Quant Mashup - Alpha Architect Unlocking REIT Returns: Real Estate Investment Factors [Alpha Architect]As of 2024, real estate investment trusts (REITs) have cemented their role as a $1.5 trillion segment within global capital markets, offering investors a liquid and regulated gateway to commercial real estate. With robust dividend mandates, leverage restrictions, and transparent operations, REITs(...) The Risks of Passive Investing Dominance [Alpha Architect]Fueled by the persistent failure of active management (as evidenced, for example, by the annual SPIVA scorecards), passive investing now commands the majority of assets under management. This structural shift is not without consequence. Chris Brightman and Campbell Harvey’s May 2025 paper(...) Why the Last Few Minutes of Trading Might Matter More Than You Think [Alpha Architect]This paper reveals a striking pattern in U.S. stock markets: the prices of individual stocks often reverse direction at the very end of the trading day. Using high-frequency data, the authors find that the last few minutes—particularly the closing auction—are dominated by large institutional(...) Do Smart Machines Make Smarter Trades? [Alpha Architect]Can machine learning models help us exploit stock market anomalies more effectively? This paper says yes—but with a few important caveats. By applying gradient boosting algorithms to a wide array of established anomalies (like value, momentum, and quality), the authors show that machine learning(...) Volatility is a Reliable and Convenient Proxy for Downside Risk [Alpha Architect]Javier Estrada, author of the June 2025 study “Volatility: A Dead Ringer for Downside Risk” tackled a longstanding debate in finance: Is volatility (the standard deviation of returns) a good measure of the risk that investors actually care about? While volatility is the most widely used risk(...) Should Investors Combine or Separate Their Factor Exposures? [Alpha Architect]If you’re a factor investor, there will come a time when you will have to choose between mom and dad: Should you combine or separate your factor exposures? And make no mistake: You will have to make a decision! While there’s no right answer, the way you structure your portfolio can have(...) Insider Trading Increases Market Efficiency [Alpha Architect]The empirical research (for example, here, here, here and here) on insider trading demonstrates that insider transactions have significant predictive power for future stock returns as they reveal helpful information that may affect the price of stocks. George Jiang and Yun Ma contribute to the(...) Enhancing Momentum Strategies [Alpha Architect]Paul Calluzzo, Fabio Moneta, and Selim Topaloglu, authors of the April 2025 study “Momentum at Long Holding Periods” investigated a key aspect of how academic momentum strategies are typically constructed when forming a portfolio. Specifically, at the end of each month t−1, the standard 12-2(...) Unlocking Cross-Asset Potential: A New Approach to Portfolio Construction [Alpha Architect]Christian Goulding and Campbell Harvey, authors of the study “Investment Base Pairs,” proposed a groundbreaking framework for portfolio construction that challenges traditional approaches in modern finance. Their research focused on leveraging cross-asset information to optimize investment(...) Profitability Retrospective: Key Takeaways for Investors [Alpha Architect]In his 2013 paper “The Other Side of Value: The Gross Profitability Premium,” Robert Novy-Marx documented that profitability, broadly measured, has as much power as relative price in predicting cross-sectional differences in expected returns. With the publication of that paper, profitability(...) The Virtue of Complexity in Return Prediction [Alpha Architect]In the realm of investment strategies, simplicity has long been favored. Traditional models with a limited number of parameters are prized for their interpretability and ease of use. However, recent research challenges this convention, suggesting that embracing complexity can lead to more accurate(...) The Aggregated Equity Risk Premium [Alpha Architect]This article explores how researchers forecast market returns by aggregating expected returns from individual stocks. Using machine learning, they improve accuracy over traditional methods. The approach helps identify when to increase or reduce market exposure. This can lead to better-informed(...) A New Approach to Regime Detection and Factor Timing [Alpha Architect]The financial research literature has found that the performance of assets (and factors) can vary substantially across regimes (for example, see here and here)—factor premiums can be regime dependent. Unfortunately, the real-time identification of the current economic regime is one of the biggest(...) How Tiny Price Differences Help Track Small Investors’ Trades [Alpha Architect]This article explains how researchers studied small investors’ trading habits by looking at tiny price differences, called subpennies, in stock trades. They found that the current method to identify these trades isn’t very accurate. By using a new approach, they improved the accuracy, helping to(...) Making Factor Strategies Work for Everyone [Alpha Architect]This article explores the difference between tradable and on-paper (theoretical) risk factors in investing. Risk factors are strategies that help explain stock market returns, but many work only in theory and not in real life. Researchers developed ways to make these factors tradable by using mutual(...) Enhancing Industry Momentum Strategies: Finding Hidden Neighbors [Alpha Architect]Momentum is a financial anomaly in which buying stocks with positive past returns and selling the negative yielding ones has delivered positive returns. After Jegadeesh and Titman (1993)’s seminal paper “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency”(...) Understanding What Drives Momentum in Global Stock Markets [Alpha Architect]This article explores why stocks that have been performing well tend to continue doing so, a phenomenon known as “momentum.” Researchers analyzed data from various countries to see if explanations found in U.S. markets also apply internationally. They discovered that when information about a(...) Adverse Effects of Index Replication [Alpha Architect]Mutual funds and ETFs whose main directive is index replication incur adverse selection costs from responding to changes in the composition of the stock market because indices rebalance in response to composition changes (due to IPOs, delistings, additions, deletions, new seasoned issuance, and(...) Anti-Dividend Investing: Yield Matters - But Not How You Think! [Alpha Architect]Dividends are the comfort food of investing. Who wouldn’t love feeling like they’re getting a seemingly “free” payout just for holding onto a stock? It’s no wonder so many investors are drawn to the siren call of yield. As with all good things, there’s a little more—perhaps a whole lot(...) How Bond ETFs Make Trading Easier and Cheaper [Alpha Architect]Bond Exchange-Traded Funds (ETFs) help people invest in bonds without having to buy them one by one. Instead, they let investors buy a mix of bonds all at once, making it easier and cheaper to trade. This is especially helpful for bonds that are usually harder to buy or sell. Because of bond ETFs,(...) What is Trend Following? A Painful Journey to Smarter Investing [Alpha Architect]When it comes to choosing an investment strategy, most investors—whether they realize it or not—are looking for something that: Beats the benchmark Never loses money Works all the time And here’s the harsh reality: this unicorn of a strategy doesn’t exist. Anyone promising you all three is(...) Understanding the Stock–Bond Correlation [Alpha Architect]This study looks at how stocks and bonds move together over time, using data from 1875 to 2023. The authors find that inflation, interest rates, and government stability affect this relationship. When inflation and interest rates go up, stocks and bonds tend to move in the same direction, making(...) Valuations Reflect U.S. Exceptionalism [Alpha Architect]Conventional wisdom can be defined as ideas that are so ingrained in our belief system that they go unchallenged. Unfortunately, much of the “conventional wisdom” about investing is wrong. One example of erroneous conventional wisdom is that investors seeking higher returns should invest in(...) The Ability to NAV Time Interval Funds [Alpha Architect]Highly illiquid assets trade infrequently making it difficult to know their true market value. To address this issue, funds that invest in illiquid assets create fair valuation estimates at periodic intervals. These valuation estimates determine the share values at which interval and tender offer(...) Artificial Intelligence and the Risks of Harking (Hypothesizing After-the-Fact) [Alpha Architect]Academics have long been aware of the risks of data mining—torturing the data until it confesses. The concern is that correlation of variables doesn’t imply that the correlation is a result of causation. That is the reason that the prevailing academic standard for researchers is that they should(...) Training Machine Learning Models For Return Prediction [Alpha Architect]Machine learning models have proven effective in predicting stock returns using lagged stock characteristics, but their success is influenced by a wide range of modeling choices. One critical, yet often overlooked, choice is how stocks are weighted in the objective function during training, with(...) Stocks aren’t always the best in the long-run [Alpha Architect]By examining data going back to 1792, McQuarrie’s study comes up with a surprising observation : stocks are not as dominant as once thought. The variability of the performance of stocks vs. bonds across various time periods is dramatic. So buckle up, stocks do not invariably outperform bonds.(...) Investigating Simple Formulaic Investing [Alpha Architect]Investing formulas are simple, easy-to-implement, systematic, stock screeners that provide instructions on how to outperform the total stock market. Marcel Schwartz and Matthias Hanauer, authors of the December 2024 study, “Formula Investing,” evaluated the effectiveness of four such popular(...) What the Index Effect’s Disappearance means for Market Efficiency [Alpha Architect]This paper investigates the puzzling decline in the price impact of S&P 500 index additions and deletions over the past four decades, despite the rapid growth of passive investing. It explores potential explanations, including changes in market liquidity and efficiency, shifts in the composition(...) Intangibles and the Performance of the Value Factor [Alpha Architect]Systematic factor-driven value strategies have underperformed broad market indices (such as the S&P 500) over the past 15+ years. That has led many to question whether intangible assets, such as patents and proprietary software, are properly treated. Current accounting standards, which require(...) Estimating Long-Term Expected Returns [Alpha Architect]This paper examines various frameworks and proxies for forecasting long-term expected returns (E(R)) over periods of 10 to 20 years, focusing on out-of-sample performance and the impact of these forecasts on investment decisions. It compares models based on yield, valuation, and the combination of(...) Frog in the Pan Momentum: International Evidence [Alpha Architect]This article analyzes various reasons why momentum strategies might work outside US borders. While the US story is firmly rooted in behavioral biases, is the same true on an international scale? That seems logical and likely. In fact, the authors conclude that a “slow diffusion of news best(...) Diversifying Trend Following Strategies Improves Portfolio Efficiency [Alpha Architect]Since the turn of the century portfolios have been exposed to four periods of crisis: the bursting of the tech bubble and the events of September 11, 2001, from 2000-2002; the Great Financial Crisis in 2007-2008, the COVID-19 pandemic in 2020, and the period of persistent inflation in 2022 when both(...) Time-Varying Drivers of Stock Prices [Alpha Architect]This paper examines the time-varying roles of subjective expectations in driving stock price and return variations. Specifically, it focuses on how subjective cash flow expectations (CF) and discount rate expectations (DR) contribute to stock price fluctuations across different economic conditions,(...) Calendar Anomalies, Much Ado About Nothing [Alpha Architect]An anomaly is a pattern in stock returns that deviates from what is expected based on established financial theories or models. These patterns can sometimes present opportunities for abnormal returns. However, they are often inconsistent and challenging to exploit. Many anomalies have achieved(...) Factors are global, respectable and repeatable [Alpha Architect]Do we have a chaotic “factor zoo” as some critics maintain? Is there a replication crisis in the research on factors? The authors of this research answer in the negative and argue that 82% of factors are replicable, the factor zoo is well-organized, and the factors are legit. Such bold(...) Improving Low Volatility Strategies [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 while, empirical studies have found the actual relationship to be basically flat, or even negative. In addition,(...) Rethinking Asset Growth in Asset Pricing Models [Alpha Architect]Measures of asset growth add considerable explanatory power to asset pricing models, but wait, there’s a twist. The formulation for measuring asset growth in risk models, such as the 5-Factor Fama-French (FF5F) or the Hou-Xue-Zhang (HXZ), do not necessarily align with traditional measures of firm(...) Markets Becoming More Efficient: The Disappearing Index Effect [Alpha Architect]Among the earliest challenges to the efficient markets hypothesis was the observation that stock prices react to investor demand unrelated to fundamentals. One example is the abnormal returns to additions and deletions to the S&P 500 Index. Robin Greenwood and Marco Sammon, authors of the(...) Using Trading Volume to Optimize Portfolio Construction and Implementation [Alpha Architect]While portfolio optimization typically focuses on risk and return prediction, implementation costs critically matter. Unfortunately, predicting trading costs is challenging because the largest component for a large investor is price impact, which depends on the size of the trade, the amount traded(...) Can Artificial Intelligence outsmart seasoned equity analysts? [Alpha Architect]If the task is to identify a firm’s true profitability, can AI outsmart seasoned analysts? Given the increasingly bloated nature of financial reports, decoding the twists and turns associated with events like obscure one-time gains and out-of-nowhere expenses to extract core earnings has become(...) Artificial Intelligence, Textual Analysis and Hedge Fund Performance [Alpha Architect]Artificial Intelligence (AI) offers the intriguing potential to revolutionize investment decision-making by providing important advantages such as: Enhanced Data Analysis: AI can process and analyze vast amounts of data from various sources, including financial news, market trends, and company(...) The Sahm Rule as a Recession Indicator [Alpha Architect]A weaker-than-expected July jobs report, with the unemployment rate increasing to 4.3%, officially triggered the Sahm Rule, causing investors to worry that the Federal Reserve may be behind the curve in cutting interest rates to prevent a recession. (The August report showed an increase in payroll(...) Reading the WSJ May Make You a Better Economist [Alpha Architect]What are the Research Questions? The research questions are as follows: How can textual analysis of business news, specifically The Wall Street Journal (WSJ), be used to measure the state of the economy? What is the structure of news coverage related to economic events, and how do these topics(...) The Hidden Cost of Index Replication [Alpha Architect]As the annual SPIVA studies demonstrate, index funds persistently outperform the vast majority of actively managed funds, even before considering taxes. With that said, most investors are unaware that there are weaknesses of index funds that result from their strategy to replicate the return of an(...) Can Skewness Identify Future Outperforming Mutual Funds [Alpha Architect]The annual SPIVA has documented that retail mutual funds underperform with great persistence, with any persistence of outperformance not significantly greater than would be randomly expected. The large body of research on the failure of active management led Charles Ellis to famously call it a(...) Data-driven Approach to Clustering Similar Macroeconomic Regimes [Alpha Architect]The research team at Verdad does some of the most interesting and innovative empirical financial research that is consistently rigorous and based on systematic approaches that are implementable and replicable, providing confidence in the findings. In a recent piece, “Analogous Market Moments,”(...) Trend-Following Filters – Part 8 [Alpha Architect]Regression analysis is a statistical method used to estimate and model the relation between a dependent variable and one or more independent variables. The dependent variable, also called the observation, is the variable being explained or predicted. The Independent variables are used to explain or(...) Investors trade Cryptos and Trad-Fi Differently [Alpha Architect]The paper examines several key questions related to how retail investors’ trading behaviors in cryptocurrencies differ from their behaviors in traditional asset classes like stocks and commodities. Are cryptos different? Evidence from retail trading Shimon Kogan, Igor Makarov, Marina Niessner,(...) Exploring Bond Tax Efficiency: Futures or Bond ETFs? [Alpha Architect]Bond futures are often assumed to be more tax-efficient than bond ETFs. My analysis indicates that this assumption is frequently incorrect. Although investors might view the 60/40 tax treatment of futures as advantageous, a futures strategy faces several challenges compared to a bond ETF, including(...)