When Equity Factors Drop Their Shorts

30 Pages Posted: 26 Nov 2019

See all articles by David Blitz

David Blitz

Robeco Quantitative Investments

Guido Baltussen

Erasmus University Rotterdam (EUR); Robeco Asset Management - Quantitative Investing

Pim van Vliet

Robeco Quantitative Investments

Date Written: November 27, 2019

Abstract

This paper makes a breakdown of common equity factor strategies into their long and short legs, and finds that (i) most added value tends to come from the long legs, (ii) the long legs of factors offer more diversification than the short legs, and (iii) the performance of the shorts is generally subsumed by the longs. These results hold across large and small caps, are robust over time, carry over to international equity markets, and cannot be attributed to differences in tail risk. Moreover, we do not even account for the substantially higher implementation costs involved with the shorts compared to the longs. We also challenge recent claims that the value and low-risk factors are subsumed by the new Fama-French factors, as we find that this result is entirely driven by the short legs of these factors and breaks down for the longs. Altogether, our findings show that decomposing factors into their long and short dimensions is crucial for understanding factor premiums and building efficient factor portfolios.

Keywords: asset pricing, factor premiums, factor investing, short selling, limits to arbitrage, low volatility, size, value, momentum, profitability, investment, quality

JEL Classification: G11, G12, G14

Suggested Citation

Blitz, David and Baltussen, Guido and van Vliet, Pim, When Equity Factors Drop Their Shorts (November 27, 2019). Available at SSRN: https://ssrn.com/abstract=3493305 or http://dx.doi.org/10.2139/ssrn.3493305

David Blitz

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Guido Baltussen (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Asset Management - Quantitative Investing ( email )

Rotterdam, 3011 AG
Netherlands

Pim Van Vliet

Robeco Quantitative Investments ( email )

Rotterdam, 3011 AG
Netherlands

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