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Navigating the factor zoo around the world: an institutional investor perspective

Author

Listed:
  • Söhnke M. Bartram

    (Centre for Economic Policy Research (CEPR)
    University of Warwick)

  • Harald Lohre

    (Invesco Quantitative Strategies
    University of Cambridge
    Lancaster University Management School)

  • Peter F. Pope

    (Bocconi University)

  • Ananthalakshmi Ranganathan

    (Invesco Quantitative Strategies
    Lancaster University Management School)

Abstract

The literature on cross-sectional stock return predictability has documented over 450 factors. We take the perspective of an institutional investor and navigate this zoo of factors by focusing on the evidence relevant to the practicalities of factor-based investment strategies. Establishing a sound theoretical rationale is key to identifying “true” factors, and we emphasize the need to recognize data-mining concerns that may cast doubt on the relevance of many factors. From a practical investment perspective, much of the factor evidence documented by academics may be more apparent than real. The performance of many factors is dependent on the inclusion of small- and micro-cap stocks in academic studies, although such stocks would likely be excluded from the real investment universe due to illiquidity and transaction costs. Nevertheless, a parsimonious set of factors emerges in equities and other asset classes, including currencies, fixed income, and commodities. These factors can serve as meaningful ingredients to factor-based portfolio construction.

Suggested Citation

  • Söhnke M. Bartram & Harald Lohre & Peter F. Pope & Ananthalakshmi Ranganathan, 2021. "Navigating the factor zoo around the world: an institutional investor perspective," Journal of Business Economics, Springer, vol. 91(5), pages 655-703, July.
  • Handle: RePEc:spr:jbecon:v:91:y:2021:i:5:d:10.1007_s11573-021-01035-y
    DOI: 10.1007/s11573-021-01035-y
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    132. Ahmed, Shamim & Bu, Ziwen & Tsvetanov, Daniel, 2019. "Best of the Best: A Comparison of Factor Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(4), pages 1713-1758, August.
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    Cited by:

    1. Wolfgang Breuer & Santiago Ruiz de Vargas, 2021. "Some key developments in international financial management," Journal of Business Economics, Springer, vol. 91(5), pages 595-615, July.

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    More about this item

    Keywords

    Asset pricing; Factor investing; Mispricing; Risk factor; Institutional investor; Transaction costs; Limits to arbitrage; Market efficiency; Anomaly;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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