Transcript Quantitative Stock Selection: Transfer Coefficients Campbell R. Harvey Duke University National Bureau of Economic Research.

Quantitative Stock Selection:
Transfer Coefficients
Campbell R. Harvey
Duke University
National Bureau of Economic Research
Transfer Coefficients
1. Certain factors induce excessive
turnover.
2. Example is a reversal factor, such as a
lagged return.
3. Selection routine needs to balance the
information in the signal with the cost of
implementing
Transfer Coefficients
4. One approach is to limit turnover. For example,
a factor might induce 120% annual turnover.
One might impose a constraint to limit the
turnover to approximate 60% per year.
5. To implement in terms of scoring screens,
suppose in any month about 10% of the stocks
leave or are added (120% per year).
(a) Calculate the difference between the old scores
and the new scores. Consider the highest 25th
percentile moves and the lowest 25th percentile
moves. Ignore the middle.
Transfer Coefficients
5. (b) Consider the old ranking and the new
ranking. Only consider the stocks that
move up and down a lot. For example, if
you have quintiles with 100 stocks in
each, and stock XYZ drops from rank
100 (Q1) to 101 (Q2) you do not sell
(assuming you are long Q1 and short
Q5)
Transfer Coefficients
6. Alternatively, one can smooth the signal. For
example, instead of looking at RR you look at
a three month moving average of RR. The
smoother factor will induce less rebalancing.
7. Both of these techniques degrade the signal
from the factor. The transfer coefficient is the
correlation between your signal changes and
your weight changes.