Quant Mashup - Alpha Architect
A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets [Alpha Architect]
Pump-and-Dump (P&D) schemes to manipulate the prices of cryptocurrencies are unlike the P&D schemes found in the equity market. They produce very large price distortions on the order of 65%, very large trading volumes of 13.5x the average, and generate very large profits to cryptocurrency
- 4 days ago, 18 Sep 2023, 10:23pm -
Momentum turning points and their impact on market cycles [Alpha Architect]
The article investigates time-series (TS) momentum strategies and their performance in financial markets based on various speeds or lookback horizons. The study aims to understand the connections between different speeds of TS momentum, unobservable variables like trend, turning points, and noise
- 1 week ago, 11 Sep 2023, 10:58pm -
Stock-bond correlation and its lessons for investors [Alpha Architect]
The correlation between stocks and bonds should be a critical component of any asset allocation decision, as it impacts not only the overall risk of a diversified multi-asset class portfolio but also the risk premia one should expect to receive for taking risk in different asset classes. The problem
- 2 weeks ago, 8 Sep 2023, 09:07pm -
Short Term Signals - can they produce meaningful alpha? [Alpha Architect]
Short-term return anomalies are generally dismissed in the academic literature “because they seemingly do not survive after accounting for market frictions.” In this research, short-term “factors” are taken seriously, and the authors argue the standard parameters may not apply to short
- 2 weeks ago, 5 Sep 2023, 05:26pm -
The Investment Factor: does it impact returns? [Alpha Architect]
Over the long term, low-investment firms have outperformed high-investment firms. This finding has led to the investment factor (CMA, or conservative minus aggressive) being incorporated into the leading asset pricing models—the four-factor q-theory model (market beta, size, investment, and
- 2 weeks ago, 2 Sep 2023, 06:33pm -
The determinants of inflation [Alpha Architect]
The research questions of the article are as follows: How can a Hidden Markov Model be applied to identify regimes of shifting inflation? What are the characteristics and descriptive information of the identified inflation regimes? Which economic variables are the determinants of inflation and how
- 3 weeks ago, 28 Aug 2023, 10:40pm -
Structured notes: Wall Street fairy tales that should be avoided! [Alpha Architect]
As a general rule of thumb, the more complexity that exists in a Wall Street creation, the faster and farther investors should run. —David Swensen, Unconventional Success Structured products are packages of synthetic investment instruments specifically designed to appeal to needs that investors
- 3 weeks ago, 26 Aug 2023, 05:57pm -
Factor seasonality - an independent risk factor? [Alpha Architect]
Factor seasonality always seemed to be an idea that was too close to factor timing to help build factor strategies. Surprisingly, the authors find a substantial factor seasonality effect across global markets, suggesting that the assumption is unwarranted. This is the first study I have encountered
- 1 month ago, 21 Aug 2023, 05:47pm -
Value and Profitability/Quality: Complementary Factors [Alpha Architect]
In his 2012 paper “The Other Side of Value: The Gross Profitability Premium,” Robert Novy-Marx demonstrated that profitability, as measured by gross profits-to-assets, had roughly the same power as book-to-market (value factor) in predicting the cross-section of average returns – profitable
- 1 month ago, 11 Aug 2023, 09:03pm -
Investor demand: can it explain returns? [Alpha Architect]
The traditional financial theory attributes security returns to market- or factor-based risk, with no role ascribed to other influences. In this research, the authors argue for including investor demand as an additional variable in explaining returns. Can changes in investor demand generate
- 1 month ago, 8 Aug 2023, 12:46am -
The Low-Beta Anomaly: are its returns justified? [Alpha Architect]
The low-beta anomaly for the capital asset pricing model (CAPM)—low-beta stocks outperform high-beta stocks—was first documented more than 50 years ago by Fischer Black, Michael Jensen, and Myron Scholes in their 1972 paper, “The Capital Asset Pricing Model: Some Empirical Tests.” In our
- 1 month ago, 5 Aug 2023, 07:00pm -
Retail attention metrics: do they produce differences in returns? [Alpha Architect]
Abstract: We find that by using a novel measure of investor attention, generated from InvestingChannel’s clickstream data on online financial news consumption, we can identify broad groups of stocks which are less efficiently priced and therefore where anomalies such as Value and Momentum are
- 1 month ago, 28 Jul 2023, 07:37pm -
Regression is a tool that can turn you into a fool [Alpha Architect]
Running regressions on past returns is a great tool for academic researchers who understand this approach’s nuance, assumptions, pitfalls, and limitations. However, when factor regressions become part of a sales effort and/or are put in the hands of investors/advisors/DIYers, “the tool can
- 1 month ago, 27 Jul 2023, 11:21pm -
Risk of Momentum Crashes: can it be reduced? [Alpha Architect]
My August 4, 2022, Alpha Architect article examined the research demonstrating that cross-sectional momentum has provided a premium that has been found to be persistent across time and economic regimes, pervasive around the globe and across sectors and asset classes (stocks, bonds, commodities and
- 1 month ago, 23 Jul 2023, 11:00pm -
Fund Concentration: Does it impact return? [Alpha Architect]
This study explores the degree to which fund concentration as measured by high tracking error or active share, affects the magnitude of excess returns and whether or not the likelihood of outperformance or underperformance are distributed similarly. Three methods of analysis were used to examine the
- 2 months ago, 20 Jul 2023, 06:07pm -
Are Sustainable Investors Compensated Adequately? [Alpha Architect]
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 and avoid those with low sustainability ratings (sin businesses), the favored company’s share prices will
- 2 months ago, 16 Jul 2023, 07:37pm -
And the Winner Is: Examining Alternative Value Metrics [Alpha Architect]
Value as an investment strategy has long been popular in both academia and among practitioners and is supported by valuation theory, which provides a framework for identifying the drivers of expected returns: the prices investors pay and the expected future cash flows investors will receive.
- 2 months ago, 7 Jul 2023, 05:53pm -
Performance of Factors: what the research says [Alpha Architect]
Since the discovery of the size, value, and momentum effects in the 1980s and 1990s, a plethora of other factors have been identified in the asset pricing literature, which led John Cochrane to coin the phrase “zoo of factors.” It has raised questions and led to research into how many factors
- 2 months ago, 30 Jun 2023, 05:30pm -
BloombergGPT: Where Large Language Models and Finance Meet [Alpha Architect]
Developments in the use of Large Language Models (LLM) have successfully demonstrated a set of applications across a number of “domains”, most of which deal with a very wide range of topics. While the experimentation has elicited lively participation from the public, the applications have been
- 2 months ago, 29 Jun 2023, 05:02am -
Intangible Value: Modernizing the Factor Portfolio [Alpha Architect]
Abstract: The “Intangible Value Factor” (IHML) can play an additive role in factor portfolios alongside the established market, size, value, quality, and momentum factors. This Six-Factor Model avoids the problematic “anti-innovation” bias of traditional factor portfolios and can be easily
- 3 months ago, 23 Jun 2023, 02:55pm -
Attenuation of Anomalies: what role do fundamentals play? [Alpha Architect]
The article aims to explore the possibility that changes in fundamentals play a role in the attenuation of stock market anomalies, offering an alternative explanation to the prevailing arbitrage-based explanation. Can the changes in fundamentals explain the attenuation of anomalies? Choi, Lewis and
- 3 months ago, 23 Jun 2023, 02:54pm -
Index Replication: avoid the negatives! [Alpha Architect]
There are several significant, well-documented benefits of index funds. In addition to outperforming a large majority of actively managed funds, they tend to have low fees, low turnover (resulting in low trading costs and high tax efficiency), broad diversification, high liquidity, and near-zero
- 3 months ago, 20 Jun 2023, 02:35am -
Long-Only Value Investing: Size Doesn't Matter! [Alpha Architect]
Many factor investors are familiar with “small-cap value investing,” which is a reasonable allocation for long-term investors who can tolerate a lot of volatility. Why are there so many small-cap value investors? Small-cap value investors have been told that the value premium is higher, on
- 3 months ago, 16 Jun 2023, 03:32am -
Industry classification and the role it plays in momentum strategies [Alpha Architect]
Momentum strategies have been popular since the original Jagadeesh and Titman article was published in 1993. Variations on the strategies have employed calculating momentum on an individual and industry basis. For instance, in a 1999 study, Moskowitz and Grinblatt produced a positive and significant
- 3 months ago, 12 Jun 2023, 07:43pm -
How do AI exposures impact future stock returns? [Alpha Architect]
In this article we examine the research about how artificial intelligence influences stock returns by analyzing a measurement of firm-level AI exposures called Alness. AI Narrative and Stock Mispricing Arka Bandyopadhyay, Dat Mai, Kuntara Pukthuanthong SSRN, Working Paper A recent version of the
- 3 months ago, 12 Jun 2023, 07:42pm -
Negative Screening and the Sin Premium [Alpha Architect]
Negative exclusionary screening refers to an investment strategy in which socially controversial firms in particular sectors are excluded from the portfolio. The Global Sustainable Investment Review reports that, in 2020, more than $15 trillion (43% of total sustainable investments) were invested
- 3 months ago, 2 Jun 2023, 08:47pm -
Intangible-Adjusted Profitability Factor [Alpha Architect]
The past decade has witnessed a dramatic increase in spending on intangibles (not just research and development and advertising expenditures, but also expenses related to human capital) relative to tangible capital expenditures on plants and equipment. Given the change, it is not surprising that
- 3 months ago, 28 May 2023, 10:08pm -
2023 Democratize Quant Conference Recap and Materials [Alpha Architect]
We recently hosted our 6th Annual Democratize Quant Conference (sign up here for updates). This post is a recap of what we learned at the conference and some resources we can make available to the public. The agenda for the 2023 conference is outlined below: Date Time Topic Presenter Notes 5/18
- 3 months ago, 25 May 2023, 11:39pm -
Drawdowns and recoveries - what lessons do they hold? [Alpha Architect]
This paper helps investors better understand drawdowns and recoveries, in terms of empirical facts, practical implications, and strategies for handling them. It shows the importance of the “interplay” between drawdowns and recoveries (which the authors call “submergence”), which should not
- 3 months ago, 25 May 2023, 11:38pm -
Gold as a Safe-Haven Asset [Alpha Architect]
Abstract: In times of extreme macroeconomic events, including war, hyperinflation, or significant economic recessions, many investors believe gold investing is a safe haven. Is that belief warranted? Investors have concerns about the increased risks of inflation and a recession, Congress’ ability
- 4 months ago, 20 May 2023, 04:57pm -
Reducing the Impact of Negative Momentum Performance [Alpha Architect]
Momentum crashes are a blight on the performance of momentum strategies. Although there has been a fair amount of research on the topic, few practical solutions have emerged to mitigate the impact on portfolios. In this study, the authors document the outperformance of momentum stocks, made somewhat
- 4 months ago, 17 May 2023, 01:16am -
Pursuing Factor Premiums at the Industry and Country Level [Alpha Architect]
Given the strong empirical evidence demonstrating the persistence, pervasiveness, robustness, and implementability of premiums for the factors of size, value, momentum, and profitability in the cross-section of returns, investors may be tempted to gain exposure to those factors across industries and
- 4 months ago, 13 May 2023, 06:18pm -
Retail Investors - naive and biased? [Alpha Architect]
A series of events has led to significantly increased interest in stock and options trading by retail investors: The arrival of investing platforms (such as Robinhood) with zero trading commissions and no account minimums. The COVID-19 pandemic, causing many workers to largely remain at home for
- 4 months ago, 6 May 2023, 03:02am -
ETF Trading: What's the best time? [Alpha Architect]
The expense ratio aside, the cost of transacting in an ETF depends on the size of the bid/ask spread at any point in time during the trading day. The ETF investor should make evidence-based trading decisions since the bid/ask spread can range from 1 basis point (bp) to several hundred bps. What are
- 4 months ago, 2 May 2023, 09:53pm -
The Drivers of Booms and Busts in the Value Premium [Alpha Architect]
Over the almost 100 years that we have had data for U.S. stocks, the value premium (the annual average difference in returns, relative to accounting measures, from buying stocks whose market prices are low versus stocks whose market prices are high) has averaged 4.4% per year (when using
- 4 months ago, 29 Apr 2023, 12:20am -
Democratize Quant 2023 is Live. Sign-up! [Alpha Architect]
We will host our 6th annual “Democratize Quant” conference on May 18th via Zoom. The event is 100% free, but we do screen participants to enforce our “no spammers” policy. Request access Conference website Our speaker line-up is excellent, and we look forward to some exciting discussions.
- 4 months ago, 27 Apr 2023, 02:11am -
Novel explanations for risk-based option momentum [Alpha Architect]
Stock momentum trading is popular in practice and extensively investigated in academic studies. The paper finds a new option momentum, extending a recent study by Heston et al. (2022), who show that options also display momentum. Our risk-based option momentum is substantially stronger, has a risk
- 4 months ago, 27 Apr 2023, 02:11am -
Social Networks and Markets: What's the connection? [Alpha Architect]
What are the Research Questions? Communication in social networks is not new. In fact, it goes back to coffee houses in the 17th century. According to Standage (2006), “the drama of the South Sea Bubble, a fraudulent investment scheme that collapsed in September 1720, ruining thousands of
- 4 months ago, 24 Apr 2023, 10:27pm -
The Quality Factor: can Intangible Intensity improve it? [Alpha Architect]
In our book “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I provided evidence that among the hundreds of equity factors identified in the literature, there were only five that met our criteria for investment. The factor must have provided a premium that was: persistent
- 4 months ago, 24 Apr 2023, 10:27pm -
Information Decay: which factors have the longest half-lives? [Alpha Architect]
What are the research questions? The authors argue that factor exposures are random variables governed by a specific distribution that drives the behavior factor exposures over time. Five factors are examined including value, momentum, quality, investment and low volatility, over 12 developed and
- 5 months ago, 18 Apr 2023, 09:38am -
Trend-Following Filters – Part 6 [Alpha Architect]
This article analyzes six trend-following indicators from a digital signal processing (DSP) frequency domain perspective in which the indicators are considered as digital filters and their frequency response characteristics are determined. In addition, potential trading signals generated by each
- 5 months ago, 12 Apr 2023, 09:53pm -
Informational Efficiency of Stock Prices and Index Investing [Alpha Architect]
The authors ask the following questions: Does the rise of index investing change information production in the economy? Does it affect the informational efficiency of stock prices? What are the Academic Insights? The authors augment (and improve) the Grossman and Stiglitz (1980) model of endogenous
- 5 months ago, 10 Apr 2023, 10:06pm -
Combining Reversals with Time-Series Momentum Strategies [Alpha Architect]
The empirical evidence from studies such as the 2017 paper “A Century of Evidence on Trend-Following Investing” and the 2020 paper “Time Series Momentum in the US Stock Market: Empirical Evidence and Theoretical Analysis” has found that time-series momentum (TSMOM) has demonstrated
- 5 months ago, 7 Apr 2023, 08:02pm -
Wes Discusses Value Investing Foundations with Isaiah Douglass [Alpha Architect]
Here is a link to our recent chat with Isaiah Douglass and Josh Bennett. An overview of the conversation is below: On this week’s episode, Isaiah is joined by expert Dr. Wesley Gray, CEO of Alpha Architect, to discuss the concepts of value
- 5 months ago, 7 Apr 2023, 08:02pm -
The FTX collapse: how did it impact traditional assets? [Alpha Architect]
This article deals with the degree of market vulnerability to spillovers from disruptions in the cryptocurrency markets. This study investigates the impact of the FTX collapse and bankruptcy across global financial markets. What do responses of financial markets to the collapse of FTX say about
- 5 months ago, 5 Apr 2023, 07:19pm -
Is a Naive 1/N Diversification Strategy Efficient? [Alpha Architect]
Investment strategy should be based on three fundamental principles. First, markets are highly, though not perfectly, efficient. That leads to the conclusion that active management is the loser’s game. Second, if markets are efficient, it must follow that you should believe that all unique sources
- 5 months ago, 2 Apr 2023, 10:23am -
R & D, Expected Profitability, and Expected Returns [Alpha Architect]
Since the development of the CAPM, academic research has attempted to find models that increase the explanatory power of the cross-section of stock returns. We moved from the single-factor CAPM (market beta) to the three-factor Fama-French model (adding size and value), to the Carhart four-factor
- 6 months ago, 19 Mar 2023, 04:52pm -
Salience Theory: How does it impact Momentum Profit? [Alpha Architect]
This research examines the potential of enhancing a standard momentum strategy using signals derived from Salience Theory (ST). The strategy presented here is to exclude stocks with extreme salience scores and then analyze the risk and return properties of the ST strategy. Salience theory and
- 6 months ago, 7 Mar 2023, 06:45am -
Intangibles and the Value Factor [Alpha Architect]
Traditional value strategies use common valuation metrics, such as book-to-market (B/M), price-to-earnings (P/E), price-to-sales (P/S) or price-to-cash flow (P/CF), to establish a ratio between a market value and a fundamental anchor to assess the cheapness of a stock. The largest historical
- 6 months ago, 4 Mar 2023, 05:39pm -
International diversification - does it work (when you need it)? [Alpha Architect]
In this article, the authors examine the research on the benefits of international diversification. Some argue that because equity markets generally crash simultaneously, there are no benefits to having equity diversification. The evidence from this paper rejects this hypothesis. Diversification
- 6 months ago, 1 Mar 2023, 04:39pm -