On the other hand, we have the orderly 5-factor model. expecting each factor to remain positive in the out-of-sample. Just like quants spent many years explaining to fundamental investors that quant is about getting baskets of stocks to outperform and not about predicting any individual stock, the same logic applies to factors: factor models are about creating baskets of factors that perform vs. Hence to pass a go/no go judgement on any given ratio just based on its t-statistic is, in my opinion, to miss the point of the early stage of research.Įven if many factor-species will vanish and end up in the factor museum, it is still better to have idea diversity than total homogeneity. Looking at any univariate factor applied to the entire universe is not the end of factor investing, but only a small beginning, a sort of idea sketch. And these details add up to big difference at the model level. Quants know that even a simplest factor like Earnings to Price can be defined in dozens of ways with normalization, adjustments, smoothing, trailing, filtering, lagging, contextualizing etc. And what about all the type II errors i/e failing to innovate?ĭoes anyone expect every sketch and painting by Picasso to be a complete masterpiece? Does anyone expect every song on an album to be the best hit? Many individual factors are indeed likely to be noise, but that does not invalidate the final combination of factors that produces positive model returns.ĭo factors with the higher backtest t-stats perform any better out-of-sample than then ones with lower but still significant ones? Less data-mining, is not going to solve the problem of failing to assemble models that work.ĭoesn’t focusing on t-stat alone seems incomplete? For example the Size factor has been accepted by the Noble Prize winner Professor Fama with a robust theoretical backing, and yet it doesn’t pass Professor Harvey’s adjusted t-stat. The least data-mined and most academically accepted narrow definitions of quant factors have had flat returns for a couple of decades now (you can see for yourself here) making them candidates for a factor museum rather than a factor zoo. Ironically, which is perhaps subtlety intentional, it feels like the mega-list of factors in the paper is an invitation to quants to browse and look for factor ideas they might have missed instead of the direct implication of the paper that most factors on that list should be avoided (see a top 10 list of quant mega-multi-factor papers here) To sum it up, it says that there are too many data-mined factors out there and that we should be using much higher t-statistics to accept factors. A typical use of the NATO Phonetic Alphabet would be to spell out each letter in a word over the phone by saying, for example: "S as in Sierra" (or "S for Sierra"), "E as in Echo, Y as in Yankee, F as in Foxtrot, R as in Romeo, I as in India, E as in Echo, D as in Delta" to communicate the spelling of the name "Seyfried" correctly.Here are my 8-thoughts and 1 solution idea about Campbell Harvey and Yan Liu’s recently released paper on their influential concept of the factor zoo.These are used to avoid misunderstanding due to difficult to spell words, different pronunciations or poor line communication.
Spelling alphabets, such as the NATO Phonetic Alphabet, consists of a set of words used to stand for alphabetical letters in oral communication.The NATO Phonetic Alphabet is instead a spelling alphabet (also known as telephone alphabet, radio alphabet, word-spelling alphabet, or voice procedure alphabet). Phonetic alphabets are used to indicate, through symbols or codes, what a speech sound or letter sounds like. Contrary to what its name suggests, the NATO Phonetic Alphabet is not a phonetic alphabet.military and has also been adopted by the FAA (American Federal Aviation Administration), ANSI (American National Standards Institute), and ARRL (American Radio Relay League). Thus this alphabet can be reffered as the ICAO/ITU/NATO Phonetic Alphabet or International Phonetic Alphabet. The NATO (North Atlantic Treaty Organization) Phonetic Alphabet is currently officially denoted as the International Radiotelephony Spelling Alphabet (IRSA) or the ICAO (International Civil Aviation Organization) phonetic alphabet or ITU (International Telecommunication Union) phonetic alphabet.
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