Research Affiliates: Finding Smart Beta In The Factor Zoo

August 22, 2014


  1. John Cochrane of the University of Chicago coined the term “zoo of factors” in his 2011 presidential address to the American Finance Association.
  2. We use risk factor to mean factors whose premia are compensation for risk and behavioral factors to mean factors whose premia are excess returns from exploiting behavioral mistakes. We use return factor to mean factors which may be behavioral or risk in nature. The literature remains divided on whether factors like value and momentum are driven by risk or behavioral biases.
  3. Harvey, Liu, and Zhu (2014) reported that 59 new factors were discovered between 2010 and 2012.
  4. The phrase “data snooping” was coined by Lo and MacKinley (1990).
  5. We have argued elsewhere that quality is not a factor in itself. On the other hand a value investor can benefit from knowing the financial and economic health of a company. See “The Moneyball of Quality Investing,” Research Affiliates, June 2014.



Banz, Rolf W. 1981. “The Relationship between Return and Market Value of Common Stocks.” Journal of Financial Economics, vol. 9, no. 1 (March):3–18.

Basu, Sanjoy. 1983. “The Relationship Between Earnings’ Yield, Market Value and Return for NYSE Common Stocks: Further Evidence.” Journal of Financial Economics, vol. 12, no. 1 (June):129–156.

Cochrane, John H. 2011. “Presidential Address: Discount Rates.” Journal of Finance, vol. 66, no. 4 (August):1047–1108.

Fama, Eugene F., and Kenneth R. French. 1992.”The Cross-Section of Expected Stock Returns.” Journal of Finance, vol. 47, no. 2 (June):427–465.

———. 1993. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, vol. 33, no. 1 (February):3-56.

———. 2008. “Dissecting Anomalies.” Journal of Finance, vol. 63, no. 4 (August):1653–1678.

Frazzini, Andrea, and Lasse H. Pedersen. 2014. “Betting Against Beta.” Journal of Financial Economics, vol. 111, no. 1 (January):1–25.

Harvey, Campbell R., Yan Liu, and Heqing Zhu. 2014. “…and the Cross-Section of Expected Returns.” Available at

Haugen, Robert A., and James Heins. 1975. “Risk and Rate of Return on Financial Assets: Some Old Wine in New Bottles.” Journal of Financial and Quantitative Analysis, vol. 10, no. 5 (December):775–784.

Jegadeesh, Narasimhan, and Sheridan Titman. 1993. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance, vol. 48, no. 1 (March):65–91.

Levi, Yaron, and Ivo Welch. 2014. “Long Term Capital Budgeting.” Working Paper (March 29). Available at SSRN:

Lo, Andrew W., and A. Craig MacKinley. 1990. “Data-Snooping Biases in Tests of Financial Asset Pricing Models.” Review of Financial Studies, vol. 3, no. 3 (Fall):431–467.

McLean, David R., and Jeffrey Pontiff. 2013. “Does Academic Research Destroy Stock Return Predictability?” Working Paper (May 16). Available at

Novy-Marx, Robert. 2013. “The Other Side of Value: The Gross Profitability Premium.” Journal of Financial Economics, vol. 108, no. 1 (April):1–28.

Shumway, Tyler, and Vincent A. Warther. 1999. “The Delisting Bias in CRSP’s Nasdaq Data and Its Implications for the Size Effect.” Journal of Finance, vol. 54, no. 6 (December):2361–2379.

© Research Affiliates®, LLC 2014. The material contained in this newsletter is for information purposes only. This material is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any securities transaction. The information contained herein should not be construed as financial or investment advice on any subject matter. Neither Robert D. Arnott nor Research Affiliates and its related entities warrants the accuracy of the information provided herein, either expressed or implied, for any particular purpose. Nothing contained in this newsletter is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this newsletter should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

Jason Hsu, Ph.D., Co-founder and Vice Chairman, Research Affiliates, LLC

Vitali Kalesnik, Ph.D., Senior Vice President, Head of Equity Research, Research Affiliates, LLC


Find your next ETF

Reset All