From theory to practice: Polish equity risk factors and their implementation costs

<ns3:p>This paper investigates the performance and implementability of equity factor strategies – value, momentum, quality, and low volatility (defensive) – in the Polish stock market over the 2014–2024 period. The ‘academic’ factors constructed as long-short portfolios are found to produce positive returns with low (or negative) correlation with the broad market. However, once transaction costs – including bid-ask spreads, commissions, and market impact – are incorporated, net factor returns deteriorate substantially, losing much of their appeal. The absence of a developed short-selling market in Poland further challenges the direct replication of traditional academic factor models. Despite these frictions, factor signals can still add value in a long-only framework, particularly when turnover constraints and liquidity filters are introduced. Backtests of factor-tilted portfolios demonstrate that smart beta-style implementations, especially those complemented by short positions in WIG20 index futures neutralizing market exposure, offer a viable alternative to pure long-short factor strategies.</ns3:p>