Quant Mashup - Larry Swedroe
Beyond Efficient Markets [Larry Swedroe]
Andrew Lo is a professor of finance and the director of the Laboratory for Financial Engineering at MIT’s Sloan School of Management. His research spans a wide range of topics, including the empirical validation and implementation of financial asset pricing models; the pricing of options and other
- 6 years ago, 9 Aug 2017, 11:11pm -
Factor Persistence & Diversification [Larry Swedroe]
Financial research has uncovered many relationships between investment factors and security returns. Given that popularity is a curse in investing, the growing popularity of factor investing has led to worries that factors have become overvalued, posing risks to investors in these strategies. For
- 6 years ago, 8 May 2017, 12:11pm -
Do Price Multiples Predict Market Returns? [Larry Swedroe]
A large body of work demonstrates that price multiples, such as the dividend-to-price ratio, predict stock returns. As a result, modern asset pricing theory increasingly incorporates time-varying expected returns. The majority of the empirical work underpinning these findings uses U.S. stock market
- 6 years ago, 4 Apr 2017, 07:14am -
Do ETFs Harvest Factors & Shrink Premiums? [Larry Swedroe]
Financial research has uncovered many relationships between investment factors and stock returns. For investors, an important question is whether the publication of this research can impact the future size of factor premiums. Asking this question is crucial on two fronts. First, if anomalies are the
- 6 years ago, 1 Apr 2017, 10:25am -
A More Complex View On Value [Larry Swedroe]
Eugene Fama and Kenneth French’s 1992 paper, “The Cross-Section of Expected Stock Returns,” resulted in the development of the Fama–French three-factor model. This model added the size and value factors to the market beta factor. As my co-author, Andrew Berkin, and I demonstrate in “Your
- 6 years ago, 29 Mar 2017, 07:25pm -
The Downside Of Momentum [Larry Swedroe]
Momentum has been found to be a persistent and pervasive factor in the returns not only of equities, but in other asset classes (including bonds, commodities and currencies). With equities (compared to the market, value, size, profitability and quality factors), during the period 1927 through 2015,
- 7 years ago, 2 Mar 2017, 09:21pm -
Predictive Nature Of Valuations [Larry Swedroe]
As we approach the end of 2016, the Shiller CAPE 10 stands at about 28, a level rarely exceeded (with the exception of in the late-1990s technology-driven bull market). Such heights cause many investors to worry about what current valuations may mean for future expected returns. I’ll try to
- 7 years ago, 31 Dec 2016, 08:58pm -
Sorting Through The Factor Zoo [Larry Swedroe]
As Professor John Cochrane observed, the literature on investment factors now fills a veritable “factor zoo” with hundreds of options. How do investors select from among this huge array of possibilities? Noah Beck, Jason Hsu, Vitali Kalesnik and Helge Kostka, authors of the paper “Will Your
- 7 years ago, 22 Dec 2016, 05:03pm -
Here's A Better Measure Of Value [Larry Swedroe]
Eugene Fama and Kenneth French’s seminal 1992 paper, “The Cross-Section of Expected Stock Returns,” resulted in the development of the Fama-French three-factor model. This model added the size and value factors to the market beta factor. One of the benefits of adding the value factor (the
- 7 years ago, 29 Nov 2016, 06:48pm -
The Perils Of Bargain Hunting [Larry Swedroe]
As I have been discussing in a series of articles (which you can find here, here and here), we now have a substantial body of evidence demonstrating that individual investors possess a preference for low-priced equities. This is anomalous behavior, because the level of a company’s stock price is
- 7 years ago, 20 Nov 2016, 11:11am -
Diversification For The Long Term [Larry Swedroe]
The table below, taken from the newly released book I co-authored with Andrew Berkin, “Your Complete Guide to Factor-Based Investing,” shows the annual premium and Sharpe ratio for the equity factors of market beta, size, value, momentum, profitability and quality. It also shows the odds that
- 7 years ago, 13 Nov 2016, 09:41am -
Bottom-Up Works Best With Multiple Factors [Larry Swedroe]
CAPM was the first formal asset pricing model. Market beta was its sole factor. With the 1992 publication of their paper, “The Cross-Section of Expected Stock Returns,” Eugene Fama and Kenneth French introduced a new-and-improved three-factor model, adding size and value to market beta as
- 7 years ago, 5 Nov 2016, 10:40am -
Low Priced Stocks No Bargain [Larry Swedroe]
As I wrote about last week, the absolute level of a firm’s stock price is arbitrary, as it can be easily manipulated by the firm through altering the number of shares outstanding (for example, by splitting the stock). Despite this obvious fact, the research into investor behavior has found a
- 7 years ago, 2 Nov 2016, 09:31am -
Published Results Impact Future Results [Larry Swedroe]
Financial research has uncovered many relationships between investment factors and stock returns. For investors, an important question is whether the publication of this research can impact the future size of factor premiums. Asking this question is crucial on two fronts. First, if anomalies are the
- 7 years ago, 24 Oct 2016, 08:55am -
More Reasons To Diversify Factors [Larry Swedroe]
Since the publication in 1992 of Eugene Fama and Kenneth French’s paper “The Cross-Section of Expected Stock Returns,” the traditional way to think about diversification has been to view portfolios as a collection of asset classes. However, we now have a nontraditional way to think about
- 7 years ago, 10 Oct 2016, 03:06pm -
Low Vol Strategies In A More Nuanced Light [Larry Swedroe]
One of the biggest problems for the first formal asset pricing model developed by financial economists, the CAPM, was that it predicted a positive relation between risk and return. But empirical studies have found the actual relation to be flat, or even negative. Over the last 50 years the most
- 7 years ago, 6 Oct 2016, 09:43am -
Is Momentum Really Dead? [Larry Swedroe]
Earlier this week, we examined a study that sought to determine whether the publication of academics’ findings on the momentum factor have led to a disappearing premium. To review, Steven Dolvin and Bryan Foltice, authors of the 2016 study “Where Has the Trend Gone? An Update on Momentum Returns
- 7 years ago, 23 Sep 2016, 02:06pm -
Why Momentum Is Struggling [Larry Swedroe]
Momentum is the tendency for assets that have performed well (poorly) in the recent past to continue to perform well (poorly) in the future, at least for a short period of time. Mark Carhart, in his 1997 study “On Persistence in Mutual Fund Performance,” was the first to use momentum, together
- 7 years ago, 19 Sep 2016, 09:33am -
A Persistent Kind Of Momentum [Larry Swedroe]
Time-series momentum examines the trend of an asset with respect to its own past performance. This is very different than cross-sectional momentum (often referred to as Carhart momentum), which compares the performance of an asset with respect to the performance of another asset. Ian D’Souza,
- 7 years ago, 16 Sep 2016, 10:48am -
Trend Following Works Weakest After Crises [Larry Swedroe]
Time-series momentum examines the trend of an asset with respect to its own past performance. This is different than cross-sectional momentum (often referred to as Carhart momentum), which compares the performance of an asset with respect to the performance of another asset. Research into
- 7 years ago, 8 Sep 2016, 02:31am -
Use Caution With Low Vol Strategies [Larry Swedroe]
As we have discussed before, one of the major problems for the first formal asset pricing model developed by financial economists, the capital asset pricing model (CAPM), was that it predicts a positive relation between risk and return. But empirical studies have found the actual relation to be
- 7 years ago, 22 Aug 2016, 02:48am -
Low Vol Benefits Fading [Larry Swedroe]
Low-volatility strategies have quickly become the darling of many investors, thanks largely to trauma caused by the bear market that arose from the 2008-2009 financial crisis combined with academic research showing that the low-volatility anomaly exists in equity markets around the globe. Earlier
- 7 years ago, 11 Aug 2016, 11:55am -
Low Vol Advantage Not What You’d Expect [Larry Swedroe]
One of the problems for the first formal asset pricing model developed by financial economists, the Capital Asset Pricing Model (CAPM), was that it predicted a positive relationship between risk and return. However, empirical studies have found the actual relationship to be flat, or even negative.
- 7 years ago, 9 Aug 2016, 04:19am -
Consider Factors In Fixed Income [Larry Swedroe]
It’s been well-documented that, in equity investing, assets have earned premiums because they are exposed to the risks of a certain factor. Given that the literature provides us with a veritable factor “zoo” (there are more than 300), for investors to consider adding exposure to a factor, it
- 7 years ago, 27 Jun 2016, 09:08am -
CAPE 10 Ratio In Need Of Context [Larry Swedroe]
The Shiller cyclically adjusted (for inflation) price-to-earnings ratio—referred to as the CAPE 10 because it averages the last 10 years’ earnings and adjusts them for inflation—is a metric used by many to determine whether the market is undervalued, fairly valued or overvalued. Employing a
- 7 years ago, 20 Apr 2016, 11:02am -
Glamour Can Distract Investors [Larry Swedroe]
There’s very strong historical evidence to support the existence of a value premium in equity markets. While there’s no dispute over the existence of the value premium (value stocks have provided an annual average return 5% higher than growth stocks over the long term), there is much debate over
- 7 years ago, 28 Mar 2016, 01:12pm -
Spikes Can Explain Returns [Larry Swedroe]
Recently there has been a lot of research on the question of whether higher moments of return other than volatility (specifically, the skewness of returns) helps to explain equity returns. (I’ve included a brief definition of skewness and a demonstrative example of it below.) For instance, the
- 7 years ago, 25 Mar 2016, 05:05am -
When Trading Detracts From Alpha [Larry Swedroe]
As explained in my latest book, “The Incredible Shrinking Alpha,” which I co-authored with Andrew Berkin, accompanying the rapid growth of the actively managed mutual fund industry, the average performance of mutual funds has been trending downward over the past few decades. Teodor Dyakov, Hao
- 7 years ago, 21 Mar 2016, 02:46pm -
Don’t Bother Timing Premiums [Larry Swedroe]
Because of the magnitude, persistence, pervasiveness and robustness of their related premiums, several factors have dominated the academic literature. Among them are market beta, size, value, momentum and profitability. However, despite their persistence, each factor has undergone even fairly long
- 8 years ago, 18 Mar 2016, 02:48pm -
Testing The Beta Premise [Larry Swedroe]
One of the most important issues in finance concerns the relationship between risk and expected return. John Lintner, William Sharpe and Jack Treynor are generally given most of the credit for introducing the first formal asset pricing model, the capital asset pricing model (CAPM), which was
- 8 years ago, 16 Mar 2016, 06:32pm -
Trend Following Works [Larry Swedroe]
The academic research has provided investors with strong evidence that there is a small group of factors-or sources of returns-that have provided higher returns over the long term. To be considered among this group, the evidence should have the following characteristics: Persistence-it holds across
- 8 years ago, 4 Mar 2016, 04:08am -
Volatility Threatens Discipline [Larry Swedroe]
This is my fourth article in a series devoted to helping investors stay disciplined in the face of market volatility—and even lengthy periods of underperformance by risky assets. The first was a December 2015 post dealing with what I call “investment depression.” The second was a January post
- 8 years ago, 26 Feb 2016, 11:45am -
Don’t Buy Winners [Larry Swedroe]
For almost five decades, the literature on the investment performance of mutual funds has found that very few managers possess sufficient stock-picking or market-timing talent to allow them to consistently and reliably produce positive risk-adjusted performance after considering their fees. In other
- 8 years ago, 19 Feb 2016, 12:41pm -
More Small-Cap Quirks [Larry Swedroe]
Given recent performance, the question of whether small-cap stocks really do outperform over time has made its way into the financial media. So far, we’ve sought to answer it by considering a multifactor approach and examining international evidence. Today we’ll tackle a behavioral explanation.
- 8 years ago, 12 Feb 2016, 10:44am -
When Risk Doesn’t Lead To Return [Larry Swedroe]
Among the more notable anomalies in modern finance is the finding that the lowest-beta stocks have produced higher returns than the highest-beta stocks. Another anomaly is that idiosyncratic (diversifiable) volatility negatively predicts equity returns. In other words, stocks with the lowest
- 8 years ago, 5 Feb 2016, 10:33pm -
The Truth About Credit Premiums [Larry Swedroe]
Interest rates, which have sat at or near historical lows during the past seven years, have led many investors to seek additional yield in the form of credit risk. The recent trend, and its popularity, gives us an opportunity to determine if this risk historically has been rewarded by examining the
- 8 years ago, 4 Jan 2016, 08:15am -
Why Index Investing Wins [Larry Swedroe]
J.B. Heaton, Nick Polson and J.H. Witte recently authored a nice short paper—it’s all of four pages—entitled “Why Indexing Works.” In it, the authors developed a simple stock selection model to explain why active equity fund managers tend to underperform their benchmark index. While most
- 8 years ago, 28 Dec 2015, 09:28am -
Using Factors To Lower Risk [Larry Swedroe]
Many investors today are confronting what could be considered a “perfect storm” that is creating strong head winds against the pursuit of higher expected returns. So far, we have discussed the main factors currently working against investors, as well as some steps they might consider taking to
- 8 years ago, 23 Dec 2015, 08:33am -
Don’t Blame Lack Of Dispersion [Larry Swedroe]
In a recent article, Advisor Perspectives editor Robert Huebscher noted: “During the last 40 years, an average of 60% of equity funds underperformed the S&P 500. But, according to the SPIVA data, 86.4% of large-cap managers underperformed their benchmark in 2014. The percentages were not much
- 8 years ago, 14 Dec 2015, 05:47am -
The Volatility Anomaly Uncovered [Larry Swedroe]
Recent academic papers have shown that low-volatility stocks have provided better returns than higher volatility stocks. What’s more, this is a global phenomenon. These findings, however, run counter to economic theory, which predicts that higher expected risk should be compensated with greater
- 8 years ago, 11 Dec 2015, 08:01am -
Rising Rates Don’t Doom REITs [Larry Swedroe]
As we have discussed many times, much of the “conventional wisdom” on investing is simply wrong. For our purposes, we can define conventional wisdom as those ideas that become so commonly accepted that they go unquestioned. Today we’ll look at the idea that rising interest rates would doom
- 8 years ago, 9 Dec 2015, 04:04am -
Default Risk Doesn’t Pay [Larry Swedroe]
There are many well-documented anomalies in finance. Among them is the surprisingly small return that investors historically have earned for taking credit risk in fixed-income markets—the default premium, as measured by the difference in returns between long-term Treasurys and long-term corporate
- 8 years ago, 7 Dec 2015, 11:57pm -
Ignore Liquidity At Your Peril [Larry Swedroe]
Liquidity is valuable to investors. Therefore, investors demand higher expected returns for less liquid stocks. The liquidity of an asset market refers to the ability of investors to buy and sell significant quantities of that asset, quickly, at low cost and without a major price concession. Thus,
- 8 years ago, 4 Dec 2015, 12:54pm -
Predictable & Skewed Returns [Larry Swedroe]
There has been a lot of research recently that investigates the link between stock returns and higher moments of the return distribution, specifically the skewness of returns. This link, unfortunately, is frequently ignored by more standard measures of market risk and volatility. Skewness, if
- 8 years ago, 2 Dec 2015, 11:32am -
Longer Lives Lower Interest Rates [Larry Swedroe]
Ever since the global financial crisis, the real interest rates of developed economies have remained in negative territory. Nominal interest rates hover near zero, and inflation rates, although quite low for historical standards, have remained positive (in most countries, at least on average).
- 8 years ago, 30 Nov 2015, 11:20pm -
When Risk Goes Unrewarded [Larry Swedroe]
Risk-based asset pricing theory suggests, simply, that assets bearing a higher risk should compensate investors with higher returns. While most papers investigating the risk-return relationship of assets are focused on equity markets, surprisingly few studies explore this phenomenon in currency
- 8 years ago, 26 Nov 2015, 03:32pm -
A Classic Factor Model Improves [Larry Swedroe]
There has been a great deal of focus by the academic community in recent years on fine-tuning the various factor models used to explain the differences in returns of diversified portfolios. Marie Lambert, Boris Fays and Georges Hubner contribute to the literature with their 2015 paper, “Size and
- 8 years ago, 19 Nov 2015, 04:06pm -
Valuation Metrics In Perspective [Larry Swedroe]
It’s well-established in the literature that valuation metrics—such as the dividend yield (D/P) and the earnings yield (E/P), as well as its cousin, the Shiller CAPE 10—provide important information in terms of future expected returns. In fact, these metrics are the best that investors have
- 8 years ago, 11 Nov 2015, 10:59am -
Dividends An Illogical Preference [Larry Swedroe]
A large body of literature examines whether managers of actively managed funds add value to their investors by generating abnormal returns. Unfortunately, not only do the vast majority fail to do so, but the evidence, as presented in my book, “The Incredible Shrinking Alpha,” demonstrates that
- 8 years ago, 6 Nov 2015, 03:45pm -
‘Cycle Factor’ Can Predict Returns [Larry Swedroe]
Anna Cieslak and Pavol Povala—authors of the paper “Expected Returns in Treasury Bonds,” which was published in the September 2015 issue of The Review of Financial Studies—examined the time variation in the risk premium that investors require for holding Treasury bonds. While most of the
- 8 years ago, 29 Oct 2015, 03:54pm -