Quantpedia has already covered a countless number of factor investing strategies and articles, from strategies in our Screener to multiple blog posts. Therefore, we can confidently say that we do like factor investing. However, there is always new research with a unique point of view. For example, we recently found a paper focused on the decay of the factor exposures of equity factor strategies. The study examines five factors: Value, Momentum, Quality, Investment, and Low Volatility, across 12 developed and emerging markets over a 20-year period. This research aims to find out how long it takes for a factor to decay after the portfolio is assembled. In other words, how often should the portfolio be rebalanced? 

Since recessions and bear markets come hand in hand for several asset classes, recession predictions have always been the foremost concern. The yield curve slope, defined as the difference between long and short-term rates, is the leading indicator backed by numerous research papers. Hansen (2021) builds on this theorem, but the author improves the recession prediction by his empirical observation that the VIX index (index of implied equity volatility or fear index) and the slope co-move in counterclockwise cycles, which align with business cycles.

Risk and diversification are critical interests of every investor, especially when things go south since the correlations across assets tend to rise during stressful times. Therefore, in the asset allocation, the risk parity allocation is one of the key topics. Factors are commonly known as underlying sources of both risk and returns, and it is assumed that they can be utilized to achieve superior risk-adjusted returns and diversification. However, there seems to be a lack of research that would be related to the macro factors. This gap is quite striking since there is a general consent that macro factors (for example, inflation) largely influence the broad set of assets. Amato and Lohre (2020) research paper fills the gap and studies the usage of macro factors as diversifiers in asset allocation.

The authors divide the macro factors to two groups, where the first consists of TERM, MARKET, USD, OIL and DEF (default risk), and the second group consists of CLI (a measure of output by OECD), G7.INFLATION, G7.Short.Rate and VIX. The research shows, that when the diversification matters the most, only the second group improves both the risk and returns, acting as a successful diversification during various economic regimes and particularly, during high economic uncertainty. Overall, the paper offers exciting insights into diversification and macro factors, accompanied by more complex mathematical models definitely worth looking into.