How Do Factor Premia Vary Over Time? A Century of Evidence

Vol. 19, No. 4, 2021

Antti Ilmanen, Ronen Israel, Rachel Lee, Tobias J. Moskowitz and Ashwin Thapar

Evaluating how factor premia vary over time and across asset classes is challenging due to limited time series data, especially outside of US equities. We examine four prominent factors across six asset classes over a century. We find little evidence for arbitrage activity influencing returns, though some novel evidence of overfitting biases. We identify meaningful time variation in risk-adjusted factor returns that appears unrelated to macroeconomic risks, supporting other theories of dynamic return premia. Attempting to capture this variation, we evaluate various factor-timing strategies, but find relatively modest predictability that likely fails to overcome implementation costs.