
New York, NY 10085
United States

Alessio De Longis

OppenheimerFunds, Inc. ( email )

2 World Financial Center
New York, NY 10085
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
396
Abstract Views
1,325
rank
77,748
PlumX Metrics