Factor Timing with Portfolio Characteristics
1 : Lancaster University management School
(LUMS)
2 : Lancaster University Management School
* : Corresponding author
Factor momentum has formed the basis of factor timing strategies. We propose an alternative approach for timing factor portfolio returns by exploiting the information from their portfolio characteristics. Different combinations of dimension reduction techniques are employed to independently reduce the number of predictors and portfolios to predict. Characteristic-based models outperform factor momentum in terms of exact predictability as well as investment performance.