Defining new factors

[eeng]

How have the factor models been validated historically? I mean, when the momentum or value factors were identified, did the researcher simply run a linear regression on past data, or perhaps some kind of train/test split was performed, to ensure that the newly identified factor was robust to new data?



The background on my query is, due to how the alpha in different factors has eroded over time (won’t go into the issue of whether timing factors is possible), surely a stablished process to detect and favor new factors will be required, but I’m unsure whether this already exists.

[yanko]

Original papers run a regression on the longest possible time series. If adding a factor pushes the intercept ("alpha") closer to 0 and if that factor's beta is deemed significant, then the factor is real. Yay!



Depending on your choice of factors, you get different results (value is real in a three-factor model, value is dead in a five-factor model, and it's alive again in a six-factor model).



So, you'd say: OK, let's cross-validate. The result is that it's all just data mining:



https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2897719



yanko

[JohnSpencer]

Factors have by and large had low connections with one another and hence tended. Use the intuitive tool to perceive how extraordinary elements have performed through market shocks, extensions, and constrictions over the long term. Assignment-land

[eye51]

Hi eeng,



regarding your second question, the work of Harvey might be of interest to you:

https://faculty.fuqua.duke.edu/~charvey/Research/Published_Papers/P118_and_the_cross.PDF

&

https://faculty.fuqua.duke.edu/~charvey/Research/Published_Papers/P116_Evaluating_trading_strategies.pdf



Also the book "evidence based TA" is a nice / quick read.

https://www.amazon.com/Evidence-Based-Technical-Analysis-Scientific-Statistical/dp/0470008741



For both approaches you need to know how much different strategies have been tested. offcourse this is an "unobservable"



@JohnSpencer: Fuck Off!

[hailiehills]

I want to buy book reports. Do you know where I can do this? Frequently, I like buying something online but I never bought papers online. Is somebody doing this nowadays?