RT Journal Article
SR Electronic
T1 The Promises and Pitfalls of Factor Timing
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 79
OP 92
DO 10.3905/jpm.2018.44.4.079
VO 44
IS 4
A1 Jennifer Bender
A1 Xiaole Sun
A1 Ric Thomas
A1 Volodymyr Zdorovtsov
YR 2018
UL https://pm-research.com/content/44/4/79.abstract
AB 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.TOPIC: Factor-based models