Will Your Factor Deliver? An Examination of Factor Robustness and Implementation Costs

The multifactor investing framework has become very popular in the indexing community. Both academic and practitioner researchers have documented hundreds of equity factors. 

But which of these factors are likely to profit investors once implemented? We find that many of the documented factors lack robustness. Size and quality, two of the more prominent factors, show weak robustness, whereas value, momentum, illiquidity, and low beta are more robust. Further examining implementation characteristics, we find that liquidity-demanding factors, such as illiquidity and momentum, are associated with significantly higher trading costs than are other factors. Investors may be better off accessing these factors through active management rather than indexation.

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Head Office
EMEA Office
67 Lombard Street
7th Floor
London
EC3V 9LJ
United Kingdom
Contact
Sarah-Jane Purvis Tel. 020 7330 9559
Company website:
http://www.cfainstitute.org
Year Founded:
1947
No. of investment offices worldwide:
4

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