IQS Research Brief

Do Factors Persist Anymore?

April 29, 2009

In this IQS Research Brief, we take a look at the persistence of factors in this latest environment.

Historically, factors had persistence – if a factor was skillful in forecasting returns today, it was likely the factor
would still be skillful 4 weeks from now. Similarly, if a factor had no skill today, it probably would not have
any skill in the near future. Is this still true?

We measure skill using the information coefficient (IC), which is the rank correlation between the model scores
and the subsequent returns. The better the agreement, the higher is the IC. To determine the level of
persistence, we calculate the correlation between the IC now and the IC 1, 4 and 8 weeks from now. The more
they move directionally together, the more positive the correlation. The more they disagree, the more negative
the correlation. Positive correlation indicates persistence; negative correlation indicates reversal. Slow moving
fundamental factors are expected to persist.

Let’s take a look at the numbers below showing the “persistence” for the 5 IQS factor categories from 2004
through May 2007 and since June 2007. The attached pages show graphs of persistence across time (36 week
moving average) for each factor category at the four-week persistence level.

One-Week Factor Persistence Chart

Momentum Value Balance Sheet Improving Sentiment
Financials
June 2004 – -.060 .022 .133 -.045 -.004
May 2007
June 2007 - .193 .085 .119 .166 .153

Four-Week Factor Persistence Chart

Momentum Value Balance Sheet Improving Sentiment
Financials
June 2004 – .091 .148 -.004 .150 .107
May 2007
June 2007 - -.115 -.092 -.049 -.012 -.046
IQS Brief – Do Factors Persist Anymore?

Eight-Week Factor Persistence Chart

Momentum Value Balance Sheet Improving Sentiment
Financials
June 2004 – -.018 .089 .104 .152 .033
May 2007
June 2007 - -.010 -.043 -.156 -.132 .003

Observations:
One-Week factor persistence for very few factors in the past, but persistence is now realized for all 5 factor
categories!
Four-Week and Eight-Week factor persistence was positive in the past, but now they are negative!
Improving Financials is expected to have longer-period persistence, which it consistently had at four-week and
eight-week, but not recently.
Momentum does not have persistence over long periods, and wouldn’t expect it to.
Value is expected to have persistence over long periods, and did so in the past, but not recently.

Conclusions:
Quantitative weighting schemes need to look back at the past to help forecast the future, with the assumption
that persistence exists. With negative persistence recently, the better plan is to weight factors opposite what has
performed well by incorporating the persistence information above into the process.
Based on the results above, shorter-term trading models would have performed well since June 2007, while
longer-term models would have performed better previously.
 Graphs of Four-Week Persistence
Correlation Calculations of 36 Week moving average

Momentum Category Model

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