Factor Investing for the Long Run

85 Pages Posted: 5 Mar 2020

See all articles by Abraham Lioui

Abraham Lioui

EDHEC Business School

Andrea Tarelli

Catholic University of Milan

Date Written: February 4, 2020

Abstract

Anomaly-based investment/pricing factors are typically built from portfolios double-sorted on size and one additional characteristic, applying simple long/short fixed-weights schemes. Characteristic-based portfolios show significant time variations of their abnormal returns and market exposures. While timing abnormal returns is challenging, a long-term risk-averse investor benefits from implementing dynamic weighting schemes that account for the market exposures of the portfolios and their time-variation. Particularly for long investment horizons, significant out-of-sample Sharpe ratio improvements and utility gains with respect to fixed-weights factor benchmarks are recorded using portfolios sorted on size, value, operating profitability, investment and momentum.

Keywords: Factor investing, Market anomalies, Dynamic asset allocation, Portfolio choice, Return predictability, Stochastic volatility

JEL Classification: G11, G12, E32, G17

Suggested Citation

Lioui, Abraham and Tarelli, Andrea, Factor Investing for the Long Run (February 4, 2020). Available at SSRN: https://ssrn.com/abstract=3531946 or http://dx.doi.org/10.2139/ssrn.3531946

Abraham Lioui

EDHEC Business School ( email )

France

Andrea Tarelli (Contact Author)

Catholic University of Milan ( email )

Largo Gemelli, 1
Milan, 20123
Italy

HOME PAGE: http://sites.google.com/view/andreatarelli

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