A multi-asset analysis of factors over 200 years

A multi-asset analysis of factors over 200 years

04-06-2018 | Insight

What makes a factor relevant? The most important requirement that an investment factor must meet in order to be considered relevant is that there is ample empirical evidence supporting the factor’s existence over time, over the cross-section and across asset classes. This is particularly important in order to avoid potential ‘p-hacking’, or ‘data mining’.

  • Pim  van Vliet, PhD
    van Vliet, PhD
    Head of Conservative Equities and Quant Allocation
  • Laurens Swinkels
  • Guido  Baltussen
    Co-head of Quant Allocation

Speed read

  • Factors should be backed by overwhelming empirical evidence
  • Potential ‘p-hacking’ is a serious threat to financial research
  • New research by Robeco looks at over two centuries of financial data

When assessing the evidence on potentially interesting factors, it is of utmost importance for researchers to consider data over the longest possible period of time and across as many asset classes as possible. The quest for such ample evidence on factor premiums was actually what recently led Robeco’s Guido Baltussen, Laurens Swinkels and Pim van Vliet to analyze more than two centuries of international market data from multiple historical sources, relating to an array of asset classes.

In research published earlier this year, the three authors looked at four major factor premiums in equity indices, government bonds, currencies, and commodities, using data going back to 1800. Such an extensive sample allowed them to falsify certain factors if previous results were simply driven by ‘p-hacking’, and to study the sensitivity of factor premiums to financial market and macro-economic regimes.

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Persistent factors

The authors found significant, persistent, and robust momentum, value, and carry premiums both within and across asset classes. They also found that the momentum, value, and carry premiums factor premiums generally work well with each other in the context of portfolio diversification. The authors also show that the time-series trend and cross-sectional momentum are in essence similar factors. Further, they argue that a multi-factor multi-asset strategy gives rise to a statistically highly significant Sharpe ratio well above 1.5, with positive returns over every single decade since 1800.

The factor premiums remain robust across economic regimes such as bear markets, turbulent periods, recessions, inflationary periods, crises, and wars. As a result, the authors conclude that a multi-factor, multi-asset approach offers considerable added value relative to a traditional 60/40 equity/bond portfolio.

Lesser-known factors

In addition, the three authors also examined other lesser-known premiums. More specifically, they looked at two low-risk factors (betting-against-volatility and betting-against-beta), and two seasonal factors (‘Sell in May and go away, but remember to come back in November’ and monthly return seasonality). They show the presence of a low-risk effect in equity markets, but not in other markets, which is consistent with the typical explanations given for the low-risk effect. They also reveal a strong monthly seasonal factor premium.

Multi-asset factor investing

Overall, the authors present convincing empirical evidence that multi-asset factor premiums are economically strong and persistent over time. They are highly unlikely to be the result of data mining, supporting the assumption that they will exist in the future. A multi-factor, multi-asset approach offers considerable added value relative to a traditional 60/40 equity/bond portfolio, offering true diversification and return enhancement.

Read the related research paper on SSRN.


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