Investigating quality minus junk : the role of shorting, market beta, firm size and value in the quality minus junk anomaly

Abstract

The quality factor of Asness, Frazzini and Pedersen (2013) combines several quality dimensions, identified in previous literature, into one strategy which presents an asset pricing puzzle of quality being positively correlated with prices yet very weakly describing them, and at the same time quality minus junk being significantly profitable. I document similar results by following their construction methodology and observe QMJ profits to be dominated by the short side. I find that quality and value are hedges and higher returns can be achieved by combining the two strategies. I also find evidence of a robust size effect and the beta anomaly by sorting quality within size and market beta portfolios. Lastly, I observe that a managed volatility portfolio, which limits risk exposure when volatility is high, produces a significant alpha for quality.