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Contribution Details

Type Bachelor's Thesis
Scope Discipline-based scholarship
Title Factor Momentum on the example of the MSCI World
Organization Unit
Authors
  • Tristan Kilian Leitner
Supervisors
  • Thorsten Hens
Language
  • English
Institution University of Zurich
Faculty Faculty of Business, Economics and Informatics
Number of Pages 45
Date 2023
Zusammenfassung Empirical research has revealed the shortcomings of the capital asset pricing model (CAPM). Ex-posure to market risk is not the only factor, which explains the cross-sectional variation of asset returns. Therefore, various factor risk premia have been uncovered to gain a better understanding of asset pricing. These insights have subsequently been used for factor investing and factor rotation strategies. Even though global factor index- and exchange-traded funds (ETFs) have existed for almost a decade, little research has been conducted on global factor risk premia. Contemporary re-search has identified asset pricing factors as local, but not global phenomenons. In order to close this research gap, this thesis pursues factor rotation trading strategies based on the constituent universe of the MSCI World Index. In the theoretical part, prior research on asset-pricing factors is reviewed. It outlines the contemporary understanding of these factors, either as risk premia or as a result of (behavioral) anomalies. Furthermore, the theoretical chapters also discusses the viability of price-momentum to scale factor exposure in the cross-section. It concludes, by reviewing the MSCI World Index. The empirical part of this thesis constructs factor portfolios based on the reviewed factors and factor construction methodology of the theoretical part. These factor portfolios are formed under long-only constraints. Prior research has identified price-momentum as a feasible method to predict future asset returns. Therefore, numerous publications have tested whether momentum can be used to cross-sectionally rotate between factor portfolios. Especially, as it has been uncovered that factor excess returns show a positive autocorrelation in their time-series. For these reasons mentioned, the viability of momentum-managed factor rotations strategies, based on the formed factor portfolios, is tested within the empirical part. 4 different strategies are built and subsequently compared to the MSCI World Index. The results reveal that momentum-managed factor rotation strategies generate an outperformance compared to the benchmark even after accounting for transaction costs. The strategies have better performance metrics than the MSCI World and are implementable for institu-tional and retail investors. Additionally, factors seem to persist as global, not only local risk premia. Ultimately, further research is necessary to document whether these findings persevere under differ-ent conditions. Conclusively, it seems plausible to argue that momentum-managed factor rotation strategies based on the constituents of the MSCI World Index can also generate alpha in the future.
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