Hands-On Machine Learning for Algorithmic Trading

Rationale

Quality factors may signal outperformance because superior fundamentals such as sustained profitability, steady growth in cash flow, prudent leveraging, a low need for capital market financing or low financial risk underpin the demand for equity shares and support the price of such companies in the long run. From a corporate finance perspective, a quality company often manages its capital carefully and reduces the risk of over-leveraging or over-capitalization.

A behavioral explanation suggests that investors under-react to information about quality, similar to the rationale for momentum where investors chase winners and sell losers. Another argument for quality premia is a herding argument similar to growth stocks. Fund managers ...