Time-Series Efficient Factors

62 Pages Posted: 1 Apr 2020 Last revised: 17 May 2021

See all articles by Sina Ehsani

Sina Ehsani

Northern Illinois University

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: January 31, 2021

Abstract

We show that factors in prominent asset pricing models are unconditionally minimum-variance inefficient. Factor returns are positively autocorrelated while risk, conditional on past returns, is constant. We derive a transformation that turns an autocorrelated factor into a “time-series efficient” factor. Time-series efficient factors earn 40% higher Sharpe ratios than the original factors and contain all the information found in the original factors. Momentum strategies profit from the inefficiencies in factor returns. An asset pricing model with time-series efficient factors, such as an efficient Fama-French five-factor model, prices momentum. Our results impose novel restrictions on theoretical models of asset returns.

Keywords: Factors, Asset Pricing Models, Anomalies, Momentum, Dynamics of the Risk-Return Tradeoff

JEL Classification: G11, G12, G40

Suggested Citation

Ehsani, Sina and Linnainmaa, Juhani T., Time-Series Efficient Factors (January 31, 2021). Tuck School of Business Working Paper No. 3555473, Available at SSRN: https://ssrn.com/abstract=3555473 or http://dx.doi.org/10.2139/ssrn.3555473

Sina Ehsani (Contact Author)

Northern Illinois University ( email )

Chicago, IL 60115
United States

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.tuck.dartmouth.edu/faculty/faculty-directory/juhani-linnainmaa

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
572
Abstract Views
1,955
rank
59,930
PlumX Metrics