Quant Mashup - Alpha Architect
The Variance Risk Premium is Pervasive [Alpha Architect]
The variance risk premium (VRP) refers to the fact that, over time, the option-implied volatility has tended to exceed the realized volatility of the same underlying asset. This has created a profit opportunity for volatility sellers—those willing to write volatility insurance options, collect the
- 1 day ago, 16 Aug 2019, 01:10pm -
Do Most Individual Stocks Outperform Cash? No. [Alpha Architect]
I’d argue that a typical investor believes the following–In the past and over the long run, stocks outperformed bonds.(1) However, as highlighted here, an academic paper last year shows that the majority of individual U.S. stocks actually lost compared to Treasury Bills (i.e. the return to
- 4 days ago, 13 Aug 2019, 12:08pm -
Betting Against Beta (BAB) Construction [Alpha Architect]
One of the more popular equity strategies over the past decade is low volatility investing. Simply put, this is a systematic strategy that invests in stocks with lower volatility, either measured by Beta or standard deviation. Why? Well, the low-beta anomaly is the fact that in the past, academics
- 1 week ago, 7 Aug 2019, 01:06pm -
No Skill? Well, Active Share Won't Save You! [Alpha Architect]
What are the research questions? This paper is the first to examine the impact of including an active share target into the mean-variance optimization process of constructing portfolios. They use the Ceria and Stubbs (2006) approach to robust portfolio optimization as methodology. Monte Carlo
- 1 week ago, 6 Aug 2019, 09:57am -
Can Low Vol Strategies Be Improved [Alpha Architect]
My Advisor Perspective article of June 17, 2019 discussed the regime shifting nature of the low volatility anomaly—low volatility stocks have outperformed high volatility stocks, providing both higher returns while experiencing lower volatility. For example, in his 2012 paper, “Enhancing a
- 2 weeks ago, 30 Jul 2019, 11:28pm -
Compound Your Knowledge Ep 18: Size, Mom, Sell-Offs, & R Code [Alpha Architect]
In this week’s post, we discuss four articles. The size, written by the folks at AQR, is titled “Fact, Fiction, and the Size Effect” and is a deep dive into the Size effect–I highly recommend everyone read the underlying paper as well. The second article examines the baseline historical
- 4 weeks ago, 19 Jul 2019, 09:58am -
Value Investing & Concentration [Alpha Architect]
As many investors have experienced, Value investing has underperformed for some time now. For the period following the Global Financial Crisis, Value investing (in general) has underperformed (1) the market and (2) Growth stocks. So while the past decade has been rough for Value investors, it can be
- 4 weeks ago, 18 Jul 2019, 11:51am -
Strategies to Reduce Crash Risk in Stocks [Alpha Architect]
Because equities are much riskier than high-quality bonds, the vast majority of the risk of a conventional 60 percent equity/40 percent bond portfolio is equity risk. Here’s the simple math demonstrating the point. Well-diversified equity portfolios have volatility of about 20 percent, and
- 1 month ago, 16 Jul 2019, 12:55pm -
Pathetic Protection via Protective Puts [Alpha Architect]
Investors would like to maximize upside participation while mitigating losses. This preference is at the base of the growth of the liquid insurance market in the form of equity index options. The author investigates the following research question: Are protective put options an effective tail hedge?
- 1 month ago, 15 Jul 2019, 01:18pm -
Enhancing the Performance of Momentum Strategies [Alpha Architect]
In “Your Complete Guide to Factor-Based Investing,” Andy Berkin and I presented the evidence demonstrating that momentum, both cross-sectional (or relative) momentum and time-series (or absolute, trend following) momentum, not only increases the explanatory power of asset pricing models while
- 1 month ago, 13 Jul 2019, 09:53am -
Momentum, Quality, and R Code [Alpha Architect]
Welcome to the first installment of Reproducible Finance by way of Alpha Architect. For the uninitiated, this series is a bit different than the other stuff on AA – we’ll focus on writing clean, reproducible code, mostly R (but some python too), applied to different ideas from the world of
- 1 month ago, 12 Jul 2019, 10:51am -
Market Sell-off Analysis: Baseline Historical Facts [Alpha Architect]
We often hear that the market is 5% off its highs or that it is down 5% from the high of the year. This alone does not tell us much. The questions I want to answer are as follows: “How often does that 5% loss become a 10% loss? Or worse yet — a 20% loss?” In other words, what are the
- 1 month ago, 10 Jul 2019, 11:55am -
Fact, Fiction, and the Size Effect [Alpha Architect]
The size effect is the phenomenon in which small stocks (i.e., those with lower market capitalizations), on average, outperform large stocks (i.e., those with higher market caps) over time. The size effect was first documented by several academic papers in the early 1980s ( Banz, 1981). However, it
- 1 month ago, 10 Jul 2019, 12:20am -
Debunking myths about stock buybacks [Alpha Architect]
What are the research questions? The authors present 4 MYTHs regarding stock buybacks popular in the financial press. MYTH 1: Companies are self-liquidating using share repurchases at a historically high rate. MYTH 2: Share repurchases have come at the expense of profitable investment. MYTH 3: The
- 1 month ago, 1 Jul 2019, 01:00pm -
Trend Following: The Epitome of No Pain, No Gain [Alpha Architect]
One of the recurring themes we see in our research is the concept of “no pain; no gain.” Or as Corey Hoffstein says, “No pain, no premium.” Cliff Asness may put it best when he says that some strategies require that you hold on to them “like grim death.” Bottom line: nothing is easy in
- 1 month ago, 26 Jun 2019, 02:28pm -
Large-Cap Price-to-Book Investing: What is Dead May Never Die [Alpha Architect]
In the great book and series Game of Thrones, the inhabitants of the Iron Islands have a saying “What is Dead May Never Die” which is to be replied with “But rises again harder and stronger.” I am reminded of this saying as more and more market commentators and practitioners declare that
- 1 month ago, 26 Jun 2019, 02:28pm -
Factor Investing Research On Steriods [Alpha Architect]
What are the research questions? Do the most prominent long/short factors — value, momentum, carry, and defensive — survive out of sample? Can long/short factors be timed? What are the Academic Insights? YES. All of the factors exist out of sample, albeit their magnitudes are generally muted.(1)
- 1 month ago, 18 Jun 2019, 11:59am -
Value Factor Valuations Over Time: US and Developed [Alpha Architect]
We built a simple tool recently to review so-called value spreads over time. (1) This tool maps out the median valuations for the top decile and bottom decile “cheap stock” portfolios (as measured by EBIT/TEV). Why might this be useful? This tool allows one to identify the “valuation” spread
- 2 months ago, 11 Jun 2019, 07:50pm -
The Cross-Section of Emerging Market Stock Returns [Alpha Architect]
As a non-academic finance person, I was never really exposed to academic research until I started working on articles for Alpha Architect. Fortunately (or unfortunately, depending on your perspective), I am now very familiar with the so-called “cross-section of expected returns” debates.
- 2 months ago, 11 Jun 2019, 07:49pm -
The Re-Death of Value, or Déjà Vu All Over? [Alpha Architect]
The underperformance of value stocks over the past 10 years has received much attention from the financial media and led at least some investors to conclude that value investing is dead. From 2009 through March 2019, while the S&P 500 Index returned 14.2 percent per annum (total cumulative
- 2 months ago, 6 Jun 2019, 02:13pm -
Is factor momentum really everywhere? [Alpha Architect]
The research presented here covers the largest number of factors (65) tested in the academic literature. The most robust and well-cited factors appear in the list of data items, available since the 1960s. A notable exclusion is the IBES dataset, which is available only in the 1980s. Is there
- 2 months ago, 3 Jun 2019, 12:55pm -
Skewness Effect in Commodities [Alpha Architect]
Nothing lasts forever and this definitely stands true for equity markets where volatility can explode and investors can lose a lot of money very quickly. Because of equity market volatility investors often seek so-called “crisis alpha” instruments, or assets that tend to go up when equity
- 2 months ago, 30 May 2019, 12:35pm -
News Sentiment and Bonds [Alpha Architect]
Academic literature has documented a news sentiment effect on equities ( here and here ). The authors investigate the following research question: Does the sentiment derived from media content impact bond market investors? What are the Academic Insights? By studying the sentiment extracted from
- 2 months ago, 28 May 2019, 03:01pm -
Volatility Targeting Improves Risk-Adjusted Returns [Alpha Architect]
There’s a large body of research, including the 2017 study “Tail Risk Mitigation with Managed Volatility Strategies” by Anna Dreyer and Stefan Hubrich, that demonstrates that, while past returns do not predict future returns, past volatility largely predicts future near-term
- 2 months ago, 22 May 2019, 01:47pm -
Volatility Anomalies: IVOL and Vol-of-Vol [Alpha Architect]
Two of the more interesting puzzles in finance are related to volatility—stocks with greater idiosyncratic volatility (IVOL) have produced lower returns and stocks with high uncertainty about risk, as measured by the volatility of expected volatility (vol-of-vol), underperform stocks with low
- 2 months ago, 22 May 2019, 12:24am -
Short Selling + Insider Selling = Profitable Strategy? [Alpha Architect]
What are the research questions? This study uses a long and comprehensive time series covering 1977-2014, with just under 180,000 quarterly observations for trades of short sellers and demand for shares by corporate insiders. (see here for a related paper we covered recently that talks about
- 3 months ago, 13 May 2019, 01:07pm -
Buying Stocks Trading Above 10x Sales-A Good Idea? [Alpha Architect]
Early last week, Meb Faber included me on a conversation on buying stocks trading at 10x their company’s revenue (sales). Is this a good idea and how did it do in the past? Given that most “known” factors have underperformed over the past 10 years, I was interested in seeing if a somewhat
- 3 months ago, 9 May 2019, 08:22pm -
Democratize Quant 2019 Recap [Alpha Architect]
We did it. We democratized quant for one more year. Last year, we suffered through a 50% drawdown in attendance due to a perfectly timed snow storm. This year the weather cooperated with us and we were able to get everyone there. Full access to presentation videos and the accompanying slides (when
- 3 months ago, 7 May 2019, 10:26am -
Tax-Managed Factor Strategies [Alpha Architect]
The authors decompose strategy returns into factor alpha, tax alpha, and residual return for 6 tax-managed versus and 6 tax-indifferent factor strategies and for one indexing strategy. In contrast to other studies, where the impact of starting date dependence is eliminated, this research generates a
- 3 months ago, 7 May 2019, 10:25am -
Compound Your Knowledge Ep. 11: ETFs, Manager Wealth, TLH, Value [Alpha Architect]
In this week’s episode, we cover four articles published on our site. The first article, written by Ryan, examines the growth in assets of ETFs and Mutual Funds. The second article, summarized by Elisabetta, examines the performance of funds by differentiating the fund’s manager on his/her
- 3 months ago, 6 May 2019, 10:09am -
Deep Dive into the Value Factor [Alpha Architect]
The financial equivalent of the famous Miller Lite, “tastes great, less filling” debate is the debate between traditional financial economics which uses risk theories to explain asset pricing and the newer behavioral finance field that uses human behavior to provide the explanations.
- 3 months ago, 2 May 2019, 01:03pm -
Compound Your Knowledge Episode 10: Factor Investing & Hedge Fund Performance [Alpha Architect]
In this week’s video, we discuss three posts. The first post discusses the new index analysis section on our site. The second post, written by Tommi, uses Hedge Funds’ past performance to identify if one can predict future Hedge Fund performance. The last post discusses Wes’ video examining an
- 3 months ago, 1 May 2019, 11:19pm -
Buyer Beware: The Reality of Tax-Loss Harvesting Benefits [Alpha Architect]
Tax loss harvesting is widely promoted, but we think the benefits are generally misunderstood and often overstated.(1) • The benefits of loss harvesting arise from tax deferral, similar to the benefits of saving in a retirement account. • The benefits of tax deferral rise and fall with expected
- 3 months ago, 26 Apr 2019, 03:10pm -
Compound Your Knowledge Episode 9: Investor Confidence & Issues with Factor Investing [Alpha Architect]
In this week’s post, we discuss two posts. The first post, written by Elisabetta, examines a new method attempting to directly measure aggregate investor overconfidence. The second post, written by Larry Swedroe, examines issues that plague Factor Investing.
- 3 months ago, 22 Apr 2019, 10:43am -
Factor Investing is Simple, But Not Easy (Video) [Alpha Architect]
We are creating a series of long-form educational videos that present materials often covered in our white papers. The intent of these videos is make our content more accessible to visual learners. The video below is a presentation related to a long-form post we have on a post called, “The
- 3 months ago, 19 Apr 2019, 03:54pm -
The Factors that Plague Factor Investing [Alpha Architect]
For those interested in the literature on factor-based investing, a new paper by Robert Arnott, Campbell Harvey, Vitali Kalesnik and Juhani Linnainmaa, “Alice’s Adventures in Factorland: Three Blunders That Plague Factor Investing,” focuses on why, in some ways, it has failed to live up to its
- 4 months ago, 16 Apr 2019, 09:45pm -
Aggregate Investor Confidence in the Stock Market [Alpha Architect]
What are the Research Questions? A common assumption in finance theory is that agents in the stock market behave rationally. Even if temporary mispricing occurs, due to irrational beliefs or incomplete information of some agents, arbitrageurs swiftly restore equilibria. In contrast, the history of
- 4 months ago, 16 Apr 2019, 09:44pm -
Investment Strategy in an Uncertain World [Alpha Architect]
In 1921, University of Chicago Professor Frank Knight wrote the classic book “Risk, Uncertainty, and Profit.” An article from the Library of Economics and Liberty described Knight’s definitions of risk and uncertainty as follows: Risk is present when future events occur with measurable
- 4 months ago, 11 Apr 2019, 01:05pm -
A Remarkable New Factor: The Cash Conversion Cycle [Alpha Architect]
The barrier to entry into the factor zoo has increased exponentially. Prof. Harvey (now working with RAFI) made this clear at the 2017 AFA address, when he highlighted the issue with data-mining in front of a room full of academics from top-flight research programs in the country. Prof. Harvey and
- 4 months ago, 9 Apr 2019, 12:32pm -
Compound Your Knowledge Episode 7: Momentum & Short Sellers [Alpha Architect]
In today’s video, we examine three articles from last week. The first article, written by Larry Swedroe, examines the Momentum of News. The second article, written by Wes, examines an out-of-sample test on Momentum by looking at Russian stocks in the 19th century. The third article, written by
- 4 months ago, 8 Apr 2019, 11:09pm -
The Momentum of News [Alpha Architect]
Since the development of the capital asset pricing model (CAPM) in the 1960s, hundreds of anomalies (what John Cochrane famously called a “zoo of new factors”) have been uncovered in the cross-section of stock returns. While some of the anomalies (such as the size and value factors) have
- 4 months ago, 4 Apr 2019, 03:09pm -
Short Selling + Insider Selling = Bad News [Alpha Architect]
What are the research questions? Is there a relationship between short selling activity and insider selling? What is the impact of short selling trading strategies that are conditioned on insider trading signals? Does the price impact of short selling subsume that of insider trading? Is the price
- 4 months ago, 1 Apr 2019, 01:04pm -
Pitfalls When Assessing Market-Timing Strategies [Alpha Architect]
Consider a market-timing strategy which supposedly predicts the direction of the stock market trend. Such a strategy generates Buy and Sell signals. A Buy signal is the signal to buy stocks, whereas a Sell signal is the signal to sell. Simple enough, but how does one evaluate the forecast accuracy
- 4 months ago, 27 Mar 2019, 12:59pm -
Why the Size Premium Should Persist w/ @LarrySwedroe [Alpha Architect]
As the chief research officer for Buckingham Strategic Wealth and The BAM Alliance, I’m often asked, after any asset class or factor experiences a period of poor performance, if the historical outperformance of stocks with that characteristic has disappeared because the premium has become well
- 4 months ago, 21 Mar 2019, 09:03am -
Factor Investing from Concept to Implementation [Alpha Architect]
There is a substantial debate on the topic of factor investing and whether or not the “backtested” excess returns are actually achievable in practice. Much of the research on the topic suggests that practitioners in the field are unable to capture any of the so-called “factor premiums”. For
- 5 months ago, 15 Mar 2019, 09:56am -
Reproducible Finance with R: Code Flows and Shiny Apps for Portfolio Analysis [Alpha Architect]
R is a programming language that owes it’s lineage to S, a language designed in it’s own developers words, “to turn ideas into software, quickly and faithfully.”(1) Shiny is an “interactive web technology” that makes it easy to take R models and publish them to the web. Jonathan L.
- 5 months ago, 13 Mar 2019, 09:59am -
Low Volatility Turnover with Value and Momentum [Alpha Architect]
What are the research questions? What is the relationship between turnover and returns from a low volatility portfolio that integrates value and momentum exposures with low volatility? Does the relationship change if a only one factor is integrated with a low volatility strategy? Note: This is a
- 5 months ago, 12 Mar 2019, 10:32am -
Sector Business Cycle Analysis [Alpha Architect]
There are different investment approaches to identify sector winners and losers, such as price momentum strategies, top down approach based on specific macroeconomic indicators or bottom-up approaches to identify sectors with improving fundamentals. One widely used approach is business cycle
- 5 months ago, 7 Mar 2019, 08:22pm -
Day of the Week Matters for Some Anomalies [Alpha Architect]
According to psychology literature, mood increases from Thursday to Friday and decreases on Monday. In general, people tend to evaluate future prospects more optimistically when they are in a good mood than when they are in a bad mood. In equity markets, the presence of optimism or pessimism that is
- 5 months ago, 4 Mar 2019, 08:18pm -
Rebalancing...Not so Fast [Alpha Architect]
My last article used Warren Buffett’s pre-crisis sale of put options to highlight the risk of getting over our financial skis. In both temperament and negotiation, Warren can outlast most bear markets. Many of us cannot. Proponents of rebalancing should acknowledge the real risk that downturns can
- 5 months ago, 27 Feb 2019, 09:15am -