128:, which can be defined primarily as the difference between intrinsic or fundamental value and the market value. The opportunity to capitalize on the value factor arises from the fact that when stocks suffer weakness in their fundamentals, leading the market to overreact and undervalue them significantly relative to their current earnings. A systematic quantitative value factor investing strategy strategically purchases these undervalued stocks and maintains the position until the market adjusts its pessimistic outlook. Value can be assessed using various metrics, including the
312:, argues that factor investing risks treating stocks like mathematical abstractions rather than ownership in companies, and furthermore states factor investing is not as objective or neutral as commonly believed: “...since the 1970s, factor investing has come to dominate the market, value being one of the two great investing styles (along with 'growth'). But those characteristics say more about market participants’
174:
111:
published their seminal three-factor papers that introduce size and value as additional factors next to the market factor. In the early 1990s, Sheridan Titman and
Narasimhan Jegadeesh showed that there was a premium for investing in high momentum stocks. In 2015 Fama and French added profitability
281:
involves buying stocks or securities with high returns over the past three to twelve months and selling those with poor returns over the same period. Despite its establishment as a phenomenon, there is no consensus explanation, posing challenges to the efficient market hypothesis and random walk
159:
was identified in the early 1970s but gained popularity after the 2008 global financial crisis. Different studies demonstrate its effectiveness over extended periods. Despite widespread practical use, academic enthusiasm varies, and notably, the factor is not incorporated into the Fama-French
39:
A factor-based investment strategy involves tilting investment portfolios towards or away from specific factors in an attempt to generate long-term investment returns in excess of benchmarks. Proponents claim this approach is quantitative and based on observable data, such as stock prices and
302:, very few of hundreds of identified factors have statistical significance in real-world scenarios. They also argue factors may not offer promised diversification under all market conditions, as factors may change in their level of correlation over time.
282:
hypothesis. Due to the higher turnover and no clear risk-based explanation the factor is not incorporated into the Fama-French five-factor model. Seasonal effects, like the
January effect, may contribute to the success of momentum investing.
40:
financial information, rather than on opinion or speculation. Factor premiums are also documented in corporate bonds and across all major asset classes including currencies, government bonds, equity indices, and commodities.
63:(CAPM), theorized by academics in the 1960s, held sway. CAPM held that there was one factor that was the driver of stock returns and that a stock's expected return is a function of its equity market risk or
640:
Arnott, Robert D. and Harvey, Campbell R. and
Kalesnik, Vitali and Linnainmaa, Juhani T., Alice’s Adventures in Factorland: Three Blunders That Plague Factor Investing (April 10, 2019). Available at SSRN:
23:
that involves targeting quantifiable firm characteristics or “factors” that can explain differences in stock returns. Security characteristics that may be included in a factor-based approach include size,
100:". In 1981 a paper by Rolf Banz established a size premium in stocks: smaller company stocks outperform larger companies over long time periods, and had done so for at least the previous 40 years.
160:
five-factor model. Low-volatility tends to reduce losses in bear markets, while often lagging during bull markets, necessitating a full business cycle for comprehensive evaluation.
305:
In a 2016 paper, Arnott and colleagues noted that many factors become popular among investors, leading to high valuations among such stocks and subsequent expected poor returns.
155:
is a strategy that involves acquiring stocks or securities with low volatility while avoiding those with high volatility, exploiting the low-volatility anomaly. The
97:
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659:
875:
Jegadeesh, Narasimhan; Titman, Sheridan (1993). "Returns to Buying
Winners and Selling Losers: Implications for Stock Market Efficiency".
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Peris, Daniel (2024). The
Ownership Dividend: The Coming Paradigm Shift in the U.S. Stock Market. London: Routledge. ISBN 978-1032270524
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713:"Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis"
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and investment as two additional factors in their five-factor asset pricing model. Profitability is also referred to as the
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Bollen, Nicolas; Fisher, Gregg (2012-07-03). "Send in the Clones? Hedge Fund
Replication Using Futures Contracts".
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Black, F.; Jensen, M. C.; Scholes, M. (1972). "The capital asset pricing model: Some empirical tests".
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The earliest theory of factor investing originated with a research paper by
Stephen A. Ross in 1976 on
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about a company’s condition and future than the reality already embedded in a dividend stream."
278:
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Maymin, Philip; Fisher, Gregg (2011-04-11). "Past
Performance is Indicative of Future Beliefs".
59:, which argued that security returns are best explained by multiple factors. Prior to this, the
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116:. Other significant factors that have been identified are leverage, liquidity and volatility.
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Fisher, Gregg; Shah, Ronnie; Titman, Sheridan (2015-03-23). "Combining Value and
Momentum".
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BANZ, Rolf W. (1981). "The relationship between return and market value of common stocks".
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Fama, Eugene F.; French, Kenneth R. (1992). "The Cross-Section of
Expected Stock Returns".
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and colleagues identify several problems with factor investing. They assert that due to
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Sanjoy Basu was the first academic to document a value premium in 1977. The roots of
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Critics of factor investing argue the concept has flaws, such as relying heavily on
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Pástor, Ľ; Stambaugh, R.F. (2003). "Liquidity risk and expected stock returns".
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802:(1993). "Common risk factors in the returns on stocks and bonds".
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that does not necessarily translate to real-world scenarios.
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outlined their findings and application in his 1984 article "
595:
Baltussen, Guido; Swinkels, Laurens; van Vliet, Pim (2021).
969:"The other side of value: The gross profitability premium"
402:
Harvey, Campbell R.; Liu, Yan; Zhu, Heqing (2016-01-01).
36:, asset growth, profitability, leverage, term and carry.
1011:"The Volatility Effect: Lower Risk Without Lower Return"
1123:"Factors from Scratch | O'Shaughnessy Asset Management"
843:"Evidence of Predictable Behavior of Security Returns"
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71:showed that the risk-return relation was too flat.
928:Fama, Eugene F.; French, Kenneth R. (2015-04-01).
556:Houweling, Patrick; van Zundert, Jeroen (2017).
78:date to decades earlier, and were formalized by
660:"The Arbitrage Theory of Capital Asset Pricing"
558:"Factor Investing in the Corporate Bond Market"
445:Your Complete Guide to Factor-based Investment
404:"… and the Cross-Section of Expected Returns"
67:, quantified as beta. The first tests of the
8:
202:. Unsourced material may be challenged and
98:The Superinvestors of Graham-and-Doddsville
1147:"How Can "Smart Beta" Go Horribly Wrong?"
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266:Learn how and when to remove this message
694:Studies in the Theory of Capital Markets
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1054:The Journal of Alternative Investments
647:http://dx.doi.org/10.2139/ssrn.3331680
1009:Blitz, David; van Vliet, Pim (2007).
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200:adding citations to reliable sources
930:"A five-factor asset pricing model"
841:Jegadeesh, Narasimhan (July 1990).
899:10.1111/j.1540-6261.1993.tb04702.x
862:10.1111/j.1540-6261.1990.tb05110.x
308:Daniel Peris, an asset manager at
69:Capital Asset Pricing Model (CAPM)
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643:https://ssrn.com/abstract=3331680
967:Novy-Marx, Robert (2013-04-01).
377:Journal of Investment Management
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86:as outlined in their 1934 book
973:Journal of Financial Economics
934:Journal of Financial Economics
805:Journal of Financial Economics
760:Journal of Financial Economics
601:Journal of Financial Economics
351:Fama–French three-factor model
124:The most well-known factor is
1:
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946:10.1016/j.jfineco.2014.10.010
443:Swedroe, Larry (2016-10-07).
1097:Journal of Political Economy
828:10.1016/0304-405X(93)90023-5
782:10.1016/0304-405X(81)90018-0
679:10.1016/0022-0531(76)90046-6
408:Review of Financial Studies
61:Capital Asset Pricing Model
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667:Journal of Economic Theory
562:Financial Analysts Journal
515:Risk and Decision Analysis
1066:10.3905/jai.2013.16.2.080
658:Ross, Stephen A. (1976).
356:Carhart four-factor model
597:"Global Factor Premiums"
336:Low-volatility investing
153:Low-volatility investing
57:arbitrage pricing theory
1023:10.3905/jpm.2007.698039
1151:researchaffiliates.com
877:The Journal of Finance
850:The Journal of Finance
717:The Journal of Finance
470:The Journal of Finance
447:. BAM ALLIANCE Press.
157:low-volatility anomaly
527:10.3233/RDA-2011-0038
148:Low-volatility factor
609:10.2139/ssrn.3325720
574:10.2469/faj.v73.n2.1
196:improve this section
21:investment approach
421:10.1093/rfs/hhv059
341:Momentum investing
279:Momentum investing
215:"Factor investing"
103:In 1992 and 1993,
711:Basu, S. (1977).
346:Quality investing
290:In a 2019 paper,
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940:(1): 1–22.
796:Fama, E. F.
414:(1): 5–68.
300:data mining
45:data mining
1186:Investment
1156:2019-07-24
1132:2018-09-06
362:References
292:Rob Arnott
226:newspapers
84:David Dodd
65:volatility
1074:219222562
1031:154015248
993:0304-405X
954:0304-405X
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286:Criticism
183:does not
138:P/S ratio
134:P/B ratio
130:P/E ratio
1180:Category
1127:osam.com
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812:: 3–56.
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535:15665310
320:See also
314:opinions
34:momentum
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625:3325720
543:1746864
500:2329112
389:2472936
240:scholar
204:removed
189:sources
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