External Research – Risk Premia

On this page we present various interesting research articles for Risk Premia strategies (with the exception of Trend Following)

Performance Decay

Why and how systematic strategies decay (Antoine Falck, Adam Rej, David Thesmar)

In this paper, we propose ex-ante characteristics that predict the drop in risk-adjusted performance out-of-sample for a large set of stock anomalies published in finance and accounting academic journals. Our set of predictors is generated by hypotheses of OOS decay put forward by McLean and Pontiff (2016): arbitrage capital flowing into newly published strategies and in-sample overfitting linked to multiple hypothesis testing. The year of publication alone – compatible with both hypotheses – explains 30% of the variance of Sharpe decay across factors: Every year, the Sharpe decay of newly-published factors increases by 5ppt. The other important variables are directly related to overfitting: the number of operations required to calculate the signal and two measures of sensitivity of in-sample Sharpe to outliers together add another 15% of explanatory power. Some arbitrage-related variables are statistically significant, but their predictive power is marginal.

Download the paper here: https://arxiv.org/abs/2105.01380