With the rapid development of factor investing, an increasing number of practitioners and researchers have published many insightful books on this topic. Reading these books can help investors better understand the concepts, methods, and applications of factor investing. This article summarizes and introduces some of the core ideas and key takeaways from several classic factor investing books in pdf format, providing a good starting point for learning about factor investing.
Fama and French’s factor models are the theoretical basis of factor investing
Eugene Fama and Kenneth French’s academic research on factor models laid the theoretical foundation for modern factor investing. Their influential paper ‘Common risk factors in the returns on stocks and bonds’ published in 1993 proposed the famous three-factor model, which uses market, size and value factors to explain stock returns. This model helps explain the cross-section of average stock returns better than the classical CAPM model. In their 2008 paper ‘Average returns, B/M, and share issues’, they incorporated profitability and investment factors and expanded the three-factor model into a five-factor model. These factor models reveal that stock returns are driven by common underlying risk factors, providing a solid basis for exploiting these factors to achieve excess returns.
Quantitative equity investing book explains how to construct equity factor portfolios
The book ‘Quantitative equity investing: techniques and strategies’ by Sebastian Ceria and Robert Stubbs provides a very accessible overview of how to implement factor investing in stocks in practice. It covers many key aspects including researching new factors, constructing factor portfolios, combining factors, managing risks and transaction costs, assessing performance and implementing factor strategies. The book also illustrates the factor investing process through a case study on the value factor. It demonstrates how to rank stocks based on valuation ratios, build factor portfolios using different weighting schemes, analyze the historical returns, risks and other characteristics of the value portfolio, and discuss implementation issues. This step-by-step example is very helpful for readers to understand the workflow of quantitative equity factor investing.
Books on smart beta explain the construction and evaluation of smart beta indices
With the popularity of smart beta investing, books focusing on smart beta indices have emerged. For example, ‘Smart Beta’ by Noël Amenc, Felix Goltz and Vedat Akgiray introduces the theoretical foundations, construction principles and empirical research on smart beta indices. It analyses how smart beta indices are constructed by applying different weighting schemes other than market capitalization weighting to capture factor premiums. The performance attribution, risk-return characteristics and portfolio diversification effects of different smart beta strategies are also discussed. Another book ‘Smart Beta’ by Jason Hsu focuses more on the evaluation and application of smart beta indices. It provides frameworks to understand the different smart beta strategies and evaluate which ones can benefit investors based on their goals, constraints and beliefs. These books can help readers gain useful knowledge about smart beta investing.
Books focusing on certain factors do deeper research on specific factors
While the general factor investing books cover a wide range of factors, there are also books doing more in-depth research on particular factors. For example, ‘Your Complete Guide to Factor-Based Investing’ by Andrew Berkin and Larry Swedroe gives an overview of the rationale, historical evidence, implementation and product choices for five major equity factors: value, size, momentum, quality and low volatility. ‘The Quality Investing Revolution’ by Per Högberg focuses on exploring the quality factor by testing different quality metrics and analyzing their efficacy in global stock markets. Readers can refer to these books to gain more thorough insights into specific factors and learn how to best harvest a certain factor premium.
In summary, the factor investing books introduced above reveal key theories, construction techniques, performance evaluations and applications of various factor strategies from different perspectives. Reading these books can provide investors with valuable knowledge and help them better implement factor investing.