The Quant Cycle

27 Pages Posted: 28 Sep 2021

See all articles by David Blitz

David Blitz

Robeco Quantitative Investments

Date Written: September 24, 2021

Abstract

Traditional business cycle indicators do not capture much of the large cyclical variation in factor returns. Major turning points of factors seem to be caused by abrupt changes in investor sentiment instead. We infer a Quant Cycle directly from factor returns, which consists of a normal stage that is interrupted by occasional drawdowns of the value factor and subsequent reversals. Value factor drawdowns can occur in bullish environments due to growth rallies and in bearish environments due to crashes of value stocks. For the reversals we also distinguish between bullish and bearish subvariants. Empirically we show that our simple 3-stage model captures a considerable amount of time variation in factor returns. We conclude that investors should focus on better understanding the quant cycle as implied by factors themselves, rather than adhering to traditional frameworks which, at best, have a weak relation with actual factor returns.

Keywords: asset pricing, factor models, business cycle, value, momentum, low volatility, quality, behavioral finance

JEL Classification: G11, G12, G14

Suggested Citation

Blitz, David, The Quant Cycle (September 24, 2021). Available at SSRN: https://ssrn.com/abstract=3930006

David Blitz (Contact Author)

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

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