A Novel Template for Understanding Priced Factors

46 Pages Posted: 24 Jul 2019

See all articles by Krishna Vyas

Krishna Vyas

Robeco Asset Management

Michael van Baren

PGGM Investments

Date Written: July 23, 2019

Abstract

We introduce a novel template which allows for robust inference when attempting to distinguish priced from unpriced risks in factor portfolios. This is of interest since factor portfolios are prone to unintended and potentially unpriced risk exposures. We demonstrate this template by decomposing industry risks for the style factors Value, Quality, Momentum, Low Volatility and Size on a global large- and mid-cap universe over 1994-2018. Our methodology reintroduces the notion of monotonicity into the discrete question at hand whether a factor is priced within and/or across industries, serving as a new perspective on this commonly researched topic. We present empirical evidence that Value is priced within industries over a wide variety of factor definitions, with no premium for industry-selection. We find no clear industry decomposition for Quality and show that different factor definitions vary in potential for earning within- and across-industry premiums. The Low Volatility and Momentum style factors do show consistent within- and across-industry premiums. The Low Volatility anomaly appears to be most pronounced within industries, whereas the Momentum anomaly is most consistent across industries. The evidence for Size points to a within-industry premium, whilst it is unpriced across industries.

Keywords: Quantitative Investing, Asset Pricing, Factor Premiums, Unpriced Risk, Industry Risk, International Markets, Value, Quality, Momentum, Low Volatility and Size

JEL Classification: C12, G11, G12, G14, G15

Suggested Citation

Vyas, Krishna and van Baren, Michael, A Novel Template for Understanding Priced Factors (July 23, 2019). Available at SSRN: https://ssrn.com/abstract=3423566 or http://dx.doi.org/10.2139/ssrn.3423566

Krishna Vyas (Contact Author)

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

Michael Van Baren

PGGM Investments ( email )

Utrechtseweg 44
P.O.Box 117
Zeist, 3700 AC
Netherlands

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
250
Abstract Views
1,861
rank
138,907
PlumX Metrics