Dynamic Factor Strategies: Navigating Business Cycle Adaptation With Factor Timing

Abstract

In this study, we explore the time-series variation in factor premia and its dependence on business cycle stages. Utilizing this observed variation, we devise a dynamic factor timing strategy that aligns with shifts in the business cycle. Our method involves identifying these business cycle regimes based on leading economic indicators and global risk appetite. The application of this framework yields a strategy that consistently delivers excess returns over static multifactor implementations and the market at large. Our findings reveal that the proposed framework is robust and statistically significant, underlining its practical viability across diverse market conditions and regions. This suggests that our dynamic approach offers significant potential for improved investment outcomes.