Factor Timing

80 Pages Posted: 3 Feb 2020

See all articles by Valentin Haddad

Valentin Haddad

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

Serhiy Kozak

University of Maryland - Robert H. Smith School of Business

Shrihari Santosh

University of Maryland

Multiple version iconThere are 3 versions of this paper

Date Written: January 2020

Abstract

The optimal factor timing portfolio is equivalent to the stochastic discount factor. We propose and implement a method to characterize both empirically. Our approach imposes restrictions on the dynamics of expected returns which lead to an economically plausible SDF. Market-neutral equity factors are strongly and robustly predictable. Exploiting this predictability leads to substantial improvement in portfolio performance relative to static factor investing. The variance of the corresponding SDF is larger, more variable over time, and exhibits different cyclical behavior than estimates ignoring this fact. These results pose new challenges for theories that aim to match the cross-section of stock returns.

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Suggested Citation

Haddad, Valentin and Kozak, Serhiy and Santosh, Shrihari, Factor Timing (January 2020). NBER Working Paper No. w26708. Available at SSRN: https://ssrn.com/abstract=3530679

Valentin Haddad (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

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Los Angeles, CA 90095-1481
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National Bureau of Economic Research (NBER) ( email )

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Serhiy Kozak

University of Maryland - Robert H. Smith School of Business ( email )

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College Park, MD 20742
United States

HOME PAGE: http://https://serhiykozak.com

Shrihari Santosh

University of Maryland ( email )

College Park
College Park, MD 20742
United States

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