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Article

The Promises and Pitfalls of Factor Timing

Jennifer Bender, Xiaole Sun, Ric Thomas and Volodymyr Zdorovtsov
The Journal of Portfolio Management Quantitative Special Issue 2018, 44 (4) 79-92; DOI: https://doi.org/10.3905/jpm.2018.44.4.079
Jennifer Bender
is the director of research for global equity beta solutions at State Street Global Advisors in Boston, MA
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Xiaole Sun
is vice president for global equity beta solutions at State Street Global Advisors in Boston, MA
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Ric Thomas
is the global head of research and strategy for the Investment Solutions Group at State Street Global Advisors in Boston, MA
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Volodymyr Zdorovtsov
is the director of research for active quantitative equity at State Street Global Advisors in Boston, MA
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Abstract

The potential to dynamically allocate across factors, or factor timing, has been an area of academic and practitioner research for decades. In this article, the authors revisit the promises of factor timing, documenting the historical linkages between equity factor performance and different groupings of predictors: sentiment, valuation, trend, economic conditions, and financial conditions. The authors highlight that different predictors are more relevant for certain horizons, so the horizon is critical in factor timing. They also argue there are significant pitfalls with factor timing as well. The difficulty of timing factors has been well documented, given the uncertainty of exogenous elements affecting their behavior and the complexity of the underlying relationships. Most importantly, the underlying causal links are time varying. In addition, these relationships are observed with the benefit of hindsight and thus suffer from the age-old problem of data mining. Despite these caveats, the authors believe that at the margin it is possible to time certain elements that can add value and improve outcomes.

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The Journal of Portfolio Management: 44 (4)
The Journal of Portfolio Management
Vol. 44, Issue 4
Quantitative Special Issue 2018
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The Promises and Pitfalls of Factor Timing
Jennifer Bender, Xiaole Sun, Ric Thomas, Volodymyr Zdorovtsov
The Journal of Portfolio Management Mar 2018, 44 (4) 79-92; DOI: 10.3905/jpm.2018.44.4.079

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The Promises and Pitfalls of Factor Timing
Jennifer Bender, Xiaole Sun, Ric Thomas, Volodymyr Zdorovtsov
The Journal of Portfolio Management Mar 2018, 44 (4) 79-92; DOI: 10.3905/jpm.2018.44.4.079
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  • Article
    • Abstract
    • SHORT HORIZONS AND FACTOR CYCLICALITY DON’T MIX
    • WHAT DOES THE ACADEMIC LITERATURE HAVE TO SAY?
    • WHICH SIGNALS MIGHT PREDICT FACTOR RETURNS?
    • THE INVESTMENT RATIONALE BEHIND SIGNALS IS CRITICAL
    • FACTOR PREDICTORS: THE EMPIRICAL EVIDENCE
    • THE PERILS AND PITFALLS OF FACTOR TIMING
    • OVERCOMING THE CHALLENGES TO TIMING FACTORS
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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  • PDF

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  • Editor’s Introduction for 2021 Special Issue on Multi-Asset Strategies
  • PERSPECTIVES: Plato or Aristotle: Who Got It Right? Evidence from the Equity Markets
  • Editor’s Introduction for 2021 Special Issue on Factor Investing
Show more Article
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