Why Has Factor Investing Failed?: The Role of Specification Errors
A 2024 paper by de Prado and Zoonekynd on factor investing in equities, using a linear factor model: the abstract does not mention a benchmark, an out-of-sample test, transaction costs, multiple testing or the size of the universe.
“We prove that specification errors can cause factor strategies to underperform and potentially yield systematic losses, even if all risk premia remain constant and are estimated with the correct sign.”
AssetEquities
StrategyFactor investing
TechniqueLinear factor modelmathematical derivation
Missing from abstract: benchmark, out-of-sample test, costs, multiple testing, universe
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