- John Cochrane of the University of Chicago coined the term “zoo of factors” in his 2011 presidential address to the American Finance Association.
- 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.
- Harvey, Liu, and Zhu (2014) reported that 59 new factors were discovered between 2010 and 2012.
- The phrase “data snooping” was coined by Lo and MacKinley (1990).
- 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.
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Harvey, Campbell R., Yan Liu, and Heqing Zhu. 2014. “…and the Cross-Section of Expected Returns.” Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2249314.
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Levi, Yaron, and Ivo Welch. 2014. “Long Term Capital Budgeting.” Working Paper (March 29). Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2327807.
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 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2156623.
Novy-Marx, Robert. 2013. “The Other Side of Value: The Gross Profitability Premium.” Journal of Financial Economics, vol. 108, no. 1 (April):1–28.
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© 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