Factors Timing Factors

Abstract

It is common practice to refer to a factor premium’s current valuation when assessing its attractiveness—in effect using a single-value-factor model to gauge whether the factor is rich, fairly valued, or cheap. Meanwhile, studies have investigated how some factor premia are exposed to other factor premia in order to characterize their behavior over time. This article questions the utility of employing factors to time factors by examining the issue through the lenses of both normative and positive asset pricing theory, while also shedding some light on the potential impact of crowding on factor attractiveness. The author believes that attempting to time factors using other factors is generally of limited value and that factor timers would be better served by focusing on the underlying rationale believed to give rise to these premia.