A comparison of two types of multi factor investing
Important findings:
- In the field of factor investing, there is a distinction between two approaches: the top-down mixing of single factor portfolios and the bottom-up integration / aggregation of scores to obtain a multi factor portfolio.
- Lately, there have been several papers touting the superiority of the aggregation of scores.
- This paper shows that this superiority of score aggregation is likely a statistical fluke.
- They find that the aggregation of scores leads to a higher sensitivity to the low volatility anomaly. The resulting risk reduction, however, does not increase the strategy returns.
Source:
Leippold, M., & Rueegg, R. (2017). The mixed vs the integrated approach to style investing: Much ado about nothing? European Financial Management.
The research paper can be obtained here.
The research paper can be obtained here.