A Century of Evidence on Factor Premia and Factor Timing
Summary
This study examines value, momentum, carry, and defensive factor returns across six asset classes using data spanning roughly a century. It compares each factor’s discovery period with earlier and later periods, using the long history and cross-asset evidence to assess whether premia persist beyond the samples in which they were first identified. The authors report that all four factors have positive out-of-sample evidence, while returns are about one-third lower outside the original samples. They find little evidence that factor performance weakened after publication, which challenges the idea that arbitrage erased the premia.
The study also tests links between factor returns and macroeconomic conditions, liquidity, sentiment, and crash risk, finding no reliable, broad explanation in those variables. Factor returns do vary over time, and valuation spreads, inverse volatility, and some constrained timing models show predictive promise. However, timing results are uneven across assets and factors. The authors caution that estimated performance can be overstated by in-sample fitting; real-time data delays, exposure to static factors, turnover, and transaction costs weaken the practical case for timing strategies.
Key ideas
- Value, momentum, carry, and defensive premia appear across several asset classes and long historical samples.
- Out-of-sample premia are lower than in the original discovery samples, consistent with some overfitting.
- The study finds little evidence that publication and arbitrage systematically reduced factor returns.
- Macro, liquidity, sentiment, and crash-risk variables do not reliably explain factor performance.
- Timing signals show uneven predictive power, and trading costs and turnover can erase much of the benefit.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.