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Empirical Asset Pricing and Factor Investing / Implementable factor portfolios

Factor decay

A book-to-price score that is almost the same set of names next quarter can still be a forecast that has already been paid. Score autocorrelation and information-coefficient decay are different clocks. The first says the rank persists. The second says the rank still lines up with the next return. The retirement rule for a live strategy is the monitoring shell. This note defines the two clocks for a characteristic portfolio and states which one a rebalance is allowed to trust.
Learning objectives. By the end of this note you should be able to:
  • define the horizon information coefficient and the lagged information coefficient, and give the December 31 example of each;
  • explain why momentum information coefficients are described as decaying faster than value information coefficients, without quoting a half-life the extract does not give;
  • separate overlapping-window bias in the standard error from genuine decay;
  • use selection, sizing, and timing as the performance split that shows whether a decaying idea is still being sized as if it were fresh.

In this lesson

  1. Two correlations that share a forecast date
  2. What decay does inside a book that is already on

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