Discovery of a 13-Sharpe OOS Factor: Drift Regimes Unlock Hidden Cross-Sectional Predictability
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arXiv
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| Formato: | Preprint |
| Publicado: |
2025
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| _version_ | 1866908656896835584 |
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| author | Singha, Mainak |
| author_facet | Singha, Mainak |
| contents | We document a high-performing cross-sectional equity factor that achieves out-of-sample Sharpe ratios above 13 through regime-conditional signal activation. The strategy combines value and short-term reversal signals only during stock-specific drift regimes, defined as periods when individual stocks show more than 60 percent positive days in trailing 63-day windows. Under these conditions, the factor delivers annualized returns of 158.6 percent with 12.0 percent volatility and a maximum drawdown of minus 11.9 percent. Using rigorous walk-forward validation across 20 years of S&P 500 data (2004 to 2024), we show performance roughly 13 times stronger than market benchmarks on a risk-adjusted basis, produced entirely out-of-sample with frozen parameters. The factor passes extensive robustness tests, including 1,000 randomization trials with p-values below 0.001, and maintains Sharpe ratios above 7 even under 30 percent parameter perturbations. Exposure to standard risk factors is negligible, with total R-squared values below 3 percent. We provide mechanistic evidence that drift regimes reshape market microstructure by amplifying behavioral biases, altering liquidity patterns, and creating conditions where cross-sectional price discovery becomes systematically exploitable. Conservative capacity estimates indicate deployable capital of 100 to 500 million dollars before noticeable performance degradation. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2511_12490 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Discovery of a 13-Sharpe OOS Factor: Drift Regimes Unlock Hidden Cross-Sectional Predictability Singha, Mainak Trading and Market Microstructure General Economics Economics Portfolio Management We document a high-performing cross-sectional equity factor that achieves out-of-sample Sharpe ratios above 13 through regime-conditional signal activation. The strategy combines value and short-term reversal signals only during stock-specific drift regimes, defined as periods when individual stocks show more than 60 percent positive days in trailing 63-day windows. Under these conditions, the factor delivers annualized returns of 158.6 percent with 12.0 percent volatility and a maximum drawdown of minus 11.9 percent. Using rigorous walk-forward validation across 20 years of S&P 500 data (2004 to 2024), we show performance roughly 13 times stronger than market benchmarks on a risk-adjusted basis, produced entirely out-of-sample with frozen parameters. The factor passes extensive robustness tests, including 1,000 randomization trials with p-values below 0.001, and maintains Sharpe ratios above 7 even under 30 percent parameter perturbations. Exposure to standard risk factors is negligible, with total R-squared values below 3 percent. We provide mechanistic evidence that drift regimes reshape market microstructure by amplifying behavioral biases, altering liquidity patterns, and creating conditions where cross-sectional price discovery becomes systematically exploitable. Conservative capacity estimates indicate deployable capital of 100 to 500 million dollars before noticeable performance degradation. |
| title | Discovery of a 13-Sharpe OOS Factor: Drift Regimes Unlock Hidden Cross-Sectional Predictability |
| topic | Trading and Market Microstructure General Economics Economics Portfolio Management |
| url | https://arxiv.org/abs/2511.12490 |