Picking factors for an algorithm using the fundamental factor models lecture.

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Picking factors for an algorithm using the fundamental factor models lecture.

posted Aug 7, 2018

Hi,
Sorry for the very basic question as I am new to this. Nevertheless...

I am using Quantopian to make my first algorithm and have been stuck on doing some factor analysis for the past few days. In the lecture on fundamental factor models, they show how to estimate the risk premiums for your factors, using some code for regressions on returns.
I understand that the estimates for risk premia is the additional reward in your algorithm you get for exposing yourself to that fundamental factor. However, when analysing a basic 6-month momentum factor I get a negative risk premium coefficient using the code in the lecture. Despite this, when analysing the factor individually using alphalens over the same time frame, it clearly has some positive predictive power of returns, (the 1st and 5th quantiles of equities have clear positive (0.59) and negative (-0.16) mean averages of returns).

Why is this?
and...
Should you t-test the risk premiums to decide if factors are statistically significant, or the coefficients from the initial regression of your factors against returns?

Thanks for the help.

1 response

Joakim Arvidsson (Cream Mongoose)

Hi Michael,

Welcome! I'd recommend posting this question in the recent Alphalens Questions thread. I have a lot of similar questions, and I've posted all of mine there.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.