Quant Mashup - Alpha Architect
Artificial Intelligence and the Risks of Harking (Hypothesizing After-the-Fact) [Alpha Architect]
Academics have long been aware of the risks of data mining—torturing the data until it confesses. The concern is that correlation of variables doesn’t imply that the correlation is a result of causation. That is the reason that the prevailing academic standard for researchers is that they should
- 3 weeks ago, 21 Jan 2025, 04:33pm -
Training Machine Learning Models For Return Prediction [Alpha Architect]
Machine learning models have proven effective in predicting stock returns using lagged stock characteristics, but their success is influenced by a wide range of modeling choices. One critical, yet often overlooked, choice is how stocks are weighted in the objective function during training, with
- 1 month ago, 13 Jan 2025, 09:13pm -
Stocks aren’t always the best in the long-run [Alpha Architect]
By examining data going back to 1792, McQuarrie’s study comes up with a surprising observation : stocks are not as dominant as once thought. The variability of the performance of stocks vs. bonds across various time periods is dramatic. So buckle up, stocks do not invariably outperform bonds.
- 1 month ago, 7 Jan 2025, 08:58pm -
Investigating Simple Formulaic Investing [Alpha Architect]
Investing formulas are simple, easy-to-implement, systematic, stock screeners that provide instructions on how to outperform the total stock market. Marcel Schwartz and Matthias Hanauer, authors of the December 2024 study, “Formula Investing,” evaluated the effectiveness of four such popular
- 1 month ago, 4 Jan 2025, 04:52am -
What the Index Effect’s Disappearance means for Market Efficiency [Alpha Architect]
This paper investigates the puzzling decline in the price impact of S&P 500 index additions and deletions over the past four decades, despite the rapid growth of passive investing. It explores potential explanations, including changes in market liquidity and efficiency, shifts in the composition
- 1 month ago, 4 Jan 2025, 04:51am -
Intangibles and the Performance of the Value Factor [Alpha Architect]
Systematic factor-driven value strategies have underperformed broad market indices (such as the S&P 500) over the past 15+ years. That has led many to question whether intangible assets, such as patents and proprietary software, are properly treated. Current accounting standards, which require
- 1 month ago, 23 Dec 2024, 02:57am -
Estimating Long-Term Expected Returns [Alpha Architect]
This paper examines various frameworks and proxies for forecasting long-term expected returns (E(R)) over periods of 10 to 20 years, focusing on out-of-sample performance and the impact of these forecasts on investment decisions. It compares models based on yield, valuation, and the combination of
- 1 month ago, 17 Dec 2024, 07:06pm -
Frog in the Pan Momentum: International Evidence [Alpha Architect]
This article analyzes various reasons why momentum strategies might work outside US borders. While the US story is firmly rooted in behavioral biases, is the same true on an international scale? That seems logical and likely. In fact, the authors conclude that a “slow diffusion of news best
- 2 months ago, 9 Dec 2024, 08:00pm -
Diversifying Trend Following Strategies Improves Portfolio Efficiency [Alpha Architect]
Since the turn of the century portfolios have been exposed to four periods of crisis: the bursting of the tech bubble and the events of September 11, 2001, from 2000-2002; the Great Financial Crisis in 2007-2008, the COVID-19 pandemic in 2020, and the period of persistent inflation in 2022 when both
- 2 months ago, 6 Dec 2024, 07:30pm -
Time-Varying Drivers of Stock Prices [Alpha Architect]
This paper examines the time-varying roles of subjective expectations in driving stock price and return variations. Specifically, it focuses on how subjective cash flow expectations (CF) and discount rate expectations (DR) contribute to stock price fluctuations across different economic conditions,
- 2 months ago, 2 Dec 2024, 04:33pm -
Calendar Anomalies, Much Ado About Nothing [Alpha Architect]
An anomaly is a pattern in stock returns that deviates from what is expected based on established financial theories or models. These patterns can sometimes present opportunities for abnormal returns. However, they are often inconsistent and challenging to exploit. Many anomalies have achieved
- 2 months ago, 30 Nov 2024, 08:36pm -
Factors are global, respectable and repeatable [Alpha Architect]
Do we have a chaotic “factor zoo” as some critics maintain? Is there a replication crisis in the research on factors? The authors of this research answer in the negative and argue that 82% of factors are replicable, the factor zoo is well-organized, and the factors are legit. Such bold
- 2 months ago, 25 Nov 2024, 09:25pm -
Improving Low Volatility Strategies [Alpha Architect]
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 while, empirical studies have found the actual relationship to be basically flat, or even negative. In addition,
- 2 months ago, 24 Nov 2024, 09:17pm -
Rethinking Asset Growth in Asset Pricing Models [Alpha Architect]
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
- 3 months ago, 14 Nov 2024, 06:46pm -
Markets Becoming More Efficient: The Disappearing Index Effect [Alpha Architect]
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
- 3 months ago, 10 Nov 2024, 09:12pm -
Using Trading Volume to Optimize Portfolio Construction and Implementation [Alpha Architect]
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
- 3 months ago, 3 Nov 2024, 09:38pm -
Can Artificial Intelligence outsmart seasoned equity analysts? [Alpha Architect]
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
- 3 months ago, 28 Oct 2024, 10:05pm -
Artificial Intelligence, Textual Analysis and Hedge Fund Performance [Alpha Architect]
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
- 3 months ago, 20 Oct 2024, 10:17pm -
The Sahm Rule as a Recession Indicator [Alpha Architect]
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
- 3 months ago, 15 Oct 2024, 11:15pm -
Reading the WSJ May Make You a Better Economist [Alpha Architect]
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
- 4 months ago, 8 Oct 2024, 11:52pm -
The Hidden Cost of Index Replication [Alpha Architect]
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
- 4 months ago, 8 Oct 2024, 11:51pm -
Can Skewness Identify Future Outperforming Mutual Funds [Alpha Architect]
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
- 4 months ago, 29 Sep 2024, 03:23am -
Data-driven Approach to Clustering Similar Macroeconomic Regimes [Alpha Architect]
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,”
- 4 months ago, 23 Sep 2024, 09:44pm -
Trend-Following Filters – Part 8 [Alpha Architect]
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
- 4 months ago, 17 Sep 2024, 10:29pm -
Investors trade Cryptos and Trad-Fi Differently [Alpha Architect]
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,
- 5 months ago, 14 Sep 2024, 08:32pm -
Exploring Bond Tax Efficiency: Futures or Bond ETFs? [Alpha Architect]
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
- 5 months ago, 8 Sep 2024, 10:02pm -
Adding Leveraged, Long-Short Factor Strategies to Improve Tax Alpha [Alpha Architect]
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
- 5 months ago, 8 Sep 2024, 10:02pm -
From Man vs. Machine to Man + Machine: The Art and AI of Stock Analyses [Alpha Architect]
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
- 5 months ago, 26 Aug 2024, 10:47pm -
Fixing the poor performance of the book-to-market ratio [Alpha Architect]
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
- 5 months ago, 20 Aug 2024, 10:09pm -
Tax management: does it benefit portfolio returns? [Alpha Architect]
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
- 6 months ago, 13 Aug 2024, 10:16pm -
The Value of WallStreetBets Investment Research Recommendations [Alpha Architect]
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
- 6 months ago, 3 Aug 2024, 09:58am -
Bayesian Solutions and Linear Asset Pricing Models [Alpha Architect]
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
- 6 months ago, 25 Jul 2024, 06:08pm -
The Impact of Amortizing Volatility across Private Investments [Alpha Architect]
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).
- 6 months ago, 19 Jul 2024, 10:09pm -
Low-priced stocks: do they impair performance? [Alpha Architect]
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
- 7 months ago, 12 Jul 2024, 06:52pm -
Macroeconomic announcements: how do they impact spending? [Alpha Architect]
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
- 7 months ago, 5 Jul 2024, 08:10pm -
U.S. Companies Have Outperformed Japanese Companies, or Have They? [Alpha Architect]
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
- 7 months ago, 29 Jun 2024, 10:04pm -
Rebalancing: can trading costs and market frictions be mitigated? [Alpha Architect]
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
- 7 months ago, 25 Jun 2024, 01:17pm -
Short Positions - do investors underreact due to illiquidity? [Alpha Architect]
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
- 7 months ago, 22 Jun 2024, 03:03pm -
How to Track Retail Investor Activity in TAQ [Alpha Architect]
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,
- 7 months ago, 18 Jun 2024, 12:17pm -
Private Equity May Not Be the Diversifier We Think (Due to Volatility Laundering), But Private Credit Could Be [Alpha Architect]
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.
- 7 months ago, 16 Jun 2024, 03:45am -
Complexity is a virtue in return prediction [Alpha Architect]
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
- 8 months ago, 11 Jun 2024, 07:17pm -
Quality, Factor Momentum, and the Cross-Section of Returns [Alpha Architect]
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
- 8 months ago, 31 May 2024, 08:08pm -
Momentum Everywhere, Even Cross-Country Factor Momentum [Alpha Architect]
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
- 8 months ago, 25 May 2024, 03:15am -
Social Media: The Value of Seeking Alpha’s Recommendations [Alpha Architect]
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
- 8 months ago, 17 May 2024, 06:20pm -
How Volatility and Turnover Affect Return Reversals [Alpha Architect]
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
- 9 months ago, 13 May 2024, 07:42pm -
Using Machine Learning Programs to Forecast the Equity Risk Premium [Alpha Architect]
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
- 9 months ago, 13 May 2024, 07:42pm -
Momentum and the Clarity of the Trend [Alpha Architect]
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,
- 9 months ago, 5 May 2024, 11:00pm -
MLMs: do they work better than traditional approaches? [Alpha Architect]
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
- 9 months ago, 30 Apr 2024, 12:44am -
Is Sector Neutrality in Factor Investing a Mistake? [Alpha Architect]
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
- 9 months ago, 18 Apr 2024, 05:13am -
Minimizing the Risk of Cross-Sectional Momentum Crashes [Alpha Architect]
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
- 10 months ago, 13 Apr 2024, 08:31pm -