Sharpen Quality Investing: A PLS-based Approach

Sharpen Quality Investing: A PLS-based Approach

• Zixuan Jiao, Stuart Management Science Ph.D. student

Abstract:

We apply a disciplined dimension reduction technique called Partial Least Square (PLS) to construct a new quality factor by aggregating information from 16 individual signals. It earns significant risk-adjusted returns and outperforms quality factors constructed by alternative techniques. We show our quality factor performs even better during rough economic patches and thus appears to hedge periods of market distress. We further show adding our quality factor to an opportunity set consisting of the other classical factors increases the maximum Sharpe ratio.

 

All Illinois Tech faculty, students, and staff are invited to attend.

The Friday Research Presentations series showcases ongoing academic research projects conducted by Stuart School of Business faculty and students, as well as guest presentations by Illinois Tech colleagues, business professionals, and faculty from other leading business schools.

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