Essays in Factor Investing

This thesis advances the theory and practice of factor investing by exploring the rich set of developed factors to explain portfolio performances in the equity and multi-asset space. Chapter 1 characterizes the strong performance of equal-weighted (EW) portfolios in relation to their value-weighted counterparts by utilizing various factor models. Unsurprisingly, EW investing comes with a highly significant positive size factor exposure but is also found to benefit from short-term reversal effects while suffering from negative momentum exposure due to its acyclic rebalancing character. Given that EW investing effectively emerges as factor investing in disguise, it seems natural to adopt a direct factor investing approach. To this end, the literature has proposed a multitude of firm characteristics for explaining the cross-section of stock returns, yet Chapter 2 demonstrates only about 15 factors to be relevant for spanning the entire factor zoo from an alpha perspective. Whilst these salient factors change through time, they fall into persistent factor style categories. Further broadening the scope, the thesis moves on to explain the cross-section of asset classes through a macro factor lens. Specifically, Chapter 3 investigates macroeconomic factor allocation based on macro factor-mimicking portfolios that consider style factors and individual asset classes alike. Chapter 4 investigates such macro factor investing over a century of data, demonstrating it to be robust in different economic regimes. Incorporating business cycle-based macro and style factor views in a Black-Litterman fashion we additionally accommodate the notion of factor timing to improve upon a diversified macro factor risk-parity strategy

Managerial behavior in fund tournaments—the impact of TrueSkill

Measuring mutual fund managers’ skills by Microsoft’s TrueSkill algorithm, we find highly skilled managers to behave self-confident resulting in higher risk-taking in the second half of the year compared to less skilled managers. Introducing the TrueSkill algorithm, which is widely used in the e-sports community, to this branch of literature, we can replicate previous findings and theories suggesting overconfidence for mid-years winners

Factor Zoo (.zip)

The number of factors allegedly driving the cross-section of stock returns has grown steadily over time. We explore how much this “factor zoo” can be compressed, focusing on explaining the available alpha rather than the covariance matrix of factor returns. Our findings indicate that about 15 factors are enough to span the entire factor zoo. This evidence suggests that many factors are redundant but also that merely using a handful of factors, as in common asset pricing models, is insufficient. While the selected factor styles remain persistent, the specific style representatives vary over time, underscoring the importance of continuous factor innovation

A Far-ultraviolet Atlas of Low-resolution Hubble Space Telescope Spectra of T Tauri Stars

We present a far-ultraviolet (FUV) spectral atlas consisting of spectra of 91 pre-main sequence stars. Most stars in this sample were observed with the Space Telescope Imaging Spectrograph (STIS) and Advanced Camera for Surveys (ACS) on the \emph{Hubble Space Telescope} (\emph{HST}). We find strong correlations among the \ion{O}{1} $\lambda$1304 triplet, %\ion{C}{2} $\lambda$1335, the \ion{Si}{4} $\lambda\lambda$1394/1403 doublet, the \ion{C}{4} $\lambda$1549 doublet, and the \ion{He}{2} $\lambda$1640 line luminosities. For classical T Tauri stars (CTTSs), we also find strong correlations between these lines and the accretion luminosity, suggesting that these lines form in processes related to accretion. These FUV line fluxes and X-ray luminosity correlate loosely with large scatters. The FUV emission also correlates well with H$\alpha$, H$\beta$, and \ion{Ca}{2} K line luminosities. These correlations between FUV and optical diagostics can be used to obtain rough estimates of FUV line fluxes from optical observations. Molecular hydrogen (H$_{2}$) emission is generally present in the spectra of actively accreting CTTSs but not the weak-lined T Tauri stars (WTTSs) that are not accreting. The presence of H$_2$ emission in the spectrum of HD 98800 N suggests that the disk should be classified as actively accreting rather than a debris disk. The spectra in the atlas are available at http://archive.stsci.edu/prepds/ttauriatlas.Comment: 89 pages, 30 figures, published in Ap

The Science Performance of JWST as Characterized in Commissioning

This paper characterizes the actual science performance of the James Webb Space Telescope (JWST), as determined from the six month commissioning period. We summarize the performance of the spacecraft, telescope, science instruments, and ground system, with an emphasis on differences from pre-launch expectations. Commissioning has made clear that JWST is fully capable of achieving the discoveries for which it was built. Moreover, almost across the board, the science performance of JWST is better than expected; in most cases, JWST will go deeper faster than expected. The telescope and instrument suite have demonstrated the sensitivity, stability, image quality, and spectral range that are necessary to transform our understanding of the cosmos through observations spanning from near-earth asteroids to the most distant galaxies.Comment: 5th version as accepted to PASP; 31 pages, 18 figures; https://iopscience.iop.org/article/10.1088/1538-3873/acb29

The James Webb Space Telescope Mission

Twenty-six years ago a small committee report, building on earlier studies, expounded a compelling and poetic vision for the future of astronomy, calling for an infrared-optimized space telescope with an aperture of at least $4m$. With the support of their governments in the US, Europe, and Canada, 20,000 people realized that vision as the $6.5m$ James Webb Space Telescope. A generation of astronomers will celebrate their accomplishments for the life of the mission, potentially as long as 20 years, and beyond. This report and the scientific discoveries that follow are extended thank-you notes to the 20,000 team members. The telescope is working perfectly, with much better image quality than expected. In this and accompanying papers, we give a brief history, describe the observatory, outline its objectives and current observing program, and discuss the inventions and people who made it possible. We cite detailed reports on the design and the measured performance on orbit.Comment: Accepted by PASP for the special issue on The James Webb Space Telescope Overview, 29 pages, 4 figure

Why do equally weighted portfolios beat value-weighted ones?

The difference in performance between an equal-weighted (EW) portfolio or index and its value-weighted (VW) counterpart has been significant in the past but without a clear outperformance of one above the other. We analyze the relation between EW and VW portfolios in a Single Index model and link the differences in performance to the time-varying betas of the constituents as well as the boundaries of market concentration. We propose the difference in performance of EW minus VW portfolios as a highly informative and simultaneously very deterministic factor to proxy the development of the average constituent’s beta and hence size effects. The proposed factor has similar characteristics as the SMB factor proposed by Fama and French (1993) but incorporates full market information

A Century of Macro Factor Investing:Diversified Multi-Asset Multi-Factor Strategies through the Cycles

We diversify a multi-asset investment portfolio across macroeconomic factors that we mimic by investable asset classes and style factors. Using a century of global data we analyze the resulting multi-asset multi-factor portfolio’s sensitivities to different macroeconomic scenarios and highlight the relevance of navigating time variation in macroeconomic risk premia. Specifically, we adapt the portfolio allocation to align with the identified macro environment as predicted by a forward-looking business cycle model. A Black-Litterman framework is used to thus improve upon a diversifiedmacro factor allocation and to further tap into predictive asset class and style factor signals.<br/

Macro Factor Investing with Style

Investors face similar macroeconomic risks and opportunities regardless of their individual investment preferences. To best navigate growth and inflation concerns, we propose building macro factor-mimicking portfolios diversified across asset classes and style factors. We focus on the macro factors Growth, Inflation and Defensive. Our approach allows for shaping the macroeconomic risk exposure of a given portfolio by applying systematic macro factor completion to effectively address specific economic outcomes