Hands-On Machine Learning for Algorithmic Trading

Quality factors

The quality factor aims to capture the excess return on companies that are highly profitable, operationally efficient, safe, stable and well-governed, in short, high quality, versus the market. The markets also appear to reward relative earnings certainty and penalize stocks with high earnings volatility. A portfolio tilt towards businesses with high quality has been long advocated by stock pickers that rely on fundamental analysis but is a relatively new phenomenon in quantitative investments. The main challenge is how to define the quality factor consistently and objectively using quantitative indicators, given the subjective nature of quality.

Strategies based on standalone quality factors tend to perform in a counter-cyclical ...