President’s Day Factor Investing Geekout

President’s Day Factor Investing Geekout

February 20, 2017 Factor Investing, Research Insights
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(Last Updated On: April 12, 2017)

Our epic piece on factors from a few weeks ago is still ringing in our own ears: Are factors even real? Or just data-mining?

The conclusion: who knows. We need more data.

And more data we can find. To include a recent master’s thesis on nordic country equities, which looks at Size, value, momentum, profitability and investment in a stock market that hasn’t been data-dredged as heavy as the US.

Here is the paper.

Here is the abstract:

This thesis is concerned with uncovering whether return pattern effects from some of the most well-known factor models are present in a non-US sample. In a two-part analysis, taking both the theoretical academic perspective and the practical industry perspective, equity returns on the Nordic capital market (Sweden, Denmark, Norway and Finland) are scoured for evidence of factor patterns to size, value, momentum, profitability and investment. Fama & French’s methods for constructing the factor models are utilized when taking the academic perspective to factor effects, and investigating the ability of four factor models to price equity returns. The Fama & French (1993) three-factor model, Carhart (1997) four-factor model, Fama & French (2015) five-factor model, and a combinational six-factor model are estimated using ordinary least squares. Inference about the relevance of the factor models are made based on hypothesis tests on single models in the cross section of returns, and joint tests across the estimated models. While none of the factor models provide complete descriptions of variations in the cross section,an ability to explain between below 20-32% of the dependent portfolios, provides indication that factor effects are prevalent on the Nordic equity markets. In the second part of the thesis’ analysis, the thesis takes the industry perspective and evaluates the possible factor patterns as trade proposals instead. First, the simple, individual factor portfolios are evaluated on their performance during different market conditions in the 25 years from 1991-2015. Several of the long-short factor portfolios have provided attractive risk-return proposals, indicating factor return patterns in Nordic equities. From the individual portfolios, much inspired by the value-momentum findings of Asness, Moskowitz & Pedersen (2013), combinational factor portfolios are constructed in order to uncover diversification benefits between the factor effects. Simple portfolio combinations are constructed, as well as more complex mean variance optimized portfolios. The thesis is able to uncover a superior factor investment portfolio that has provided market-insensitive alpha the 25 years in which it would have been applied.Overall, both the academic and industry perspective to factor patterns in returns presents compelling evidence towards the presence of factor effects on the Nordic markets.

One of the charts in the paper:

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.

Cliff Asness asked a good question: why are the alphas all positive? I inquired with the author and it sounds like the analysis was done correctly. Without working with the underlying data we can never confirm/deny. Here is another paper to consider on the similar subject.


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Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.


  • Henning Hammar

    Interesting article. As a Nordic investor I have been reading a lot of American literature about factor investing and then tried to understand if it works in the Nordic markets. All results I’ve seen so far confirms that what is found in US also works here in the Nordic markets, sometimes the effects are even more proponent as the community is less evolved around factors here. It really shows that factors are universal, which is fascinating.

  • Agree. You probably have a lot more opportunity over there since the US markets are evolving to be more “factor” efficient over time.

  • Bertrand

    I am going through the same process as yours Henning (i.e. studying the application of factor investing), except I am doing it for Mexico. I am amazed to see that simple systematic rules work so well for any market across the globe.

    My assumption is that no matter the composition and organisation of a market, the people behind it remain the same, with the same flaws.

  • human insanity is the only thing consistent across markets.

  • Henning Hammar

    Yes, it truly is. Also agree with that we have a lot more opportunity in smaller markets. Here in Sweden we have just over about 100 mutual funds and ETF:s with focus on the local market. Only three of them has a systematic quant approach, two with dividends and one with momentum.

    My Swedish quantitative value and momentum portfolio, created with much help from this blog for which I am ever grateful, outperformed the market with 37 % the past two years since inception. It is much to do with a small cap effect, but still outperforms a lot of the small cap funds. So it works well in real life as well.

  • awesome. Thanks for sharing

  • The grad students are running out of original ideas …

    Nick de Peyster
    http://undervaluedstocks.info/