An examination of the benefits of factor investing in U.K. stock returns

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Abstract

This study uses the Bayesian approach of Wang (1998) to examine the benefits of factor investing in U.K. stock returns in the presence of market frictions. My study finds that factor investing provides significant performance benefits when the benchmark investment universe is the market index, even in the presence of market frictions such as portfolio constraints and trading costs. However when the benchmark investment universe includes industry portfolios, market frictions, such as no short selling constraints and trading costs, tends to eliminate the benefits of factor investing. Imposing less restrictive portfolio constraints, factor investing can generate significant performance for investors with higher risk aversion levels.
Original languageEnglish
Pages (from-to)154-170
Number of pages7
JournalInternational Journal of Economics and Finance
Volume10
Issue number4
DOIs
Publication statusPublished - 16 Mar 2018

Keywords

  • factor investing
  • Bayesian evaluation
  • mean-variance analysis

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