Factor Premia and Factor Timing: A Century of Evidence

88 Pages Posted: 17 Jun 2019

See all articles by Antti Ilmanen

Antti Ilmanen

AQR Capital Management

Ronen Israel

AQR Capital Management, LLC

Tobias J. Moskowitz

Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)

Ashwin K Thapar

AQR Capital Management, LLC

Franklin Wang

AQR Capital Management, LLC

Date Written: June 7, 2019

Abstract

We examine four prominent factor premia – value, momentum, carry, and defensive – over a century from six asset classes. First, we verify their existence with a mass of out-of-sample evidence across time and asset markets. We find a 30% drop in estimated premia out of sample, which we show is more likely due to overfitting than informed trading. Second, probing for potential underlying sources of the premia, we find little reliable relation to macroeconomic risks, liquidity, sentiment, or crash risks, despite adding five decades of global economic events. Finally, we find significant time-variation in factor premia that are mildly predictable when imposing theoretical restrictions on timing models. However, significant profitability eludes a host of timing strategies once proper data lags and transactions costs are accounted for. The results offer support for time-varying risk premia models with important implications for theory seeking to explain the sources of factor returns.

Suggested Citation

Ilmanen, Antti S. and Israel, Ronen and Moskowitz, Tobias J. and Thapar, Ashwin K and Wang, Franklin, Factor Premia and Factor Timing: A Century of Evidence (June 7, 2019). Available at SSRN: https://ssrn.com/abstract=3400998 or http://dx.doi.org/10.2139/ssrn.3400998

Antti S. Ilmanen

AQR Capital Management ( email )

United Kingdom
+447887475184 (Phone)

Ronen Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Tobias J. Moskowitz (Contact Author)

Yale University, Yale SOM ( email )

New Haven, CT 06520
United States

HOME PAGE: http://som.yale.edu/tobias-j-moskowitz

AQR Capital ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ashwin K Thapar

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Franklin Wang

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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