Time-Series Variation in Factor Premia: The Influence of the Business Cycle
Volume 18, No. 1, 2020
Christopher Polk, Mo Haghbin and Alessio de Longis
Factor cyclicality can be understood in the context of factor sensitivity to aggregate cash-flow news. Factors exhibit different sensitivities to macroeconomic risk, and this
heterogeneity can be exploited to motivate dynamic rotation strategies among established factors: size, value, quality, low volatility and momentum. A timely and realistic identification
of business cycle regimes, using leading economic indicators and global risk appetite, can be used to construct long-only factor rotation strategies with information ratios nearly 70% higher than static multifactor strategies. Results are statistically and economically significant across regions and market segments, also after accounting for transaction costs, capacity and turnover.