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Factor Investing: From Theory to Practice

Tarun Gupta, Jay Raol and Viorel Roscovan
The Journal of Beta Investment Strategies Winter 2022, 13 (4) 10-31; DOI: https://doi.org/10.3905/jbis.2022.1.016
Tarun Gupta
is the head of research and managing director at Invesco Systematic and Factor Investing in New York, NY
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Jay Raol
is the head of fixed income factors at Invesco Quantitative Strategies in Atlanta, GA
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Viorel Roscovan
is a senior researcher and director at Invesco Quantitative Strategies in Frankfurt am Main, Germany
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Abstract

Although factor investing has become an industry standard, the debate over which factors drive the risk and return of various asset classes across the globe is ongoing. The literature documents more than 400 of such factors claiming to deliver an attractive risk and return trade-off. Although promising, this research also imposes a heavy burden on practitioners who seek to identify the true factors that can help generate ongoing investment returns in excess of benchmarks. Modern multiple-testing techniques proposed by academics typically fall under traditional hypothesis testing and can generally be summarized as imposing more-stringent statistical thresholds for factor premiums to satisfy. In addition, such statistical techniques may ignore prior economic beliefs that investors might have that are important for the optimal design of investment strategies. This article proposes a parsimonious yet rigorous paradigm for practitioners to determine factor existence by focusing on economic theory alongside robust empirical evidence and incorporating real-world implementation considerations. The main goal of the framework is to guide practitioners in factor selection while designing investment strategies that can maximize the probability of generating ongoing investment performance. The authors apply this framework for value, momentum, quality, low-volatility, and size factors in equity and fixed-income markets across the globe. They find compelling evidence for value, momentum, quality, and low-volatility factors, but not the size factor. Their framework can be readily extended to evaluate broad factor categories across different asset classes, alternative factor signals, or additional investment constraints.

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The Journal of Beta Investment Strategies: 13 (4)
The Journal of Beta Investment Strategies
Vol. 13, Issue 4
Winter 2022
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Factor Investing: From Theory to Practice
Tarun Gupta, Jay Raol, Viorel Roscovan
The Journal of Beta Investment Strategies Nov 2022, 13 (4) 10-31; DOI: 10.3905/jbis.2022.1.016

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Factor Investing: From Theory to Practice
Tarun Gupta, Jay Raol, Viorel Roscovan
The Journal of Beta Investment Strategies Nov 2022, 13 (4) 10-31; DOI: 10.3905/jbis.2022.1.016
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