Quant Mashup - Alpha Architect
Accruals and Momentum and Their Implications for Factor Investors [Alpha Architect]
The price momentum and accruals (the difference between accounting earnings and cash flows—adjustments made for revenue that has been earned but not received, and costs that have been incurred but not paid) anomalies are two well-documented financial phenomena. Recent research has focused on
- 21 hours ago, 17 Sep 2020, 09:26pm -
Can the Best Stock Pickers Still Beat the Market? An Out of Sample Test [Alpha Architect]
We all intuitively know we are better than average drivers, and if we’re investors, well we know we’re better than average there too. Frankly, we all put ourselves easily in the top 10%, at least. Those that are in the know will quote Buffet’s, “The Superivestors of Graham-and-Doddsville,”
- 2 days ago, 16 Sep 2020, 11:27am -
Can We Use the Shiller CAPE Ratio to Forecast Country Returns? [Alpha Architect]
We all became relatively aware of the CAPE ratio when Shiller predicted the 2000 internet bubble in his book “Irrational Exuberance,” then after he added a touch of robustness when he called the 2007 housing crisis 1 we all became intimately aware of it. Since that time CAPE has been utilized to
- 1 week ago, 10 Sep 2020, 09:30pm -
Predicting Bond Returns? Focus on GDP Growth and Inflation Indicators [Alpha Architect]
Can the excess returns of government bonds be predicted? This is a classic research question in finance academic research circles. Sometimes practitioners, who are often buried in the more exciting parts of the financial markets, tend to forget that government bonds (do they even belong in your
- 1 week ago, 9 Sep 2020, 10:13am -
Effects of Portfolio Construction on the Performance of Style Factor ETFs [Alpha Architect]
Every once in a while it’s effective to challenge the deep-seated ideas that have been utilized to construct your portfolio. Here at Alpha Architect continuously study the literature and conduct research to derive what we believe gives investors the best shot at winning over the long-haul. This
- 2 weeks ago, 31 Aug 2020, 12:07pm -
How to Measure and Understand Portfolio Tail Risk Events [Alpha Architect]
To any investor that has had the opportunity to experience a large collapse in the market, they can tell you that essentially there is nowhere to hide. Correlations of assets that were held to diversify a portfolio suddenly get very correlated in extreme market conditions aka the tails of the
- 3 weeks ago, 27 Aug 2020, 08:11pm -
Does Gold do What it is Supposed to do? [Alpha Architect]
The world has unquestionably be sent on a wild ride in 2020. We entered the year full of optimism and hope. Markets were at or near all-time highs, unemployment was low, living on easy street was good. Then the impact of COVID-19 ripped through the market and the economy with enough force to make
- 3 weeks ago, 24 Aug 2020, 11:07pm -
Even Great Investments Experience Massive Drawdowns [Alpha Architect]
Editor’s Note: The ability of value investors to adhere to their investment strategy has been put to the greatest test ever. From January 2017 through March 2020, in terms of total returns, the Russell 3000 Growth Index outperformed the Russell 3000 Value Index by 51.7 percentage points (46.7% vs.
- 4 weeks ago, 21 Aug 2020, 10:32am -
Value Investing: An Examination of the 1,000 Largest Firms [Alpha Architect]
Among stock investors, a common strategy/belief held is Value investing — buying stocks that are relative cheaper on price/fundamental ratios. The idea behind why value investing works is that Value stocks are either (1) riskier and/or (2) have been mispriced by the market. In theory, these
- 4 weeks ago, 18 Aug 2020, 08:40pm -
An Introduction to Digital Signal Processing for Trend Following [Alpha Architect]
Digital signal processing (DSP), specifically the use of digital filters, is embedded in many indicators used by technical analysts to study and make trading decisions using time series of stock, bond, currency, commodity, and other financial asset prices. This analysis takes a look at several of
- 1 month ago, 13 Aug 2020, 10:29pm -
What is Sequence Risk and Can Trend Following Help Reduce It? [Alpha Architect]
What exactly is “sequence risk?” We’ll get more into the weeds of it, but for now, consider it the risk of loss when you can least afford it. Think of a client leaving their retirement party with their shiny new set of steak knives and then learning via the news that their enormous position in
- 1 month ago, 11 Aug 2020, 10:29am -
Cross-Asset Signals and Time-Series Momentum [Alpha Architect]
In their paper “Time Series Momentum,” published in the May 2012 issue of the Journal of Financial Economics, Tobias Moskowitz, Yao Hua Ooi and Lasse Pedersen documented significant time-series momentum (trend) in equity index, currency, commodity and bond futures—delivering substantial
- 1 month ago, 6 Aug 2020, 11:57am -
Is Systematic Value Dead??? [Alpha Architect]
There is a large body of academic research demonstrating that the value premium has been persistent over long periods, pervasive across asset classes (stocks, bonds, commodities, and currencies) and also across and within industries, countries, and regions, robust to various fundamental metrics, and
- 1 month ago, 30 Jul 2020, 12:05pm -
Relative Skewness: A New Risk Factor? [Alpha Architect]
In the search for more and better factors, this article examines the cross-sectional relationship between historical skewness (see Jack’s post here) and the returns on a robust set of assets and documents the premium for taking on skewness risk. The authors construct long/short portfolios across
- 1 month ago, 27 Jul 2020, 12:41pm -
Fundamental Momentum, the Carry Trade, and Currency Returns [Alpha Architect]
Momentum in prices is the tendency of assets that have performed well recently (such as over the prior year) to outperform assets in the same asset class that have performed poorly over the prior year. For a more thorough review of momentum check out this post by Wes Gray. This phenomenon has been
- 1 month ago, 23 Jul 2020, 09:09pm -
What is Impact Investing? [Alpha Architect]
Can we do impact investing that is both good for us and tastes better? In the past, if an investment had positive non-financial outcomes (positive impact), a return trade-off was expected. Today, some investors find that incorporating aspects such as diversity, stakeholders, and environmental
- 1 month ago, 21 Jul 2020, 11:15pm -
Left Tail Risk and Left Tail Momentum [Alpha Architect]
The positive trade-off between risk and expected return is the most fundamental concept in financial economics. Most investors are risk-averse. In order to hold higher-risk securities, they demand higher compensation in the form of higher expected returns. And risk-averse investors are more
- 2 months ago, 15 Jul 2020, 10:38am -
Reducing Estimation Error in Mean-Variance Optimization [Alpha Architect]
As a general rule, we recommend you kick your spidey senses into high gear anytime there is a geek bearing formulas (especially if they are trying to sell you something). Simple is always a nice cheap default because complexity often leads to confusion, which leans to a need to have an expert, which
- 2 months ago, 13 Jul 2020, 09:04pm -
March for the Fallen 2020: Sign-Up for The Virtual Version! [Alpha Architect]
We are going to help make March for the Fallen a virtual event this year (September 26, 2020 at 8am). COVID is bad news, but we can turn lemons into lemonade…and we can still show gratitude for Gold Star Families by breaking into smaller groups and marching outdoors! We’ve already have 20 local
- 2 months ago, 9 Jul 2020, 09:37am -
Market Return Around the Clock [Alpha Architect]
Get your popcorn ready, the quants are about to do battle… As with all good questions in academic research, there are two sides to the story. We recently published Matthew Bartolini’s blog post explaining the impacts of trading costs on the “Overnight Return Anomaly.” This paper, takes the
- 2 months ago, 7 Jul 2020, 01:57pm -
Combining Momentum with Long-Term Reversal [Alpha Architect]
Two of most documented anomalies in the asset pricing literature are the momentum effect and the long-term reversal effect. Momentum is typically defined as the last 12 months of returns excluding the most recent month (i.e., months 2–12) because it tends to show a reversal, which some have
- 2 months ago, 3 Jul 2020, 11:38am -
Time Series Momentum: Theory and Evidence [Alpha Architect]
The profitability of trend-following strategies has been documented in a large number of empirical studies. The majority of these empirical studies find that these strategies are profitable in the long-run over periods ranging from 50 to 150 years. However, two issues of concern arise regarding the
- 2 months ago, 30 Jun 2020, 01:06pm -
How Trend Following Strategies Shape Return Distributions [Alpha Architect]
Crisis Alpha is on everyone’s mind right now, maybe due to a bit of recency bias, but regardless of the reason thinking of and preparing for “tail-risk” is best done before it’s needed. Trend following is one such strategy that is rooted in academic research and is an enticing way to manage
- 2 months ago, 29 Jun 2020, 01:10pm -
Diversifying Your Value Portfolio? Quality Works, but Have You Heard of Momentum? [Alpha Architect]
What if your portfolio was only based on one idea? Something like “stocks always go up” or “value always beats growth.” You may be learning a humbling lesson right now that Mr. Market has taught us over and over again (and learning it the painful way). In this post, we’ll examine various
- 2 months ago, 26 Jun 2020, 01:46pm -
Can Statistics Actually Determine if Managers Have No Skill? [Alpha Architect]
Whether they are selecting a manager, a factor, or a strategy, investors can make two types of mistakes. We thought we were hiring Peter Lynch, not this loser! A Type I error (or false discovery) when selecting a manager who turns out to be unskilled. That Warren Buffett guy is washed up, let’s
- 2 months ago, 23 Jun 2020, 02:40pm -
Do Option Prices Inform Stock Returns? [Alpha Architect]
In perfectly efficient markets, option prices should not convey any new information or contribute to the price discovery of underlying assets. However, if markets are not perfectly efficient, traders with private information might prefer to transact in option markets over stock markets even though
- 2 months ago, 18 Jun 2020, 09:47pm -
Trading Costs Wipe Out the Overnight Return Anomaly [Alpha Architect]
At least once a year, the press and Twittersphere propagate the mistaken idea that investors can earn excess returns by buying the S&P 500 at the close of the market, then selling it at the open the next day. The logic is that by exposing themselves to only overnight returns, investors can seek
- 3 months ago, 16 Jun 2020, 12:53pm -
Order Flow Correlation May Imply Momentum Factor Crowding [Alpha Architect]
This study is one of several studies reviewed here and here, attempting to measure factor crowding. This article specifically examines the presence of factor crowding by estimating the correlation between market order flow with the magnitude of the factor signal to trade. They hypothesize that
- 3 months ago, 15 Jun 2020, 08:24pm -
Monster Factor Correlation Chart [Alpha Architect]
We recently added a monster correlation matrix to our factor library data sheet that maps out the correlation of all the factors against every other factor. Here is a sample output that highlights the difference in the correlations between value factors and different quality factors. Note the big
- 3 months ago, 12 Jun 2020, 12:53pm -
5 Surprising Things We Learned from a Factor Investing Expert [Alpha Architect]
Lu Zhang and his colleagues made some waves with their new paper, “Replicating Anomalies.” (now published in the RFS — congrats!). We have a summary of the paper here. Lu Zhang, and his colleagues, Kewei Hou and Chen Xue, spent nearly 3 years carefully compiling and replicating 447
- 3 months ago, 11 Jun 2020, 12:29pm -
Counterpoint: ETF Activity May Make the Stock Market MORE Efficient [Alpha Architect]
The Securities and Exchange Commission (SEC) has called for more research and discussion on the impacts of ETFs. In a previous post, we covered why ETF’s have not screwed up correlations, liquidity, and alpha opportunities. However, here is another post from Wes that outlines arguments that ETFs
- 3 months ago, 8 Jun 2020, 11:08pm -
Excess Returns Podcast: Systematic Value Investing [Alpha Architect]
Recently I was invited to talk with Justin and Jack on the Excess Returns Podcast. I thank them for the opportunity and enjoyed the conversation! Below are some of the topics we discussed: Struggles in value and its long-term potential going forward. What would it take to convince you that value
- 3 months ago, 5 Jun 2020, 10:13am -
Do Interest Rates Explain Value’s Underperformance? [Alpha Architect]
From January 2017 through March 2020, the value premium, defined by HML (the return of high book-to-market stocks minus the return of low book-to-market stocks experienced a drawdown of 42 percent. 1 If we extend the period back to January 2007, the drawdown of about 51 percent is the largest ever.
- 3 months ago, 4 Jun 2020, 01:15pm -
How I Explain Crappy Returns [Alpha Architect]
Diversification. It looks great on paper, but for the past ten years, being globally and “Factor” diversified has been anything but great. Understandably, many diversified investors are looking at their returns and wondering why they should follow such a strategy when the S&P 500 – which
- 3 months ago, 2 Jun 2020, 10:39pm -
Is value dead? Has the story changed? No. [Alpha Architect]
Although there is widespread agreement that systematic value strategies have turned in at least a decade of underperformance, there is little agreement as to the underlying cause or cause(s). However, a number of rationalizations and critiques have emerged that question the long term viability of
- 3 months ago, 2 Jun 2020, 01:58am -
Smart(er) Investing - The Easy Way [Alpha Architect]
Most of the time we make you “earn your education” by reading our posts to build up your knowledge of the latest and greatest academic research concepts. That said, we understand there are different ways to educate, which is why we’re experimenting with video and audio. In the videos below, 3
- 3 months ago, 29 May 2020, 01:15pm -
Tactically Adjusting Everything in a Financial Crisis? Bad Idea. [Alpha Architect]
With the current market conditions and the wild ride we’ve all been on, we’ve pivoted our attention to focus on supplying academic research on responding to a crisis. This article investigates what the appropriate tactical adjustments investors should consider when making changes to their
- 3 months ago, 26 May 2020, 11:35am -
Prospect Theory Helps Explain Return Anomalies [Alpha Architect]
The field of behavioral finance provides us with fascinating insights into individual investor behavior, including how individuals view risk, as well as the impact of those views on asset prices. Prospect theory plays a major role in explaining investor behavior. The theory, formulated in 1979 by
- 3 months ago, 19 May 2020, 12:11pm -
Trend Following the S&P 500? Some Practical Advice [Alpha Architect]
Now that market volatility is back, tail risk management strategies are gaining some attention. A lot of investors are dipping their toe into the water and exploring trend-following strategies on the S&P 500 — arguably the most popular U.S. stock market index.This paper explores multiple trend
- 3 months ago, 19 May 2020, 10:31am -
Discussion: Managing the Costs of Passively Investing in Active Strategies [Alpha Architect]
We recently covered a paper by David Blitz that highlighted the potential problems with passively investing in “active” strategies. The research piece is great and surfaces a lot of great concepts. Like a lot of research we publish/summarize this article appears to “shoot Alpha Architect in
- 4 months ago, 15 May 2020, 09:38am -
Academic Finance Research Galore. WFA Sessions Announced [Alpha Architect]
Attention all finance geeks. The latest and greatest from academic researchers is available for all to review. The WFA recently released their sessions. WFA is one of the more prestigious academic conferences and papers presented at the conference often find their way into top-tier academic
- 4 months ago, 14 May 2020, 10:12am -
Machine Learning and Investing: Forecasting Fundamentals w/ Ensembles [Alpha Architect]
Quantitative factor portfolios generally use historical company fundamental data in portfolio construction. The key assumption behind this approach is that past fundamentals proxy for elements of risk and/or systematic mispricing. However, what if we could forecast fundamentals, with a small margin
- 4 months ago, 13 May 2020, 01:37pm -
Skulls, Financial Turbulence and Risk Management [Alpha Architect]
When hunting for diversity, the typical investor considers only average correlations. However, when measuring an asset’s diversification benefits utilizing average correlations tend to mislead investors. For example, when both U.S. and non-U.S. equities produce returns greater than one standard
- 4 months ago, 12 May 2020, 10:05am -
The Size Effect in Multifactor Portfolios [Alpha Architect]
The lack of a statistically significant size premium in the U.S. since the publication of Rolf Banz’s 1981 paper, “The Relationship Between Return and Market Value of Common Stocks,” published in the Journal of Financial Economics, led many investors to question its use in building portfolios.
- 4 months ago, 7 May 2020, 02:53pm -
Cheap vs. Expensive Factors: Does Valuation Matter for Future Returns? [Alpha Architect]
Tesla (TSLA) breached the $100 billion market capitalization in January 2020 and became the most valuable car manufacturer globally. However, valuing the company is challenging given the growth profile, complexity of the business, and erratic CEO. It is not yet profitable and cash flow is negative,
- 4 months ago, 5 May 2020, 01:53pm -
Why Passively Investing in Active Methods May Not Work [Alpha Architect]
In this piece, David Blitz provides an interesting perspective on using the passive framework as a blueprint for constructing active (ETF-like) products. The article is not an empirical (no charts!) nor a theoretical (no analytics) analysis, but is focused on just one question: Is it efficient to
- 4 months ago, 5 May 2020, 09:29am -
What's the Story Behind EBIT/TEV? [Alpha Architect]
A common question we receive at Alpha Architect is the following: Why do you focus on EBIT/TEV as a value screen for stocks instead of the more traditional measures such as book to price? In short, we believe stocks are ownerships in businesses (I know that sounds crazy coming from a quant shop!).
- 4 months ago, 1 May 2020, 02:50pm -
Ways to Measure Extreme Downside Risk [Alpha Architect]
Larry Swedroe recently wrote a post titled “Is there a Tail Risk Premium in Stocks.” This post is a good complement to Larry’s as this paper proposes two new measures of systematic tail risk and explores whether they are associated with a significant risk premium. The first measure, Extreme
- 4 months ago, 28 Apr 2020, 10:46am -
Trend Following is Everywhere [Alpha Architect]
Similar to some better-known factors, such as size and value, time-series momentum (TSMOM) historically has demonstrated abnormal excess returns. For the less familiar with trend following it’s worth your time to review Alpha Architects white paper on trend following here. TSMOM is measured by a
- 4 months ago, 23 Apr 2020, 12:32pm -
How to Compute Active Share [Alpha Architect]
In the short video below, I show how to compute Active Share. The accompanying excel file with the formulas can be found here. I start by computing the active share for two hypothetical funds, and then examine the active share of a few live ETFs.
- 4 months ago, 22 Apr 2020, 12:20pm -