Optimal Factor Timing in a High-Dimensional Setting

29 Pages Posted: 17 Sep 2024

See all articles by Robert Lehnherr

Robert Lehnherr

Northern Trust Corporation - Northern Trust Asset Management

Manan Mehta

Northern Trust Asset Management

Stefan Nagel

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 16, 2024

Abstract

We develop a framework for equity factor timing in a high-dimensional setting when the number of factors and factor return predictors can be large. To ensure good out-of-sample performance, the approach is disciplined by shrinkage that effectively expresses a degree of skepticism about outsized gains from timing. In our empirical application, the predictors include macroeconomic variables and factor-specific characteristics spreads between the long and short legs of the factors. We find sizable gains from timing equity factors, including for factors constructed only from large-cap stocks.

Keywords: Equity factors, factor timing, shrinkage

Suggested Citation

Lehnherr, Robert and Mehta, Manan and Nagel, Stefan, Optimal Factor Timing in a High-Dimensional Setting (August 16, 2024). Available at SSRN: https://ssrn.com/abstract=4938729 or http://dx.doi.org/10.2139/ssrn.4938729

Robert Lehnherr

Northern Trust Corporation - Northern Trust Asset Management ( email )

50 South LaSalle Street
Chicago, IL 60603
United States
+13124445443 (Phone)

Manan Mehta

Northern Trust Asset Management ( email )

50 South LaSalle Street
Chicago, IL 60603
United States

Stefan Nagel (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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