A fundamental approach to quantitative equity portfolio management

Abstract

The aim of the present paper is to determine the explanatory power of three fundamental factors in cross-sectional stock returns. In order to do so, these three factors were combined with the Carhart four factor model. Results revealed that from 2006 to 2015, the Size factor of Fama and French and the twelve month Momentum of Jegadeesh and Titman had no statistical power in explaining the cross-sectional stock returns. Conversely, the Value and Market Beta factors of Fama and French, and the fundamental factors EBITDA/Sales, CFO/Capex, Price/CFO have demonstrated to be all statistically significant in explaining the cross-sectional stock returns in the period in analysis. It was also found that portfolios constructed monthly, using a Long/Short strategy in which one buys the top quintile and sells the lowest quintile, are able to produce statistically significant abnormal returns, or alpha. The abnormal returns are determined using as control factors, or benchmark, the returns of the Fama and French three factor strategy in the European market. Furthermore, the Long/Short strategy is negatively and positively exposed to the Size portfolio and to the Value portfolio, respectively, of the Fama and French three factor model.

Date of Award	27 Oct 2016
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	José Corrêa Guedes (Supervisor)