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

Research output: Contribution to journalArticle

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.
LanguageEnglish
Pages154-170
Number of pages7
JournalInternational Journal of Economics and Finance
Volume10
Issue number4
DOIs
Publication statusPublished - 16 Mar 2018

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Factors
Investing
Stock returns
Market frictions
Portfolio constraints
Trading costs
Benchmark
Risk aversion
Bayesian approach
Investors
Short selling
Industry
Market index

Keywords

  • factor investing
  • Bayesian evaluation
  • mean-variance analysis

Cite this

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An examination of the benefits of factor investing in U.K. stock returns. / Fletcher, Jonathan.

In: International Journal of Economics and Finance, Vol. 10, No. 4, 16.03.2018, p. 154-170.

Research output: Contribution to journalArticle

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