Quoniam experts publish paper in the Journal of Banking & Finance with Professor from Goethe University Frankfurt

Dr Claudia Zunft and Dr Volker Flögel of Quoniam Asset Management teamed up with Prof Dr Christian Schlag from Goethe University Frankfurt to explore the value-added of short-term momentum in factor portfolios. Their work was recently published in the Journal of Banking & Finance.

Can you explain in a nutshell what your paper is about?

It is well known that the performance of equity factor portfolios is subject to intermediate periods of downturns. Examples are the significant underperformance of small caps in the 1980s and 1990s, the momentum crash in 2009, and the poor performance of value that started after the financial market crisis at the latest and lasted for more than a decade. Against this background, it appears worthwhile to engage in so-called “factor timing,” i.e., to overweight a factor when its expected excess return is high and to scale the factor exposure down when the expected excess return is low.

In our paper, we explore a powerful predictor of factor excess returns, namely the last-month excess return of the factor itself. We find that a high excess return of a factor in the last month (relative to past levels) also predicts a high excess return in the next month, and vice versa. In other words, there is time series momentum in equity factors. This is true for the most popular factor portfolios in many global developed markets including Europe and applies in various sample periods including times of crisis.

Momentum-managed factors are not spanned by well-known timing strategies that employ, e.g., factor volatility or valuation. Importantly, the benefits associated with momentum-based factor timing survive transaction costs and carry over to simple multi-factor portfolios that take static and equal weights in the factors. However, real-life multi-factor portfolios are usually based on an optimisation with sophisticated alpha and risk forecasts and a battery of constraints. The transfer of timing-based profits into these complex portfolios remains a challenge and deserves further research, which is beyond the scope of our paper.

„For the majority of factors, our strategies appear successful especially in recessions and times of crisis.“

Dr Claudia Zunft
Research Forecasts

Did your findings turn out as expected, or were there surprises?

The various equity factors are characterized by completely different return characteristics and distributions. Against this background, I was surprised to see that time series momentum pervasively predicts excess returns of, basically, all popular factor portfolios including value, momentum, and the market portfolio. In addition, most related papers investigate the timing ability of a predictor and document predictive power for the excess returns of a single factor only.

Moreover, I find it remarkable that the benefits associated with momentum-based factor timing carry over to simple multi-factor portfolios. The authors of a related paper study valuation-based factor timing and find weak evidence on performance enhancements in simple multi-factor portfolios. They attribute this finding to, among other things, the high degree of diversification in multi-factor portfolios, which is intuitive to me.

Altogether, the predictive power of factor momentum for the multitude of single-factor portfolios and the transfer of the timing-induced benefits into simple multi-factor portfolios substantiate that factor momentum is a pervasive empirical phenomenon.

Your LinkedIn profile states that you are a “passionate Quant researcher.” What did passion mean as your team worked on this paper?

There are many papers out there that claim that factor timing does, basically, not work. Given that the probability of receiving a disappointing outcome was huge, we discussed whether we should, actually, start a research project on factor timing. Our final decision to explore the topic was purely driven by our scientific curiosity. Put differently, we really wanted to understand whether factor timing is truly dead or not. This is what passion means to me: the willingness to take a chance although we might fail.

f. l. t. r. Dr Claudia Zunft, Prof Dr Christian Schlag, Dr Volker Flögel


Managed portfolios that exploit positive first-order autocorrelation in monthly excess returns of equity factor portfolios produce large gains in Sharpe ratios. We document this finding for factor portfolios formed on the broad market, size, value, momentum, investment, profitability, and volatility. The value-added induced by factor management via short-term momentum is a robust empirical phenomenon that survives transaction costs and carries over to multi-factor portfolios. The novel strategy established in this work compares favorably to well-known timing strategies that employ e.g. factor volatility or factor valuation. For the majority of factors, our strategies appear successful especially in recessions and times of crisis.

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