Causal Factor Investing: Can Factor Investing Become Scientific?

Virtually all journal articles in the factor investing literature make associational claims, in denial of the causal content of factor models. Authors do not identify the causal graph consistent with the observed phenomenon, they justify their chosen model specification in terms of correlations, and they do not propose experiments for falsifying causal mechanisms. Absent a causal theory, their findings are likely false, due to rampant backtest overfitting and incorrect specification choices. This Element differentiates between type-A and type-B spurious claims, and explains how both types prevent factor investing from advancing beyond its current phenomenological stage. It analyzes the current state of causal confusion in the factor investing literature, and proposes solutions with the potential to transform factor investing into a truly scientific discipline. This title is also available as Open Access on Cambridge Core.

Author: Marcos M. López de Prado
Publisher: Cambridge University Press
Published: 11/09/2023
Pages: 75
Binding Type: Paperback
Weight: 0.30lbs
Size: 9.00h x 6.00w x 0.19d
ISBN13: 9781009397292
ISBN10: 100939729X
BISAC Categories:
- Business & Economics | Finance | General
- Business & Economics | Investments & Securities | General