Wednesday, April 29, 2009

Do Quant Factors Persist Anymore?

An interesting analysis from the team over at Innovative Quant Solutions looking at the persistence of key quant factors such as Momentum, Value, Balance Sheet, Improving Financials, and Sentiment.

Cutting to the chase, here are IQS' observations and conclusions:

One-Week factor persistence for very few factors in the past, but persistence is now realized for all 5 factor categories!
Four-Week and Eight-Week factor persistence was positive in the past, but now they are negative!
Improving Financials is expected to have longer-period persistence, which it consistently had at four-week and eight-week, but not recently.
Momentum does not have persistence over long periods, and wouldn’t expect it to.
Value is expected to have persistence over long periods, and did so in the past, but not recently.


Quantitative weighting schemes need to look back at the past to help forecast the future, with the assumption that persistence exists. With negative persistence recently, the better plan is to weight factors opposite what has performed well by incorporating the persistence information above into the process.
Based on the results above, shorter-term trading models would have performed well since June 2007, while longer-term models would have performed better previously.
The pain for Momentum and Sentiment factors is getting higher and higher, as evidenced by the beta covering rally in the market.

Wave of bullishness? Call the squeeze for what it is.

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