The size effect is the phenomenon in which small stocks (i.e., those with lower market capitalizations), on average, outperform large stocks (i.e., those with higher market caps) over time. The size effect was first documented by several academic papers in the early 1980s ( Banz, 1981). However, it

What are the research questions? The authors present 4 MYTHs regarding stock buybacks popular in the financial press. MYTH 1: Companies are self-liquidating using share repurchases at a historically high rate. MYTH 2: Share repurchases have come at the expense of profitable investment. MYTH 3: The

One of the recurring themes we see in our research is the concept of “no pain; no gain.” Or as Corey Hoffstein says, “No pain, no premium.” Cliff Asness may put it best when he says that some strategies require that you hold on to them “like grim death.” Bottom line: nothing is easy in

In the great book and series Game of Thrones, the inhabitants of the Iron Islands have a saying “What is Dead May Never Die” which is to be replied with “But rises again harder and stronger.” I am reminded of this saying as more and more market commentators and practitioners declare that

What are the research questions? Do the most prominent long/short factors — value, momentum, carry, and defensive — survive out of sample? Can long/short factors be timed? What are the Academic Insights? YES. All of the factors exist out of sample, albeit their magnitudes are generally muted.(1)

We built a simple tool recently to review so-called value spreads over time. (1) This tool maps out the median valuations for the top decile and bottom decile “cheap stock” portfolios (as measured by EBIT/TEV). Why might this be useful? This tool allows one to identify the “valuation” spread

As a non-academic finance person, I was never really exposed to academic research until I started working on articles for Alpha Architect. Fortunately (or unfortunately, depending on your perspective), I am now very familiar with the so-called “cross-section of expected returns” debates.

The underperformance of value stocks over the past 10 years has received much attention from the financial media and led at least some investors to conclude that value investing is dead. From 2009 through March 2019, while the S&P 500 Index returned 14.2 percent per annum (total cumulative

The research presented here covers the largest number of factors (65) tested in the academic literature. The most robust and well-cited factors appear in the list of data items, available since the 1960s. A notable exclusion is the IBES dataset, which is available only in the 1980s. Is there

Nothing lasts forever and this definitely stands true for equity markets where volatility can explode and investors can lose a lot of money very quickly. Because of equity market volatility investors often seek so-called “crisis alpha” instruments, or assets that tend to go up when equity

Academic literature has documented a news sentiment effect on equities ( here and here ). The authors investigate the following research question: Does the sentiment derived from media content impact bond market investors? What are the Academic Insights? By studying the sentiment extracted from

There’s a large body of research, including the 2017 study “Tail Risk Mitigation with Managed Volatility Strategies” by Anna Dreyer and Stefan Hubrich, that demonstrates that, while past returns do not predict future returns, past volatility largely predicts future near-term

Two of the more interesting puzzles in finance are related to volatility—stocks with greater idiosyncratic volatility (IVOL) have produced lower returns and stocks with high uncertainty about risk, as measured by the volatility of expected volatility (vol-of-vol), underperform stocks with low

What are the research questions? This study uses a long and comprehensive time series covering 1977-2014, with just under 180,000 quarterly observations for trades of short sellers and demand for shares by corporate insiders. (see here for a related paper we covered recently that talks about

Early last week, Meb Faber included me on a conversation on buying stocks trading at 10x their company’s revenue (sales). Is this a good idea and how did it do in the past? Given that most “known” factors have underperformed over the past 10 years, I was interested in seeing if a somewhat

We did it. We democratized quant for one more year. Last year, we suffered through a 50% drawdown in attendance due to a perfectly timed snow storm. This year the weather cooperated with us and we were able to get everyone there. Full access to presentation videos and the accompanying slides (when

The authors decompose strategy returns into factor alpha, tax alpha, and residual return for 6 tax-managed versus and 6 tax-indifferent factor strategies and for one indexing strategy. In contrast to other studies, where the impact of starting date dependence is eliminated, this research generates a

In this week’s episode, we cover four articles published on our site. The first article, written by Ryan, examines the growth in assets of ETFs and Mutual Funds. The second article, summarized by Elisabetta, examines the performance of funds by differentiating the fund’s manager on his/her

The financial equivalent of the famous Miller Lite, “tastes great, less filling” debate is the debate between traditional financial economics which uses risk theories to explain asset pricing and the newer behavioral finance field that uses human behavior to provide the explanations.

In this week’s video, we discuss three posts. The first post discusses the new index analysis section on our site. The second post, written by Tommi, uses Hedge Funds’ past performance to identify if one can predict future Hedge Fund performance. The last post discusses Wes’ video examining an

Tax loss harvesting is widely promoted, but we think the benefits are generally misunderstood and often overstated.(1) • The benefits of loss harvesting arise from tax deferral, similar to the benefits of saving in a retirement account. • The benefits of tax deferral rise and fall with expected

In this week’s post, we discuss two posts. The first post, written by Elisabetta, examines a new method attempting to directly measure aggregate investor overconfidence. The second post, written by Larry Swedroe, examines issues that plague Factor Investing.

We are creating a series of long-form educational videos that present materials often covered in our white papers. The intent of these videos is make our content more accessible to visual learners. The video below is a presentation related to a long-form post we have on a post called, “The

For those interested in the literature on factor-based investing, a new paper by Robert Arnott, Campbell Harvey, Vitali Kalesnik and Juhani Linnainmaa, “Alice’s Adventures in Factorland: Three Blunders That Plague Factor Investing,” focuses on why, in some ways, it has failed to live up to its

What are the Research Questions? A common assumption in finance theory is that agents in the stock market behave rationally. Even if temporary mispricing occurs, due to irrational beliefs or incomplete information of some agents, arbitrageurs swiftly restore equilibria. In contrast, the history of

In 1921, University of Chicago Professor Frank Knight wrote the classic book “Risk, Uncertainty, and Profit.” An article from the Library of Economics and Liberty described Knight’s definitions of risk and uncertainty as follows: Risk is present when future events occur with measurable

The barrier to entry into the factor zoo has increased exponentially. Prof. Harvey (now working with RAFI) made this clear at the 2017 AFA address, when he highlighted the issue with data-mining in front of a room full of academics from top-flight research programs in the country. Prof. Harvey and

In today’s video, we examine three articles from last week. The first article, written by Larry Swedroe, examines the Momentum of News. The second article, written by Wes, examines an out-of-sample test on Momentum by looking at Russian stocks in the 19th century. The third article, written by

Since the development of the capital asset pricing model (CAPM) in the 1960s, hundreds of anomalies (what John Cochrane famously called a “zoo of new factors”) have been uncovered in the cross-section of stock returns. While some of the anomalies (such as the size and value factors) have

What are the research questions? Is there a relationship between short selling activity and insider selling? What is the impact of short selling trading strategies that are conditioned on insider trading signals? Does the price impact of short selling subsume that of insider trading? Is the price

Consider a market-timing strategy which supposedly predicts the direction of the stock market trend. Such a strategy generates Buy and Sell signals. A Buy signal is the signal to buy stocks, whereas a Sell signal is the signal to sell. Simple enough, but how does one evaluate the forecast accuracy

As the chief research officer for Buckingham Strategic Wealth and The BAM Alliance, I’m often asked, after any asset class or factor experiences a period of poor performance, if the historical outperformance of stocks with that characteristic has disappeared because the premium has become well

There is a substantial debate on the topic of factor investing and whether or not the “backtested” excess returns are actually achievable in practice. Much of the research on the topic suggests that practitioners in the field are unable to capture any of the so-called “factor premiums”. For

R is a programming language that owes it’s lineage to S, a language designed in it’s own developers words, “to turn ideas into software, quickly and faithfully.”(1) Shiny is an “interactive web technology” that makes it easy to take R models and publish them to the web. Jonathan L.

What are the research questions? What is the relationship between turnover and returns from a low volatility portfolio that integrates value and momentum exposures with low volatility? Does the relationship change if a only one factor is integrated with a low volatility strategy? Note: This is a

There are different investment approaches to identify sector winners and losers, such as price momentum strategies, top down approach based on specific macroeconomic indicators or bottom-up approaches to identify sectors with improving fundamentals. One widely used approach is business cycle

According to psychology literature, mood increases from Thursday to Friday and decreases on Monday. In general, people tend to evaluate future prospects more optimistically when they are in a good mood than when they are in a bad mood. In equity markets, the presence of optimism or pessimism that is

My last article used Warren Buffett’s pre-crisis sale of put options to highlight the risk of getting over our financial skis. In both temperament and negotiation, Warren can outlast most bear markets. Many of us cannot. Proponents of rebalancing should acknowledge the real risk that downturns can

Low volatility strategies have garnered a fair amount of popularity and a growing body of supporting research. Studies have shown risk reduction levels of 25%, while turnover has varied from 20% to 120%. However, higher turnover produces higher costs of trading, such that the excess return obtained

Everyone in finance remembers 2008–the Global Financial Crisis. Yes, I know, the final downward movement in the stock market was in early 2009. However, many remember 2008 as the year of the crisis. So now we are 10 years removed from the crisis. Why do I mention this? After the crisis, some began

One of the oldest and most persuasive arguments in the stock market is that small stocks outperform large stocks.(1) Warren Buffett, speaking at the 2013 Berkshire Hathaway Annual Meeting, summarized the sentiment when discussing the disadvantages of managing a huge amount of capital: There’s no

What are the research questions? The main purpose of this study was to examine the changes in the distribution of the US equity risk premium as the return horizon varies over the short term, medium and long term (see here for a piece that covers those topics). In this recap, we look at ancillary

We have all heard the mantra, “You can’t time the market!” But in reality, investors attempt to do just that every day as part of their tactical asset allocation strategies, which are less extreme variants of the classic trend-following “risk-on/risk-off” approach, which many associate

What are the Research Questions? The authors investigate the asset pricing implications of corporate manager sentiment, focusing on its predictability for future U.S. stock market returns. Specifically, they ask the following research questions: Does high corporate manager sentiment lead to

What are the research questions? China represents the world’s second largest stock market and a growing component of the world’s GDP. China also operates under peculiar political and economic environments relative to the market economies of the Western world. Because China is so unique, a

In a recent ETF column, Allan Roth listed five investment lessons. While I agreed with much of what he wrote, one claim—factor investing has “failed miserably”— called for examination of the facts. But first, a little background. William Sharpe, Jack Treynor and John Linter are typically

There is a 72% probability of the San Franciso Bay Area getting hit by at least one earthquake of a magnitude of 6.7 or stronger between today and 2043 according to the United States Geological Survey, which is a scientific agency of the U.S. government. An earthquake of that magnitude is likely to

In today’s video, we examine three posts. First, we examine ESOPs and 1042 QRP (qualified replacement property) with Doug Pugliese. Second, we examine a guest post by Nicolas Rabener examining Value, Momentum and Carry over the past 10 years. Last, we examine a guest post by Elisabetta discussing

Rankings are everywhere in the finance industry. A number of papers identify bonus schemes and tournament incentives(1) among the main drivers of excessive risk-taking in developed financial markets. The article studies the impact of rankings on professionals’ risk-taking investment decisions.

The October 2018 market correction where the S&P 500® Index fell by 7%, its worst October since 2008,(1) left investors searching for a culprit. Some of the usual suspects were blamed — rising geopolitical tensions ahead of the US midterms, the high likelihood of a slowdown in economic and