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Quant Mashup - Alpha Architect
Trend Following: Timing Fast and Slow Trends [Alpha Architect]
Momentum, the tendency of past winner stocks to outperform past loser stocks over the next several months, is one of the most well-documented and well-researched asset pricing anomalies. In our book “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I presented the evidence of a
- 6 hours ago, 19 May 2022, 08:12pm -
Form 3 and Form 4 Alpha: Focus on What Insiders Don't Trade [Alpha Architect]
Plenty of research ( most recently, Cziraki et al. 2021) shows that insider buys contain value-relevant information while insider sales include little to no information. But what about the action of “not trading”? The authors of this study ask the following: Are the trades of portfolio insiders
- 3 days ago, 16 May 2022, 08:42pm -
Momentum Investing: What happens if we boot stocks over 10x P/S? [Alpha Architect]
Short answer up front–very little.(1) This was a simple question posed to me by one of our blog readers–what impact does excluding stocks trading at 10x P/S have on a Momentum portfolio? A good question–especially for those who are “value” investors that are interested in momentum. For
- 6 days ago, 13 May 2022, 11:59am -
Institutions Trading Against Anomalies: Are Their Trades Informed? [Alpha Architect]
Outperforming the market, before expenses, is a zero-sum game—if one group of active investors outperforms, another group of active investors must underperform. Is there a group of sophisticated investors who persistently exploit more naïve investors? The body of research has found that before
- 6 days ago, 13 May 2022, 11:59am -
Using Momentum to Find Value [Alpha Architect]
Value and momentum are two of the most powerful explanatory factors in finance. Research on both has been published for over 30 years(1). However, it was not until recently that the two had been studied in combination and across markets. Bijon Pani and Frank Fabozzi contribute to the literature with
- 2 weeks ago, 5 May 2022, 11:58am -
The Future of Factor Investing [Alpha Architect]
In this article, the authors expound on the importance of the factor “revolution” in finance. Factor investing has moved from a bedrock position to a future of innovation and disruption. With respect to factors the authors discuss where we have been and what can we look forward to. What are the
- 2 weeks ago, 5 May 2022, 11:58am -
Betting Against Beta: New Insights [Alpha Architect]
The 2014 study by Andrea Frazzini and Lasse Pedersen, “Betting Against Beta,” established strong support for low-beta (as well as low-volatility) strategies. The authors found that for U.S. stocks, the betting against beta (BAB) factor (a portfolio that holds low-beta assets leveraged to a beta
- 2 weeks ago, 29 Apr 2022, 04:16am -
The Implementation Costs of Indexed ETFs [Alpha Architect]
A common mistake made by many passive investors is that they view all index funds in the same asset class as “commodities(1)”, often considering only the expense ratio when making their investment choices. However, not all index funds are alike, and not all passively managed funds (what I refer
- 4 weeks ago, 21 Apr 2022, 09:51pm -
Can Market Maker Capital Constraints Result in Mispricing of ETFs? [Alpha Architect]
In this research, the authors explore the role of financial intermediaries in contagion or comovements in pricing efficiency. Specifically, lead market makers (LMMs) like Goldman Sachs, Cantor Fitzgerald, RBC Capital Markets, and others, have funding constraints that may influence their ability to
- 4 weeks ago, 21 Apr 2022, 09:51pm -
Bond Investing in Inflationary Times [Alpha Architect]
As the chief research officer of Buckingham Strategic Partners, the issue I am being asked to address most often is about fixed income strategies when yields are at historically low levels and inflation risk is heightened due to the unprecedented increase in money creation (through quantitative
- 1 month ago, 14 Apr 2022, 09:24pm -
Shorting ETFs: A look into the ETF Loan Market [Alpha Architect]
The growth of ETFs has been explosive (and we aren’t helping the matter via ETF Architect which facilitates low-cost high quality ETF white label services). At the end of 2020, there was roughly $5.4 trillion invested in ETFs in the United States, representing more than 25% of US market trading by
- 1 month ago, 11 Apr 2022, 12:19pm -
Is Sector-neutrality in Factor Investing a Mistake? [Alpha Architect]
Firm characteristics such as size, book-to-market ratio, profitability, and momentum have been found to be correlated with expected returns. The predictive power of these characteristics may stem from their industry component, their firm-specific component, or both. For example, while the study
- 1 month ago, 8 Apr 2022, 12:57pm -
Gaining an Edge via Textual Analysis of FOMC Meetings [Alpha Architect]
How investors understand and use central bank communications, aka FEDSPEAK, is oftentimes cryptic and difficult to analyze. This study attempts to provide some clarity to this issue by applying textual analysis to both high-frequency price and communication data, to focus on episodes whereby stock
- 1 month ago, 4 Apr 2022, 11:48pm -
Are Stock Market Bubbles Identifiable? [Alpha Architect]
We can define an investment bubble as an irrational strong price increase—implying a predictable strong decline. The efficient market hypothesis (EMH) implies both the absence of bubbles and that the future return is unpredictable. In his Nobel Prize lecture, the father of the EMH, Eugene Fama
- 1 month ago, 31 Mar 2022, 11:49am -
Which Articles Should You Read on SeekingAlpha.com? [Alpha Architect]
One of the most established tenets in social psychology science states, “When considering what content to share in their social interactions, people primarily contemplate what impressions their sharing could create among receivers and whether those impressions are consistent with who they are or
- 1 month ago, 28 Mar 2022, 08:44pm -
2022 Democratize Quant Conference Recap and Materials [Alpha Architect]
We recently hosted our Democratize Quant Conference (sign up here for updates). This post is a recap of what we heard and some resources we can make available to the public. Democratize Quant 2022 Agenda/Outline Session 1: State of the Asset Management Industry (with a focus on the ETF aspect) Dave
- 1 month ago, 26 Mar 2022, 11:11am -
Can Investment Flows Affect Prices? Yep. [Alpha Architect]
Traditional finance theory suggests that stocks prices always reflect their fair market values based on publicly available information. Or in academic parlance, the “semi-strong” form efficient markets hypothesis serves as the null. What are the implications of this hypothesis? Well, the
- 1 month ago, 26 Mar 2022, 11:11am -
A Deep Dive into the Low Beta Premium [Alpha Architect]
One of the big problems for the first formal asset pricing model developed by financial economists, the CAPM, was that it predicts a positive relationship between risk and return. However, empirical studies have found the actual relationship to be basically flat, or even negative. In addition,
- 2 months ago, 18 Mar 2022, 09:34pm -
Are Financial Crises Predictable? [Alpha Architect]
Who among us wouldn’t want to be the savior that predicts a market crisis and saves our clients from losses in capital — or even better — profits from them? A central topic of interest for academics is whether there are more precise tools to predict financial crises. Those who believe so
- 2 months ago, 14 Mar 2022, 11:43am -
Factor Investing Premiums and the Economic Cycle [Alpha Architect]
Academic research has found that factor premiums are both time-varying and dependent on the economic cycle. For example, the authors of the 2017 study “Fama-French Factors and Business Cycles” examined the behavior of six Fama-French factors—market beta (MKT), size (SMB), value (HML), momentum
- 2 months ago, 12 Mar 2022, 11:12am -
New Accounting Standards and Factor Investing [Alpha Architect]
How well do quantitative investors navigate around the changes to the accounting standards that are endemic to the financial data used in quantitative strategies? The numbers reported on financial statements are wholly governed by regulation and by each firm’s interpretation of those accounting
- 2 months ago, 8 Mar 2022, 09:53am -
Factor Investing: Are Internally Generated Intangibles Worthless? [Alpha Architect]
As mind-bending as it sounds, although a company’s internally generated intangible investments generate future value, they are currently not accepted as assets under US GAAP. Omission of this increasingly important class of assets reduces the usefulness and relevance of financial statement
- 2 months ago, 4 Mar 2022, 10:25am -
Does diversification always benefit investors? No. [Alpha Architect]
Diversification has been around since the early 1950s and is often considered a “free lunch” in finance. But is that actually the case? We’ve highlighted here and here that the reality is more complicated than the theory. Consider the two basic assumptions about correlations in the context of
- 2 months ago, 23 Feb 2022, 10:22am -
Factor Investing: Is a Human Capital Factor on the Horizon? [Alpha Architect]
From 1991 to 2018, capital expenditures as a percentage of total sales remained relatively flat, at about 10 percent. On the other hand, personnel expenses almost doubled during that time. In fact, by 2018 personnel expenses (the costs for hiring, wages, salaries, and bonuses; social security and
- 3 months ago, 18 Feb 2022, 10:12am -
Trend-Following Filters – Part 5 [Alpha Architect]
Previous articles in this series examine, from a digital signal processing (DSP) frequency domain perspective, various types of digital filters used by quantitative analysts and market technicians to analyze and transform financial time series for trend-following purposes. An Introduction to Digital
- 3 months ago, 15 Feb 2022, 07:29pm -
The Fed Put is Alive and Well [Alpha Architect]
The question of whether or not the FED considers or responds to the stock market in its policy decisions has been studied fairly extensively, however, the subject of the existence of the “FED put” continues to pop up in the literature. In this particular revival of the issue, the authors are
- 3 months ago, 8 Feb 2022, 09:50am -
Is The Value Premium Smaller Than We Thought? [Alpha Architect]
From 2017 through March 2020, the relative performance of value stocks in the U.S. was so poor, experiencing its largest drawdown in history, that many investors jumped to the conclusion that the value premium was dead. It is certainly possible that what economists call a “regime change” could
- 3 months ago, 4 Feb 2022, 10:12am -
What Explains the Momentum Factor? Frog-in-the Pan is Still the King [Alpha Architect]
A lot of ink has been spilled on a seemingly simple question: Why does the momentum factor exist? We have done our fair share contributing to the question and our collective conclusions are in our book Quantitative Momentum. We walked away from the question and determined the following: We will
- 3 months ago, 2 Feb 2022, 09:31am -
Portfolio Strategies for Volatility Investing [Alpha Architect]
The most basic tenet of financial theory is that risk and expected return are related. One widely used measure of risk is volatility. As far back as 1976, with the publication of Fischer Black’s “Studies of Stock Price Volatility Changes,” financial economists have known that volatility and
- 3 months ago, 27 Jan 2022, 09:02pm -
The Best Strategies for Dealing with Inflation? Factors and Trend-Following [Alpha Architect]
Inflation — what’s that? … It has been quite a while since inflation has been considered a problem. Today, however, the angst surrounding the possibility of a resurgence in inflation is real and “top of mind” for investors. If the current fear becomes a reality, how should investors react?
- 3 months ago, 27 Jan 2022, 09:01pm -
Factor Investing in Sovereign Bond Markets [Alpha Architect]
In our 2016 book “Your Complete Guide to Factor-Based Investor” Andrew Berkin and I recommended that due to the risks of data mining (or p-hacking)—researchers torture the data until it confesses—for you to consider investing in a factor it should have demonstrated a premium that was:
- 4 months ago, 14 Jan 2022, 09:15am -
Trend-Following Filters – Part 4 [Alpha Architect]
Previous articles in this series examine, from a digital signal processing (DSP) frequency domain perspective, various types of digital filters used by quantitative analysts and market technicians to analyze and transform financial time series for trend-following purposes. An Introduction to Digital
- 4 months ago, 12 Jan 2022, 11:19am -
Asset Allocation and Private Market (i.e. illiquid) Investing [Alpha Architect]
Allocations to illiquid assets(1) have become increasingly popular, thus requiring asset managers to consider portfolio-wide liquidity characteristics. Although determining the price of illiquidity is a challenge for investors, the construction of a portfolio that includes liquidity constraints can
- 4 months ago, 11 Jan 2022, 01:38am -
What Do Mutual Fund Investors Really Care About? [Alpha Architect]
Itzhak Ben-David, Jiacui Li, Andrea Rossi, and Yang Song contribute to the literature on the behavior of individual investors with their July 2021 study “What Do Mutual Fund Investors Really Care About?”, published in the July 2021 issue of The Review of Financial Studies. They began by noting
- 4 months ago, 7 Jan 2022, 10:15am -
Understanding Momentum Investing [Alpha Architect]
Momentum, the tendency of past winner stocks to outperform past loser stocks over the next several months, is one of the most well-documented and well-researched asset pricing anomalies. In our book, “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I present the evidence of a
- 4 months ago, 30 Dec 2021, 12:31pm -
Our Top 5 Geeky Finance Posts for 2021 [Alpha Architect]
We are calling it quits for the holidays. Most of us have kids and Santa is coming to town! We’ll talk about research and educate investors next week. Here are the Top 5 content pieces this year (Based on traffic): Even God would get fired as an Active Investor Does Gamma Hedging Actually Affect
- 4 months ago, 23 Dec 2021, 11:37am -
Value investing: What history says about five-year periods after valuation peaks [Alpha Architect]
No matter how you slice it, Value stocks are historically cheap compared to the past. There have been numerous articles on this topic, such as Ryan’s post here, Larry Swedroe’s post here, and more recently, Cliff Asness’ post here. Cliff’s post is one picture, shown below. 1 Source:
- 4 months ago, 22 Dec 2021, 11:06am -
The Relationship Between the Value Premium and Interest Rates [Alpha Architect]
Value stocks sharply underperformed growth stocks from 2017 to 2020, exacerbating a longer period of lackluster performance dating back to the Global Financial Crisis. The Death of Systemic Value Investing is not new news for frequent readers of the blog nor are the possible pathways to Resurrecting
- 5 months ago, 18 Dec 2021, 05:20am -
You Thought P-Hacking was Bad? Let's talk about "Non-Standard Errors" [Alpha Architect]
Most readers are familiar with p-hacking and the so-called replication crisis in financial research (see here, here, and here for differing views). Some claim that these research challenges are driven by a desire to find ‘positive’ results in the data because these results get published, whereas
- 5 months ago, 4 Dec 2021, 11:40am -
Size, Value, Profitability, and Investment Factors in International Stocks [Alpha Architect]
The current workhorse asset pricing model is the Fama-French five-factor model (2015), which added the profitability and investment factors to their original (1992) three factors of market beta, size, and value—increasing the model’s explanatory power. Nusret Cakici and Adam Zaremba contribute
- 5 months ago, 4 Dec 2021, 11:38am -
Can Prospect Theory Explain the Value and Momentum Factors? [Alpha Architect]
Traditional finance academics lean towards risk-based models to explain why various return characteristics, such as value and momentum, predict returns. But there is another school of thought often referred to as ‘behavioral finance.’ This field has some of its own ideas (see below) on why
- 5 months ago, 29 Nov 2021, 11:10pm -
Should We Never Invest in Individual Stocks? [Alpha Architect]
Hendrik Bessembinder published a fascinating paper, which finds that nearly all publicly traded stocks in the U.S. — if held as buy and hold investments — underperform Treasury bills. This finding is incredibly surprising and interesting. Of course, when bold claims are made, they tend to
- 5 months ago, 28 Nov 2021, 08:41pm -
The Value of the Value Factor: Cheaper now than a year ago? [Alpha Architect]
About a year and a half ago, after one of the worst relative drawdowns the value factor has ever seen, I wrote a piece showing the value factor was cheap relative to history. Since then, value strategies are on a solid run (look at pretty much any type of value strategy and I think you’d agree).
- 5 months ago, 24 Nov 2021, 10:05am -
Chasing Low Beta Loses Alpha [Alpha Architect]
One of the big problems for the first formal asset pricing model developed by financial economists, the CAPM, was that it predicts a positive relationship between risk and return. However, empirical studies have found the actual relationship to be basically flat, or even negative. Over the last 50
- 5 months ago, 20 Nov 2021, 08:36am -
Factor Investing Deep Dive with Jack Vogel [Alpha Architect]
Ben and Cameron, which host the excellent Rational Reminder podcast, sit down with Jack Vogel and go through a laundry list of factor investing questions. The topics discussed: 0:27 Do long-only factor premiums survive transaction costs? 2:28 Would the market impact of rebalancing a fund like MTUM
- 6 months ago, 14 Nov 2021, 07:41pm -
The Vanishing Illiquidity Premium [Alpha Architect]
Liquidity—the ability to buy and sell significant quantities of a given asset quickly, at low cost, and without a major price concession—is valuable to investors. Therefore, they demand a premium as compensation for the greater risks and costs of investing in less-liquid securities. For example,
- 6 months ago, 11 Nov 2021, 08:02pm -
How Crazy is the Current Market? Not that Crazy. [Alpha Architect]
Eric Balchunas had a recent tweet that I found fascinating. Eric’s tweet merely captures the tip of the iceberg with respect to the current market environment, which certainly feels “bubbly.” 1 The gist of the tweet is that $META, which is an ETF from our friends over at Roundhill Investments,
- 6 months ago, 11 Nov 2021, 09:45am -
US Funds Have Surprisingly Large International Exposure [Alpha Architect]
Did you know that the percentage of foreign sales of the FTSE 100 is 76% and 43% for the SP500? This study investigates the power of indirect international exposure, that is international exposure through holdings of domestic stocks. The authors ask the following: What is the indirect international
- 6 months ago, 8 Nov 2021, 10:04pm -
Using Machine Learning to Predict Options Returns [Alpha Architect]
Though classical option pricing models assume that options are redundant assets, more recent research rejects this idea. However, research on cross-sectional predictors of option returns is relatively scarce and not very well understood. Contrarily, extensive literature examines cross-sectional
- 6 months ago, 4 Nov 2021, 10:09pm -
Do factors have a role in asset allocation? [Alpha Architect]
What is the role of factors in asset allocation? Should investors substitute factor exposures for asset classes in constructing strategic portfolios? Or should factors be used as an instrument to enhance the performance of asset class-based allocation schemes? There are still quite a few questions
- 6 months ago, 27 Oct 2021, 10:32am -
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