Forums  > General  > Defining new factors  
     
Page 1 of 1
Display using:  

eeng


Total Posts: 23
Joined: Dec 2014
 
Posted: 2018-07-24 10:48
How have the factor models been validated historically? I mean, when the momentum or value factors were identified, did the researcher simply run a linear regression on past data, or perhaps some kind of train/test split was performed, to ensure that the newly identified factor was robust to new data?

The background on my query is, due to how the alpha in different factors has eroded over time (won’t go into the issue of whether timing factors is possible), surely a stablished process to detect and favor new factors will be required, but I’m unsure whether this already exists.

quantmatters.wordpress.com

yanko


Total Posts: 63
Joined: Nov 2009
 
Posted: 2018-07-25 15:57
Original papers run a regression on the longest possible time series. If adding a factor pushes the intercept ("alpha") closer to 0 and if that factor's beta is deemed significant, then the factor is real. Yay!

Depending on your choice of factors, you get different results (value is real in a three-factor model, value is dead in a five-factor model, and it's alive again in a six-factor model).

So, you'd say: OK, let's cross-validate. The result is that it's all just data mining:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2897719

yanko
Previous Thread :: Next Thread 
Page 1 of 1