Using portfolio theory, the authors of this piece develop an approach for estimating the degree of political risk between a country and its export destination and the status of political relationships. The research about political beta presented is the first to apply portfolio theory to problems

The year 2022 was a difficult one for investors in traditional 60/40 portfolios, as equities all around the globe and bonds produced double-digit losses, a very rare event. Can factor strategies mitigate risk? That performance has heightened interest in the diversification benefits of factor-based

This article attempts to demystify the approach and methodology used to characterize the risk and return relationship in private equity today. The illiquid nature of the asset class makes the demystification of private equity returns difficult to achieve under any circumstances. Still, the framework

In his 2011 presidential address to the American Finance Association, John Cochrane coined the term “zoo of factors,” reflecting concerns about the quality of financial research. How do you separate the signal from the noise? In our book “Your Complete Guide to Factor-Based Investing,”

Despite the widespread popularity of trend-following investing, little is known about optimal trend-following with transaction costs. A few existing studies consider this question using a continuous-time model within the stochastic optimal control theory framework. However, despite being

In this article about asset pricing theory, we examine the research on the impact of technological advances that displace human labor in favor of machine capital to asset pricing. Automation and the displacement of labor by capita: Asset pricing theory and empirical evidence Jiˇrí Knesl Journal of

The past decade has seen a dramatic growth in sustainable investing—applying environmental, social and governance (ESG) criteria to investment strategies. Investments considered environmentally friendly are often referred to as “green,” while “brown” denotes the opposite. Important

Traditional measures of geopolitical risk have been primarily qualitative. In this article, the authors describe and analyze not just new, but novel measures including textual analysis of news and expert reports, novel econometric methods and machine learning applications for measuring geopolitical

Multi-factor, long-short portfolios have provided significant portfolio diversification benefits by adding unique sources of risks that have historically produced premiums that meet the criteria Andrew Berkin and I established in our book “Your Complete Guide to Factor-Based Investing”—the

Pastor, Stambaugh, and Taylor (2015) and Zhu (2018) provide significant evidence of decreasing returns to scale (DRS) at both the fund and industry levels. The authors examine the robustness of their inferences after Adams, Hayunga, and Mansi (2021) critique the above two studies. What are the

More specifically, the paper differentiates between: Traditional linear models (ordinary least squares regression and elastic net) and Machine learning methods that allow for non-linearities and interactions (tree-based models such gradient boosted regression trees and random forest and neural

The research summarized here is built upon a documented risk management strategy applied to factor investing (Barroso and Santa-Clara, 2015; Moreira and Muir, 2017). The idea was to overlay a scaled volatility measure designed to change risk exposures and hopefully produce higher Sharpe ratios. That

The size effect was first documented by Rolf Banz in his 1981 paper “The Relationship Between Return and Market Value of Common Stocks,” which was published in the Journal of Financial Economics. After the 1992 publication of Eugene Fama and Kenneth French’s paper “The Cross-Section of

Spikes in inflation and fear of stagflation prompted this study which answers the following question: 1. How do risk premiums and investment strategies behave across inflationary regimes like periods of high inflation, deflation, or stagflation? What are the Academic Insights? By utilizing the

Trend following (time series momentum) is one of the most well-documented and well-known factors in investing, demonstrating persistence, pervasiveness, robustness, and implementability (survives transaction costs). Lesser well-known is relative sentiment—an indicator that measures the positions,

Several studies show momentum works in global equities, corporate bonds, currencies, and commodities. This paper asks the following research question: Does momentum work within option markets? What are the Academic Insights? By focusing on the returns of delta-neutral straddles (from 1996 to 2019)

Academic research on trend-following investing has almost exclusively been focused on testing the profitability of various trading rules. Most of these rules are based on moving averages of past prices. The most popular is the Simple Moving Average (SMA). Less commonly used types of moving averages

The empirical research on the ability of actively managed funds, including such studies as the 2002 paper “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses” by Russ Wermers, has found that they do have the ability to identify

This post is the second and final portion of the review on momentum published on Momentum literature. The seminal article on momentum was published by Jegadeesh and Titman in 1993. Although the Jegadeesh article foreshadowed much of the research on cross-sectional and time series momentum at the

At its most basic level, factor-based investing is simply about defining, and then systematically following, a set of rules that produce diversified portfolios. An example of factor-based investing is a value strategy, buying cheap (low valuation) assets and selling expensive (high valuation)

What are the Research Questions? Several studies reveal variables that predict cross-sectional differences in stock returns but mainly rely on a sample of U.S. stocks, mostly covering the post-1963 period. These studies are often criticized for potential data mining issues since the database never

There are basically two types of investors, those that are risk averse and, thus, both demand risk premiums for taking risk and diversify their holdings, and those who are risk seekers who have a preference for positively skewed (lottery-like) returns which leads them to speculate and concentrate

n this article, the author examines the research published over the last 30 years on momentum and its theoretical credibility. One of the original momentum articles was published by Jegadeesh and Titman in 1993, and is considered the seminal work on the topic. The research review contained in this

This article discusses the academic research about the Momentum Gap and the role that its predictive potential may have in reducing momentum crashes, hence possibly improving performance. In our book “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I presented the evidence

In this article, the author examines several important questions related to asynchronous trading, or the variation in trading frequency that occurs when trading stocks or other assets. Timo Wiedemann, University of Muenster (Germany) The newest version of the paper can be found here. What are the

The rise of stock indexing has raised concerns that index investing distorts stock prices—indexers are free riders who rely on prices without contributing to price discovery, thus reducing price efficiency. Byung Ahn and Panos Patatoukas, authors of the study “Identifying the Effect of Stock

In this article, we examine the research that addresses the question of whether or not democracy leads to better possible outcomes for the stock market. Democracy and Stock Returns Xun Lei and Tomasz Piotr Wisniewski SSRN Working Paper A version of this paper can be found here Want to read our

It is well documented in the literature that over the long term, low-investment firms have outperformed high-investment firms—with the negative relation between asset growth (AG) and future stock returns particularly featured by the overvaluation of high AG stocks. This finding has led to the

In order for investors to determine which of the hundreds of factors in what John Cochrane famously called the “zoo of factors” were worthy of investment, Andrew Berkin and I set out seven criteria in our book “Your Complete Guide to Factor-based Investing.” For a factor to be considered, it

Consumer demand drives the cash flows of consumer-oriented companies. Thus, they should serve as a reliable source of information to predict future fundamentals above and beyond the information contained in financial statements and readily available market data. For example, Jiekun Huang, author of

In 2019, the SEC proposed that all brokers and advisors be required to determine whether or not their clients understood the risks of investing in levered and inverse exchange traded products before selling such products to them. The SEC moved on this requirement in response to a series of fund

The past few years in the stock market have been pretty crazy. And the pinnacle of “crazy” was during March 2020 — peak chaos in the stock market. Below is a chart of US large-cap stocks and small-cap stocks in 2020. Note the monster crash in March — watch out below! Source: koyfin.com As an

Near the end of 2021, I wrote an article noting that value portfolios looked historically cheap based on valuation spreads. I found that in the next five years (after the peak), Value investing performed quite well.(1) Following this post, I have received numerous questions related to the following

The objective of research into asset pricing is to determine which characteristics are most important for predicting returns and then build simplified models using as few factors as possible—to tame the so-called “zoo of factors”—while still providing a high level of explanatory power. In

Breaking new ground, the authors present a novel view on the nature and source of “momentum” that differs from our current understanding of momentum, whether it be industry momentum, residual, or any other version of momentum. Explanations of the source of profitability for momentum strategies

Despite the fact that a company’s internally generated intangible investments create future value, (Summary) under current U.S. generally accepted accounting principles, internally developed intangibles are not included in reported assets. While research and development (R&D) is an important

In “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I established criteria that must be met before considering investing in a factor-based strategy. We established the criteria to minimize the risks that any findings were the result of data-mining exercises. Data mining occurs

Relative sentiment is an indicator that measures the positions, flows, and attitudes of institutional investors compared to those of individual investors–where institutions typically consist of large asset managers, insurance companies, pension funds, and endowments. In some instances,

In “Your Complete Guide to Factor-Based Investing” Andrew Berkin and I provided six criteria that had to be met in order to determine which exhibits in the “factor zoo” are worthy of investment. For a factor to be considered, it must meet all of the following tests. To start, it must provide

In this article, the authors explore an alternative measure of consumer demand from a unique dataset of individual credit and debit card daily transactions ( available one week after the transaction was made on average) from January 2013 to December 2019. They ask the following: Can more timely

We were recently asked what we thought about bonds as an investment. A lot of this was inspired by my comments on bonds via a discussion on how I personally invest. I’ll repost what I said on bonds below: What are your thoughts on bonds and commodities? In general, I’m not a fan of corporate

What are the research questions? Theories abound in the financial literature explaining the drivers of momentum and reversal in one way or another. Not surprisingly, most portray the role of public and private information as key to the underlying relationships and weigh the type of information

In our book “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I presented the evidence demonstrating that momentum, both cross-sectional (CSMOM) and time-series (TSMOM), has provided a premium that has been found to be persistent across time and economic regimes, pervasive

Just recently we posted the trend-following weights for our Robust Asset Allocation model. Something interesting happened — the model suggested zero exposure to every asset, except commodities(1) source: https://alphaarchitect.com/indexes/trend/#trendasset My knee-jerk reaction was, “Wow, never

What are the Research Questions? There is abundant literature on the relationship between the business cycle and future stock returns. The traditional view is that stocks are rationally priced to immediately reflect investors’ expectations about future economic activity and that expected excess

As Sam Adams and I explained in our new book, “Your Essential Guide to Sustainable Investing,” while sustainable investing continues to gain in popularity, economic theory suggests that if a large enough proportion of investors choose to favor companies with high sustainability ratings (green

In our last installment, we reviewed the performance–across four regions–of a machine-learning-based Sentix relative sentiment model for tactical asset allocation. The regions included: the USA, Europe, Japan, and Asia ex-Japan (referred to as USA, EUR, JPN, and AEJ, respectively, in the charts

Short sellers play a valuable role in keeping market prices efficient by preventing overpricing and the formation of price bubbles in financial markets. Market efficiency is important because an efficient market allocates capital efficiently. If short sellers were inhibited from expressing their

Twitter is an interesting dataset for researchers interested in consumer beliefs. (200 million monthly active users worldwide (Elon Musk may disagree!) and about 10 million active users in Italy in 2019 (AGCOM 2020)). Inflation expectations are at the heart of any consumption and investment decision

Empirical research, including the 2017 paper “A Century of Evidence on Trend-Following Investing,” has found momentum to be a persistent and pervasive factor in returns of not only stocks but other asset classes as well, including bonds, commodities, and currencies. Recent empirical research on