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Performance Measurement of Active Investment Strategies Using Pure Factor Portfolios

Author

Listed:
  • Máté Fain

    (Corvinus University of Budapest)

  • Helena Naffa

    (Corvinus University of Budapest)

Abstract

The article uses pure factor portfolios formed by multivariate cross-sectional regressions to examine whether these active investment strategies could achieve excess return relative to passive strategies. The hypothesis can also be construed as a test of market efficiency. The study includes ten style factors. Our empirical study shows that a consensus buy strategy of the pure value factor yielded significant positive excess returns in the past almost 20 years. Size and momentum factors characterised in the literature by positive excess return are not significant in our study. Excess return of the factors capturing riskiness (earnings variability, volatility, leverage) is significant and negative, which corroborates with our expectations, rendering a consensus sell investment strategy successful, based on these factors. The profitability, growth and trading activity factors produced results contrary to our expectations; therefore, excess return could have been achieved via a contrarian selling strategy. Our research results are consistent with the weak form of market efficiency analyses.

Suggested Citation

  • Máté Fain & Helena Naffa, 2019. "Performance Measurement of Active Investment Strategies Using Pure Factor Portfolios," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 18(2), pages 52-86.
    • Handle: RePEc:mnb:finrev:v:18:y:2019:i:2:p:52-86
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    Cited by:

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    2. Barnabas Timar, 2021. "How Does the Market Price Responsible and Sustainable Investments?," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 20(2), pages 117-147.

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    More about this item

    Keywords

    equity markets; asset pricing; return; pure factor portfolio; multivariate regression; performance measurement; market efficiency;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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