Virtually all journal articles in the Factor Investing literature make associational claims, instead of Causal claims.
This title is also available as Open Access on Cambridge Core..
It analyzes the current state of Causal confusion in the Factor Investing literature, and proposes solutions with the potential to transform Factor Investing into a truly scientific discipline.
This Element differentiates between type-A and type-B spurious claims, and explains how both types prevent Factor Investing from advancing beyond its current phenomenological stage.
Absent a Causal theory, their findings are likely false, due to rampant backtest overfitting and incorrect specification choices.
Authors do not identify the Causal graph consistent with the observed phenomenon, they justify their chosen model specification in terms of correlations, and they do not propose experiments for falsifying Causal mechanisms.
Virtually all journal articles in the Factor Investing literature make associational claims, instead of Causal claims
