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

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

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

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 (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

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

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

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

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

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,”

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

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,

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

Empirical research, including the 2020 study “An Empirical Evaluation of Tax-Loss Harvesting Alpha” and the 2023 study “Expected Loss Harvest from Tax-Loss Harvesting with Direct Indexing,” has found that tax-loss harvesting strategies in separately managed accounts (SMAs) can improve the

The research questions are as follows: How does AI perform compared to human analysts in predicting stock returns? Under what circumstances do human analysts retain their advantage over AI? What is the impact of combining human analysts with AI (the “Man + Machine” approach) on stock prediction

While the research, commentary and speculation about the failure of value factor strategies over the last decade or two continues along a number of avenues, we haven’t yet seen a movement back towards fundamental analysis or a discounted cash flow (DCF) approach. In this paper, the authors argue

As a result of the trading required to capture the premiums that drive factor strategies investors may face significant tax liabilities. The challenge for the portfolio manager is to incorporate tax-efficient trading practices at each rebalance to mitigate tax impacts and ultimately avoid

Wallstreetbets has become an increasingly prominent source of investment research, particularly for risk-seeking retail investors. The excitement from the GameStop episode resulted in the forum growing from 500,000 users in July of 2018 to 10.7 million users by June 2021. Do their recommendations

What is a Bayesian solution? Good question. Bayesian statistics, named for Thomas Bayes, is a structured framework that allows one to update the probability of an event occurring as new data about that event becomes available. In the context of the infamous Factor Zoo in investing, Bayes’ rule

While publicly traded stocks, bonds, and real estate have their prices constantly adjusted throughout the day, leading to lots of volatility, private capital managers have significant discretion as to when and how they mark-to-market or mark-to-model their portfolios (typically valued quarterly).

It is well documented in the literature that retail investors have an irrational preference (from a traditional finance perspective) for investing in high-volatility stocks which have lottery-like distributions—those that exhibit positive skewness and excess kurtosis (fat tails). Studies, such as

This paper explores several key aspects related to household consumption behavior during the Great Financial Crisis of 2008-2009, with a focus on the impact of salient adverse macroeconomic announcements. Spending Less After (Seemingly) Bad News Garmaise, Levi and Lustig Journal of Finance, 2024 A

Over the period January 2000-March 2024, the S&P 500 Index returned 7.4% per annum, outperforming the return of 2.2% per annum of Japanese large stocks (MSCI/Nomura data) by 5.2 percentage points per annum. The outperformance has been even greater since 2010, with the S&P 500 Index returning

The focus of this paper is to test an effective rebalancing method that prioritizes trades with the strongest signals to capture more of the factor premium while reducing turnover and trading costs. The authors coined the term “smart rebalancing” which involves prioritizing trades based on the

The important role played by short sellers, who, through their actions, keep prices efficient by preventing overpricing and the formation of price bubbles in financial markets, has received increasing academic attention in recent years. Research into the information contained in short-selling

This paper explores the effectiveness of the BJZZ algorithm, developed by Boehmer, Jones, Zhang, and Zhang (2021), in identifying and signing retail trades executed off exchanges with subpenny price improvements. A (Sub)penny For Your Thoughts: Tracking Retail Investor Activity in TAQ Barber, Huang,

Volatility laundering causes the risk-adjusted returns and the diversification benefits of private equity to be significantly overstated. However, the problem of volatility laundering is not a problem for all private investments, specifically not for high-quality, floating rate, private credit.

Finance has seen unprecedented growth in the use of artificial intelligence, specifically in machine learning models. Applications have included portfolio construction, stock analysis and in this case, the prediction of stock market returns. This paper discusses the benefits of using complex models

Of the hundreds of equity factors identified in the financial literature, there were only five that met the criteria Andrew Berkin and I established in our book Your Complete Guide to Factor-Based Investing. To be considered for investment, a factor must have provided a premium that was persistent

Among the many factors cited in academic research, only a handful have been sufficiently reliable for use in asset pricing models. One of those is momentum. The evidence has been robust for not only cross-sectional (relative) and time-series (absolute or trend) momentum, but also for factor

The increased popularity of social media as a forum for market participants to post and exchange opinions has been accompanied by heightened interest from academic researchers who have sought to determine if there is valuable information in the postings. For example, the June 2020 study “Do

In the research reviewed here, the authors analyze the relationship of aggregate market liquidity to the time-series performance of reversal strategies. The strength and persistence of reversals and reversal driven strategies appear to be different depending on specific risk features of those

The ability to predict stock returns and the equity risk premium (ERP) is of great interest to academics, financial practitioners, and investors, as future estimated returns have implications for asset allocations. To date, the best metric we have for forecasting future equity returns and the ERP is

Momentum continues to receive much attention from researchers because of the strong empirical evidence. Out of the hundreds of exhibits in the factor zoo, momentum (both cross-sectional [long-short] and absolute [trend]) was one of just five equity factors that met all the criteria (persistent,

Can AI models improve on the failures in predicting returns strictly from a practical point of view? In this paper, the possibilities are tested with a battery of AI models including linear regression, dimensional reduction methods, regression trees and neural networks. These machine learning models

The justification for neutralizing sectors in factor strategies is a work in progress. To date, academic researchers haven’t had an empirical model to mimic the impact of removing sector “effects” on the measurement and performance of factor strategies. The authors develop and test a

While empirical research on cross-sectional (long-short) momentum has shown high returns, investors have also experienced huge drawdowns—momentum exhibits both high kurtosis and negative skewness. Since 1926, there have been several momentum crashes that featured short but persistent periods of

Out of the hundreds of exhibits in the factor zoo, momentum was one of just five equity factors that met all the criteria (persistent, pervasive, robust, implementable, and intuitive) Andrew Berkin and I established in our book Your Complete Guide to Factor-Based Investing. Because of the strong

The benefits of diversification are well known. In fact, it’s been called the only free lunch in investing. Investors who seek to benefit from diversification of the sources of risk and return of their portfolios must accept that adding unique sources of risk means that their portfolio will

Perhaps the most well-documented and researched asset pricing anomaly is momentum—the tendency of past winner stocks to outperform past loser stocks over the next several months. While average time-series momentum (trend following) returns have been high, strategies employing trend following have

Academic research, including the studies “Do Investors Overpay for Stocks with Lottery-like Payoffs? An Examination of the Returns on OTC Stocks,” “Lottery Preference and Anomalies” and “Do the Rich Gamble in the Stock Market? Low Risk Anomalies and Wealthy Households,” has found that

“Conventional wisdom” can be defined as ideas that are so accepted that they go unquestioned. Unfortunately, conventional wisdom is often wrong. Two examples are that millions of people once believed the conventional wisdom that the Earth is flat, and millions also believed that the Earth is the

The academic research, including the 2023 studies “Lottery Preference and Anomalies” and “Do the Rich Gamble in the Stock Market? Low Risk Anomalies and Wealthy Households,” the 2022 study “Lottery Demand and the Asset Growth Anomaly,” and the 2014 study “Do Investors Overpay for

The paper aims to provide insights into the dynamics of benchmark selection, the effectiveness of Relative Performance Evaluation ( RPE ) incentivization, and the broader implications for fund performance and market competition. Self-Declared Benchmarks and Fund Manager Intent: “Cheating” or

Expectations of future earnings growth matter a great deal to valuations because investors, in their collective wisdom, assign higher valuations to companies they expect will grow more quickly in the future (growth stocks). In contrast, firms expected to show slower growth (value stocks) are

One use of the NLP (natural language processing) features of ChatGPT is to search out patterns in the immense amounts of news, data and other sources of information about specific stocks, and then efficiently convert them into summaries valuable for all types of investors. Can this be accomplished

In our book The Incredible Shrinking Alpha, Andrew Berkin and I presented the evidence demonstrating that the markets have become more efficient over time, making it more difficult to outperform the market on a risk-adjusted basis. Market efficiency explains the lack of persistent outperformance of

In our book, “The Incredible Shrinking Alpha,” Andrew Berkin and I identified four key trends that were increasing the hurdles for active managers in their quest to generate alpha: Academic research has been converting what was once alpha into beta (common factors that could be accessed at much

What are the Research Questions? This paper examines the decisions of sophisticated market participants – experienced institutional portfolio managers (PMs) – and the authors ask the following questions: Is there a significant difference in performance between buying and selling decisions made

Because of the strong evidence, momentum continues to receive much attention from researchers. Out of the hundreds of exhibits in the factor zoo, one of just five equity factors that met all the criteria (persistent, pervasive, robust, implementable, and intuitive) Andrew Berkin and I established in