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An Examination of the Benefits of Factor Investing in U.K. Stock Returns

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  • Jonathan Fletcher

Abstract

This study uses the Bayesian approach of Wang (1998) to examine the benefits of factor investing in U.K. stock returns in the presence of market frictions. My study finds that factor investing provides significant performance benefits when the benchmark investment universe is the market index, even in the presence of market frictions such as portfolio constraints and trading costs. However when the benchmark investment universe includes industry portfolios, market frictions, such as no short selling constraints and trading costs, tends to eliminate the benefits of factor investing. Imposing less restrictive portfolio constraints, factor investing can generate significant performance for investors with higher risk aversion levels.

Suggested Citation

  • Jonathan Fletcher, 2018. "An Examination of the Benefits of Factor Investing in U.K. Stock Returns," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(4), pages 154-170, April.
  • Handle: RePEc:ibn:ijefaa:v:10:y:2018:i:4:p:154-170
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    References listed on IDEAS

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    More about this item

    Keywords

    factor investing; mean-variance analysis; Bayesian evaluation;

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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