Ben Zhao JM Practice Talk
An Efficient Factor from Basis Anomalies
Date: 10/03/2016 (Mon)
Time: 11:30am- 1:00pm
Location: Seminar will be held on-site: Social Sciences 111
Organizer: Jia Li, Ph.D.
Meeting Schedule: (Not currently open for scheduling. Please contact the seminar organizer listed above.)
All meetings will be held in the same location as the seminar unless otherwise noted.
11:30am - Seminar Presentation (11:30am to 1:00pm)
Additional Comments: A look-ahead-bias-free, ex-ante efficient portfolio from Size, B/M and Momentum anomalies has an ex-post Sharpe ratio of 2.3. It picks up the non-monotonic benefits from characteristics that cannot be captured by the multi-factors and eliminates 39 out of 42 unique anomalies. Using tests of cross-sectional regressions, mean-variance efficiency, miss-specification, model comparison and spurious factors, the 1-factor significantly out-perform the combined (or separate) 11 factors: MKT-Rf, SMB, HML, MOM, RMW, CMA, qME, qIA, qROE, QMJ, LIQ among combinations of 147 test assets. The efficient factor is priced at the firm-level with 12% per year spread. Optimal mix of new exotic characteristics can be engineered to pass existing testing tools as “unique anomalies”, yet are completely manifested by the efficient factor. A theory where assets are priced recursively w.r.t. the group-specific efficient factor shows that “anomalous” predictabilities are equivalent to 1-factor pricing, regardless of rational/behavioral cause. An implied Stochastic Discount Factor return deduced from the efficient factor is consistent with economic theory.