Factor Covariances Predict Factor Returns

Nigel J. Barradale, Søren Hvidkjær

Publikation: Working paperForskning

Resumé

We examine low-turnover zero-investment “factor” portfolios constructed from various stock characteristics previously shown to predict returns. The nine different factor portfolios all exhibit negative market betas. Our central result is that a more negative beta across factors predicts higher factor returns over the next two years. Similarly, the average relative volatility of the factor returns, as well as the cross-sectional variance of the betas and volatilities, predicts future factor returns. While the results are difficult to reconcile with standard risk-based explanations, they are consistent with the existence of a time-varying mass of naïve investors, whose trading affects the returns to characteristics-based factor portfolios. Indeed, the average beta across factors is highly negatively correlated across time with the Baker and Wurgler (2006) investor sentiment measure.
OriginalsprogEngelsk
Udgivelses stedFrederiksberg
UdgiverCopenhagen Business School [wp]
Antal sider47
StatusUdgivet - 2013

Emneord

  • Factor returns
  • Factor covariances
  • Investor sentiment
  • Time-series predictability

Citer dette

Barradale, N. J., & Hvidkjær, S. (2013). Factor Covariances Predict Factor Returns. Frederiksberg: Copenhagen Business School [wp].
Barradale, Nigel J. ; Hvidkjær, Søren. / Factor Covariances Predict Factor Returns. Frederiksberg : Copenhagen Business School [wp], 2013.
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Barradale, NJ & Hvidkjær, S 2013 'Factor Covariances Predict Factor Returns' Copenhagen Business School [wp], Frederiksberg.

Factor Covariances Predict Factor Returns. / Barradale, Nigel J.; Hvidkjær, Søren.

Frederiksberg : Copenhagen Business School [wp], 2013.

Publikation: Working paperForskning

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Barradale NJ, Hvidkjær S. Factor Covariances Predict Factor Returns. Frederiksberg: Copenhagen Business School [wp]. 2013.