Momentum, the tendency of past winner stocks to outperform past loser stocks over the next several months, is one of the most well-documented and well-researched asset pricing anomalies. In our book “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I presented the evidence of a

Plenty of research ( most recently, Cziraki et al. 2021) shows that insider buys contain value-relevant information while insider sales include little to no information. But what about the action of “not trading”? The authors of this study ask the following: Are the trades of portfolio insiders

Short answer up front–very little.(1) This was a simple question posed to me by one of our blog readers–what impact does excluding stocks trading at 10x P/S have on a Momentum portfolio? A good question–especially for those who are “value” investors that are interested in momentum. For

Outperforming the market, before expenses, is a zero-sum game—if one group of active investors outperforms, another group of active investors must underperform. Is there a group of sophisticated investors who persistently exploit more naïve investors? The body of research has found that before

Value and momentum are two of the most powerful explanatory factors in finance. Research on both has been published for over 30 years(1). However, it was not until recently that the two had been studied in combination and across markets. Bijon Pani and Frank Fabozzi contribute to the literature with

In this article, the authors expound on the importance of the factor “revolution” in finance. Factor investing has moved from a bedrock position to a future of innovation and disruption. With respect to factors the authors discuss where we have been and what can we look forward to. What are the

The 2014 study by Andrea Frazzini and Lasse Pedersen, “Betting Against Beta,” established strong support for low-beta (as well as low-volatility) strategies. The authors found that for U.S. stocks, the betting against beta (BAB) factor (a portfolio that holds low-beta assets leveraged to a beta

A common mistake made by many passive investors is that they view all index funds in the same asset class as “commodities(1)”, often considering only the expense ratio when making their investment choices. However, not all index funds are alike, and not all passively managed funds (what I refer

In this research, the authors explore the role of financial intermediaries in contagion or comovements in pricing efficiency. Specifically, lead market makers (LMMs) like Goldman Sachs, Cantor Fitzgerald, RBC Capital Markets, and others, have funding constraints that may influence their ability to

As the chief research officer of Buckingham Strategic Partners, the issue I am being asked to address most often is about fixed income strategies when yields are at historically low levels and inflation risk is heightened due to the unprecedented increase in money creation (through quantitative

The growth of ETFs has been explosive (and we aren’t helping the matter via ETF Architect which facilitates low-cost high quality ETF white label services). At the end of 2020, there was roughly $5.4 trillion invested in ETFs in the United States, representing more than 25% of US market trading by

Firm characteristics such as size, book-to-market ratio, profitability, and momentum have been found to be correlated with expected returns. The predictive power of these characteristics may stem from their industry component, their firm-specific component, or both. For example, while the study

How investors understand and use central bank communications, aka FEDSPEAK, is oftentimes cryptic and difficult to analyze. This study attempts to provide some clarity to this issue by applying textual analysis to both high-frequency price and communication data, to focus on episodes whereby stock

We can define an investment bubble as an irrational strong price increase—implying a predictable strong decline. The efficient market hypothesis (EMH) implies both the absence of bubbles and that the future return is unpredictable. In his Nobel Prize lecture, the father of the EMH, Eugene Fama

One of the most established tenets in social psychology science states, “When considering what content to share in their social interactions, people primarily contemplate what impressions their sharing could create among receivers and whether those impressions are consistent with who they are or

We recently hosted our Democratize Quant Conference (sign up here for updates). This post is a recap of what we heard and some resources we can make available to the public. Democratize Quant 2022 Agenda/Outline Session 1: State of the Asset Management Industry (with a focus on the ETF aspect) Dave

Traditional finance theory suggests that stocks prices always reflect their fair market values based on publicly available information. Or in academic parlance, the “semi-strong” form efficient markets hypothesis serves as the null. What are the implications of this hypothesis? Well, the

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. However, empirical studies have found the actual relationship to be basically flat, or even negative. In addition,

Who among us wouldn’t want to be the savior that predicts a market crisis and saves our clients from losses in capital — or even better — profits from them? A central topic of interest for academics is whether there are more precise tools to predict financial crises. Those who believe so

Academic research has found that factor premiums are both time-varying and dependent on the economic cycle. For example, the authors of the 2017 study “Fama-French Factors and Business Cycles” examined the behavior of six Fama-French factors—market beta (MKT), size (SMB), value (HML), momentum

How well do quantitative investors navigate around the changes to the accounting standards that are endemic to the financial data used in quantitative strategies? The numbers reported on financial statements are wholly governed by regulation and by each firm’s interpretation of those accounting

As mind-bending as it sounds, although a company’s internally generated intangible investments generate future value, they are currently not accepted as assets under US GAAP. Omission of this increasingly important class of assets reduces the usefulness and relevance of financial statement

Diversification has been around since the early 1950s and is often considered a “free lunch” in finance. But is that actually the case? We’ve highlighted here and here that the reality is more complicated than the theory. Consider the two basic assumptions about correlations in the context of

From 1991 to 2018, capital expenditures as a percentage of total sales remained relatively flat, at about 10 percent. On the other hand, personnel expenses almost doubled during that time. In fact, by 2018 personnel expenses (the costs for hiring, wages, salaries, and bonuses; social security and

Previous articles in this series examine, from a digital signal processing (DSP) frequency domain perspective, various types of digital filters used by quantitative analysts and market technicians to analyze and transform financial time series for trend-following purposes. An Introduction to Digital

The question of whether or not the FED considers or responds to the stock market in its policy decisions has been studied fairly extensively, however, the subject of the existence of the “FED put” continues to pop up in the literature. In this particular revival of the issue, the authors are

From 2017 through March 2020, the relative performance of value stocks in the U.S. was so poor, experiencing its largest drawdown in history, that many investors jumped to the conclusion that the value premium was dead. It is certainly possible that what economists call a “regime change” could

A lot of ink has been spilled on a seemingly simple question: Why does the momentum factor exist? We have done our fair share contributing to the question and our collective conclusions are in our book Quantitative Momentum. We walked away from the question and determined the following: We will

The most basic tenet of financial theory is that risk and expected return are related. One widely used measure of risk is volatility. As far back as 1976, with the publication of Fischer Black’s “Studies of Stock Price Volatility Changes,” financial economists have known that volatility and

Inflation — what’s that? … It has been quite a while since inflation has been considered a problem. Today, however, the angst surrounding the possibility of a resurgence in inflation is real and “top of mind” for investors. If the current fear becomes a reality, how should investors react?

In our 2016 book “Your Complete Guide to Factor-Based Investor” Andrew Berkin and I recommended that due to the risks of data mining (or p-hacking)—researchers torture the data until it confesses—for you to consider investing in a factor it should have demonstrated a premium that was:

Previous articles in this series examine, from a digital signal processing (DSP) frequency domain perspective, various types of digital filters used by quantitative analysts and market technicians to analyze and transform financial time series for trend-following purposes. An Introduction to Digital

Allocations to illiquid assets(1) have become increasingly popular, thus requiring asset managers to consider portfolio-wide liquidity characteristics. Although determining the price of illiquidity is a challenge for investors, the construction of a portfolio that includes liquidity constraints can

Itzhak Ben-David, Jiacui Li, Andrea Rossi, and Yang Song contribute to the literature on the behavior of individual investors with their July 2021 study “What Do Mutual Fund Investors Really Care About?”, published in the July 2021 issue of The Review of Financial Studies. They began by noting

Momentum, the tendency of past winner stocks to outperform past loser stocks over the next several months, is one of the most well-documented and well-researched asset pricing anomalies. In our book, “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I present the evidence of a

We are calling it quits for the holidays. Most of us have kids and Santa is coming to town! We’ll talk about research and educate investors next week. Here are the Top 5 content pieces this year (Based on traffic): Even God would get fired as an Active Investor Does Gamma Hedging Actually Affect

No matter how you slice it, Value stocks are historically cheap compared to the past. There have been numerous articles on this topic, such as Ryan’s post here, Larry Swedroe’s post here, and more recently, Cliff Asness’ post here. Cliff’s post is one picture, shown below. 1 Source:

Value stocks sharply underperformed growth stocks from 2017 to 2020, exacerbating a longer period of lackluster performance dating back to the Global Financial Crisis. The Death of Systemic Value Investing is not new news for frequent readers of the blog nor are the possible pathways to Resurrecting

Most readers are familiar with p-hacking and the so-called replication crisis in financial research (see here, here, and here for differing views). Some claim that these research challenges are driven by a desire to find ‘positive’ results in the data because these results get published, whereas

The current workhorse asset pricing model is the Fama-French five-factor model (2015), which added the profitability and investment factors to their original (1992) three factors of market beta, size, and value—increasing the model’s explanatory power. Nusret Cakici and Adam Zaremba contribute

Traditional finance academics lean towards risk-based models to explain why various return characteristics, such as value and momentum, predict returns. But there is another school of thought often referred to as ‘behavioral finance.’ This field has some of its own ideas (see below) on why

Hendrik Bessembinder published a fascinating paper, which finds that nearly all publicly traded stocks in the U.S. — if held as buy and hold investments — underperform Treasury bills. This finding is incredibly surprising and interesting. Of course, when bold claims are made, they tend to

About a year and a half ago, after one of the worst relative drawdowns the value factor has ever seen, I wrote a piece showing the value factor was cheap relative to history. Since then, value strategies are on a solid run (look at pretty much any type of value strategy and I think you’d agree).

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. However, empirical studies have found the actual relationship to be basically flat, or even negative. Over the last 50

Ben and Cameron, which host the excellent Rational Reminder podcast, sit down with Jack Vogel and go through a laundry list of factor investing questions. The topics discussed: 0:27 Do long-only factor premiums survive transaction costs? 2:28 Would the market impact of rebalancing a fund like MTUM

Liquidity—the ability to buy and sell significant quantities of a given asset quickly, at low cost, and without a major price concession—is valuable to investors. Therefore, they demand a premium as compensation for the greater risks and costs of investing in less-liquid securities. For example,

Eric Balchunas had a recent tweet that I found fascinating. Eric’s tweet merely captures the tip of the iceberg with respect to the current market environment, which certainly feels “bubbly.” 1 The gist of the tweet is that $META, which is an ETF from our friends over at Roundhill Investments,

Did you know that the percentage of foreign sales of the FTSE 100 is 76% and 43% for the SP500? This study investigates the power of indirect international exposure, that is international exposure through holdings of domestic stocks. The authors ask the following: What is the indirect international

Though classical option pricing models assume that options are redundant assets, more recent research rejects this idea. However, research on cross-sectional predictors of option returns is relatively scarce and not very well understood. Contrarily, extensive literature examines cross-sectional

What is the role of factors in asset allocation? Should investors substitute factor exposures for asset classes in constructing strategic portfolios? Or should factors be used as an instrument to enhance the performance of asset class-based allocation schemes? There are still quite a few questions