Research on pre-1926 database reveals equity factors are ‘eternal’

Research on pre-1926 database reveals equity factors are ‘eternal’

21-12-2021 | Research

New research reveals that equity factor styles have existed and persisted since the mid-19th century. This is based on a groundbreaking US stock database that has been built by a team of Robeco researchers, led by Guido Baltussen, in collaboration with the Erasmus University. This underlines that factor premiums do not depend on specific market regimes, which is good news for long-term quant investors.

  • Guido  Baltussen
    Head of Factor Investing
  • Bart van Vliet
    van Vliet
    Investment Specialist
  • Pim  van Vliet, PhD
    van Vliet, PhD
    Head of Conservative Equities and Head of Quantitative Equities

Speed read

  • Authors constructed a novel US stock database, from 1866 to 1926
  • Low risk, Momentum and Value premiums are significant in this era
  • Analysis showcases the potential of machine learning techniques

Over the last few decades, asset pricing literature has uncovered numerous equity factors, such as low risk, momentum and value, that explain cross-sectional differences in stock returns. The empirical evidence presented in support of these findings has largely relied on the Center for Research in Security Prices (CRSP) database, which houses US stock data – including returns – dating all the way back to 1926.

This sample period has been so intensively analyzed that many experts have warned that studies on factors could potentially be plagued by data dredging or p-hacking effects.1 In other words, many of the factors that seem important in-sample could lose explanatory power, or even fail to hold up out-of-sample. This issue can be addressed with a truly independent and sufficiently large dataset that can be used for out-of-sample testing.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates

Constructing a novel database

Regarding the latter, Guido Baltussen, Bart van Vliet and Pim van Vliet (from our Quantitative Investing team), in collaboration with the Erasmus University, have constructed a novel US stock database for the period 1866 to 1926, containing stock prices, dividend yields and market capitalization values. This huge effort, spanning over several years, entailed the hand-collection of market capitalization data, double-checking of all inputs, as well as data cleaning and adjustments for stock delistings and stock splits using digitalized financial journals. The team then merged this information with data from an external data provider – Global Financial Data – for the same period.

This ‘pre-CRSP’ sample period is of similar length to the one used in existing CRSP-based studies (61-years), and covers an economically important period that is independent to prevailing datasets. This era was characterized by strong economic growth and rapid industrial development, laying the foundations for the preeminence of the US economy. Meanwhile, the US stock market played a pivotal role in economic growth and the financing of key innovations during this phase.

The novel database provides new ground for independent tests, that can allow us to better understand return drivers and stock prices. The authors used the data to examine the cross-section of US stock returns over the pre-CRSP period in their research.2 This focused on well-documented stock characteristics, namely beta, momentum (12-1 month price momentum), short-term reversal (1-month), size and value (dividend yield).

Evidence of equity factor premiums pre-1926

The analysis started with Fama-MacBeth regressions3 and univariate portfolio sorts on the dataset. The authors found that market beta was not priced and the capital asset pricing model (CAPM) largely failed to explain asset prices, as low-beta stocks generated positive alpha and high-beta stocks delivered negative alpha. Furthermore, momentum and value exhibited significant premiums and return spreads. By contrast, size failed to do so on both counts, while short-term reversal displayed a significant premium but yielded an insignificant return spread.

The authors then built market-neutral and size-neutral factor portfolios, by double-sorting on size and a specific factor characteristic. They observed economically substantial and statistically significant premiums and CAPM alphas for low-risk (beta), momentum and value (dividend yield), while the size premium was again insignificant for both measures. In terms of short-term reversal, they saw significant premiums but insignificant CAPM alphas. The main results are summarized in Figures 1 and 2.

Figure 1 | Return spread (%), for the periods 1866 to 1926 and 1927 to 2019

Source: Robeco Quantitative Research. The figure shows the average annualized returns for the size, value, momentum, short-term reversal and beta factors for the pre-CRSP and CRSP samples. Factors are constructed from top-bottom portfolios from 2x3 size-characteristic-based portfolios. The pre-CRSP sample starts in January 1866 and ends December 1926. The CRSP sample runs between January 1927 and December 2019. Performance is measured on a monthly frequency.

Figure 2 | CAPM alpha (%), for the periods 1866 to 1926 and 1927 to 2019

Source: Robeco Quantitative Research. The figure shows the average annualized CAPM alphas for the size, value, momentum, short-term reversal and beta factors for the pre-CRSP and CRSP samples. Factors are constructed from top-bottom portfolios from 2x3 size-characteristic-based portfolios. The pre-CRSP sample starts in January 1866 and ends December 1926. The CRSP sample runs between January 1927 and December 2019. Performance is measured on a monthly frequency.

Overall, there was no material out-of-sample decay in factor premiums, as they were broadly similar in both the pre-1926 and post-1926 eras. The authors also confirmed that these results were generally robust over time, while different testing choices held up across industries and exchanges. Moreover, factor spanning tests revealed that low-risk, momentum, short-term reversal and value are non-redundant asset pricing factors, while size is subsumed by other factors. This indicates that low-risk, momentum and value are durable asset pricing factors.

Machine learning techniques offer valuable insight on stock returns

The authors also conducted an out-of-sample test of machine learning (ML) methods, that had previously been successfully applied in the asset pricing literature. For example, some researchers4 have argued that cross-sectional regressions and portfolio sorts can miss important dynamics and interactions between variables, such as return volatility and price momentum. These researchers found that ML models (random forests and neural networks that allow for nonlinear predictor interactions) could predict cross-sectional differences in stock returns over the period 1957 to 2016.

However, this sample period coincides with the CRSP era. And ultimately, ML models also require out-of-sample testing in independent samples, similar to traditional factor tests. The authors therefore applied the most promising ML techniques (random forest and neural network models) to the new 61-year sample period. They noted that the ML methods also worked in the pre-CRSP stage, as both models delivered significant CAPM alphas. As such, the research outlines that ML tools offer valuable information in terms of understanding the cross-section of stock returns.

In conclusion, this deep historical research underlines that factor premiums are not very dependent on specific market regimes, nor specific market structures. Instead, they are probably an ‘eternal’ feature of financial markets.

1 See: Harvey, C. R., July 2017, “Presidential address: the scientific outlook in financial economics”, Journal of Finance.
2 See: Baltussen, G., Van Vliet, B. P., and Van Vliet, P., November 2021, “The cross-section of stock returns before 1926 (and beyond)”, working paper.
3 See: Fama, E. F., and MacBeth, J. D., June 1973, “Risk, return, and equilibrium: empirical tests”, Journal of Political Economy.
4 See: Gu, S., Kelly, B., and Xiu, D., February 2020, “Empirical asset pricing via machine learning”, The Review of Financial Studies.

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.



1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is to be accessed by “professional investors” only (as defined in the Securities and Futures Ordinance (Cap.571) and/or the Securities and Futures (Professional Investors) Rules (Cap.571D) under the laws of Hong Kong). The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click the “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree