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Performance Measurement of Active Investment Strategies Using Pure Factor Portfolios

Fain, Máté and Naffa, Helena (2019) Performance Measurement of Active Investment Strategies Using Pure Factor Portfolios. Financial and Economic Review, 18 (2). pp. 52-86. DOI https://doi.org/10.33893/FER.18.2.5286

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Official URL: https://doi.org/10.33893/FER.18.2.5286


Abstract

The article uses pure factor portfolios formed by multivariate cross-sectional regressions to examine whether these active investment strategies could achieve excess return relative to passive strategies. The hypothesis can also be construed as a test of market efficiency. The study includes ten style factors. Our empirical study shows that a consensus buy strategy of the pure value factor yielded significant positive excess returns in the past almost 20 years. Size and momentum factors characterised in the literature by positive excess return are not significant in our study. Excess return of the factors capturing riskiness (earnings variability, volatility, leverage) is significant and negative, which corroborates with our expectations, rendering a consensus sell investment strategy successful, based on these factors. The profitability, growth and trading activity factors produced results contrary to our expectations; therefore, excess return could have been achieved via a contrarian selling strategy. Our research results are consistent with the weak form of market efficiency analyses.

Item Type:Article
Uncontrolled Keywords:equity markets, asset pricing, return, pure factor portfolio, multivariate regression, performance measurement, market efficiency
JEL classification:G11 - Portfolio Choice; Investment Decisions
G12 - Asset Pricing; Trading Volume; Bond Interest Rates
G14 - Information and Market Efficiency; Event Studies; Insider Trading
G15 - International Financial Markets
Subjects:Finance
DOI:https://doi.org/10.33893/FER.18.2.5286
ID Code:5821
Deposited By: MTMT SWORD
Deposited On:28 Jul 2020 10:14
Last Modified:29 Jul 2020 12:30

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