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Contribution Details

Type Master's Thesis
Scope Discipline-based scholarship
Title Long or Short? Sources of returns in factor portfolios
Organization Unit
  • Tobias S. Habetha
  • Alexandre Ziegler
  • English
Institution University of Zurich
Faculty Faculty of Business, Economics and Informatics
Number of Pages 66
Date April 2018
Abstract Text This thesis assesses the efficacy of strategies attempting to harvest equity premia related to value, size, momentum, quality and low beta factors in US equities and investigates potential improvements in strategy design that lead to increased real-world performance. In detail, this study empirically tests factor investing strategies and their predictability using data for all listed US stocks from 1990 to 2016. The size factor is constructed following the methodology explored in Fama and French (1992), value follows Asness and Frazzini (2013), momentum is implemented according to Carhart (1997), quality is based on Novy-Marx (2013a) and low beta follows Frazzini and Pedersen (2014). Stock selection is constricted to non-penny stocks and the most illiquid 10% of stocks are ignored at every rebalancing date. Additionally to the sort based long-short strategy implementation, ong-versus-index and short-versus-index implementations are investigated in order to attribute the excess return of the factor to the long and short legs. Under practical considerations, the long-versus-index approach is preferable, as short positions in the market are easy to implement via index products and futures. In an extension of the framework presented in Frazzini and Pedersen (2014), the benefits of hedging factor strategies using index products is also explored. Any design changes that lead to performance increases of individual premia are tested against an equal-weighted 1/N benchmark of the factors. If the improvement is unrelated to the other factors, the combination of the altered factors should outperform the original benchmark. My results show that the beta neutral combination of factors outperforms the dollar neutral combination. Adding to this, premia can, on average, be harvested without having to short individual securities. The exceptions are the momentum and quality factors, where the short leg adds significant outperformance. Combining long-short momentum and quality strategies with long-versus-index implementations of the other premia produces a market neutral strategy that returns an annual CAPM alpha of 11.4% at a Sharpe ratio of 1.40 on paper. This strategy outperforms the individual factors and the market in terms of risk-adjusted returns.
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