An Anatomy of Characteristics in Dynamic Trading

Abstract

We propose testing the joint and marginal power of characteristics in predicting returns via a dynamic trading strategy (e.g., Kyle, 1985). The analysis finds that most characteristics (88%) fail to supply independent information. Indeed, removing these subsumed characteristics significantly enhances the optimal portfolio returns. Our analysis further reveals a leading role played by Fama-French-Carhart factors as informative characteristics.

Keywords: Anomalies; Dynamic trading; Informative characteristics

JEL Classification: G12; G14