How To Build An Actually Useful Factor Model (opens in new tab)

You’ll often see new papers describing “so and so” as a new factor being discovered, and they will often cite some Sharpe/t-stat as the primary reason why this should be considered as a “factor” that explains the cross-section of stock returns. Unfortunately, the truth is that most of them are not novel factors and can hardly be considered useful, because using t-stat as a measure of importance/success is using the wrong metric / asking the wrong questions when building a factor model. We’ve ...