PT  - JOURNAL ARTICLE
AU  - Tarun Gupta
AU  - Jay Raol
AU  - Viorel Roscovan
TI  - Practical Applications of Factor Investing: From Theory to Practice
AID  - 10.3905/pa.2023.pa554
DP  - 2023 Feb 07
TA  - Practical Applications
PG  - pa.2023.pa554
4099  - https://pm-research.com/content/early/2023/02/06/pa.2023.pa554.short
4100  - https://pm-research.com/content/early/2023/02/06/pa.2023.pa554.full
AB  - In Factor Investing: From Theory to Practice, from the Winter 2022 issue of The Journal of Beta Investment Strategies, Tarun Gupta, Jay Raol, and Viorel Roscovan (all of Invesco) present a simple but rigorous evidence-based framework for testing and accepting factors as valid drivers of risks and returns. They find that value, momentum, quality, and low volatility are valid factors but that the size factor is questionable. Their methodology for validating factors comprises four elements: 1) economic theory, 2) robust risk and return evidence, 3) cross-asset and cross-region validation, and 4) implementability. The authors stress that investors should consider only factors that are implementable in practice. Incorporating real-world constraints into implementability tests allows investors to identify the factors that deliver attractive risk–return trade-offs after accounting for transaction costs and investment constraints.