The Cross-Section of Factor Returns

Abstract

We explore the cross-section of factor returns using a sample of 150+ equity factors. Most factors exhibit a positive premium and a negative market beta in the long run. Factor themes with a clear positive beta, in particular low leverage and size, have no alpha after controlling for this beta exposure. The remaining factors generate most of their raw return in bear markets, which also explains half of their decay in the predominantly bullish post-2004 period. Beta-adjusting factor returns yields alphas that are not only higher but also considerably more stable. We also revisit factor performance cyclicality, establish a low-beta effect at the level of factors, and confirm the existence of seasonal and momentum effects in the cross-section of factor returns. Altogether, our insights into factor behavior aid the development of more robust factor-based investment strategies.

Keywords: Factor investing, value, momentum, quality, low risk, low beta, factor timing, factor rotation, anomalies, factor premiums, asset pricing, factor models

JEL Classification: G11, G12, G14