Quant Mashup - Alpha Architect
For Consistency Across Market Conditions, Try a Quant Manager [Alpha Architect]
What are the research questions? Using eVestment, a source of data for asset managers, the authors evaluate U.S. fundamental and quantitative managers, specifically core, growth and value styles. Eighteen strategy types (six in each style) were identified and results calculated using averages for
- 6 years ago, 2 Jul 2018, 12:43pm -
Podcast: Momentum in Theory, Momentum in Practice [Alpha Architect]
Here is a link to our podcast on Flirting with Models. Today I am speaking with Jack Vogel, co-CIO of boutique ETF issuer Alpha Architect. I’ve known Jack for some time now and was particularly excited to bring him on the show for two reasons. The first, which you will quickly learn in the
- 6 years ago, 29 Jun 2018, 11:33am -
Explaining the Beta Anomaly [Alpha Architect]
The superior performance of low-beta and low-volatility stocks was documented in the literature back in the 1970s — by Fischer Black (in 1972) among others — even before the size and value premiums were “discovered.” The low-beta/low-volatility anomaly has been demonstrated to exist in
- 6 years ago, 28 Jun 2018, 01:49pm -
Financial Constraints Generate a 6.5% 5-Factor Fama-French Alpha? [Alpha Architect]
Farre-Mensa and Ljungqvist (2016) observe that many measures of financial constraints used in the literature are flawed. In fact, to date, it remains an empirical challenge to quantify them. The authors attempt at solving this problem by answering the following research questions: Can textual
- 6 years ago, 25 Jun 2018, 10:45pm -
Trust the Process [Alpha Architect]
As a native Philadelphian and huge basketball fan, I fully agree with the 76ers fan’s rally cry — Trust the Process. Even the players, such as Joel Embiid, have echoed the sentiment of the fans: For those not in Philly and not too familiar with the NBA, “Trust the Process” explains the 76ers
- 6 years ago, 23 Jun 2018, 07:05am -
A Smarter CAPE Ratio to Better Forecast Expected Stock Returns [Alpha Architect]
What are the research questions? The authors propose and test an enhanced Shiller model that incorporates macroeconomic conditions, by modeling real bond yields and volatility, equity volatility and inflation, in a 2 step approach to forecasting equity returns. The underlying thesis is that the
- 6 years ago, 19 Jun 2018, 12:33am -
The 52 Week High and the Q-Factor Investment Model [Alpha Architect]
In the past, we have examined the following two topics: (1) stock performance & the 52-week high and (2) the investment CAPM. When examining the performance of stocks relative to their respective 52-week high (highlighted by us here), the authors (George and Hwang) find the following: When
- 6 years ago, 14 Jun 2018, 10:35pm -
Commodities for the Long Run [Alpha Architect]
The paper investigates this issue by answering the following research questions: Are commodities returns positive on average? How do they vary in different economic states (backwardation/contango; expansion/recession periods; unexpected inflation) ? How have they contributed to a broad portfolio?
- 6 years ago, 11 Jun 2018, 10:25pm -
The Future for Factor Investing May Be Different Than its Backtested Past [Alpha Architect]
We believe there are cause and effect relationships in the world — and in investing — that hold true over time. Many are common sense and easily observable – like fire creates smoke – while others are harder to see and understand. With factor investing, true relationships can be hard to see
- 6 years ago, 9 Jun 2018, 10:16am -
Machine Learning for Financial Market Prediction With Sklearn and Keras [Alpha Architect]
Recently, Wes pointed me to this interesting paper by David Rapach, Jack Strauss, Jun Tu and Guofu Zhou: “Dynamic Return Dependencies Across Industries: A Machine Learning Approach.” The paper presents a strategy that forecasts industry returns and shows excellent historical returns. In this
- 6 years ago, 6 Jun 2018, 11:29am -
The Inconsistent Performance of Value and Size Factors in the Chinese A-Share Market [Alpha Architect]
What are the research questions? Does the Fama-French “size” factor explain the cross-section of stock returns in the Chinese A-share market? Does the Fama-French “value” factor explain the cross-section of stock returns in the Chinese A-share market? What are the Academic Insights? YES. The
- 6 years ago, 4 Jun 2018, 12:21pm -
Factor Regressions Problems and How to Fix Them [Alpha Architect]
Factor Regressions are one way to ascertain a fund’s exposure to certain factors that an investor/advisor may want to allocate towards, such as Value, Momentum, Quality, etc. Luckily, there are some great free tools available online, such as portfoliovisualizer.com, that allows investors to run
- 6 years ago, 1 Jun 2018, 09:34pm -
Sharpening the Arithmetic of Active Management [Alpha Architect]
For many investors, the superiority of passive investing over active investing is axiomatic (Earth to passive investors; Lunch is never free!) And why not? Study after study has demonstrated that only a small portion of actively managed funds beat their benchmarks over long time frames. A recent
- 6 years ago, 31 May 2018, 04:07pm -
Style Investing in Fixed Income [Alpha Architect]
The paper investigates this issue by answering the following research questions: Can common robust risk premia (value, momentum, carry and defensive) enhance returns in Fixed Income investing? Do style-based Fixed Income portfolios present diversifying potential? Is a long/short implementation
- 6 years ago, 31 May 2018, 04:06pm -
Investor Attention and the Low Volatility Anomaly [Alpha Architect]
One of the big problems for the first formal asset pricing model developed by financial economists, the Capital Asset Pricing Model (CAPM), was that it predicts a positive relationship between risk and return. However, the historical evidence demonstrates that while the slope of the security market
- 6 years ago, 26 May 2018, 11:20am -
What to do with Underperforming Investments? Assessment via Bayesian Inference [Alpha Architect]
Assume you made a decision to invest in an active strategy based on, say, a backtest of the underlying process (to be clear, active means NOT passive market-cap weight in my context). Over the next few years, you sit in the strategy watching it underperform the passive benchmark. You are a
- 6 years ago, 23 May 2018, 07:53am -
Technical Analysis in the Chinese Stock Market: Does it Work? [Alpha Architect]
The authors conduct a comprehensive analysis of five categories of technical trading rules (including channel break rules, filter rules, moving average rules, oscillator rules and support/resistance rules) using aggregate data from the Chinese stock market for the period 1997 to 2015. Do technical
- 6 years ago, 21 May 2018, 01:06pm -
Explaining the Demand for Higher Beta Stocks [Alpha Architect]
The Capital Asset Pricing Model (CAPM) indicates returns should go up linearly as beta increases (in other words, risk and return are positively related). However, as I’ve previously discussed, the historical evidence demonstrates that, while the slope of the security market line is generally
- 6 years ago, 17 May 2018, 01:03pm -
5 Cutting Edge Investment Research Articles [Alpha Architect]
This year’s annual financial research “geekfest,” officially known as the American Finance Association Annual Meeting, assembles the world’s top-tier academic researchers to discuss their latest financial research. Source: Wes’s art studio and a photo by Daniel Cheung If you are looking to
- 6 years ago, 15 May 2018, 11:48am -
Value Investing Portfolios are Not Dead, But Some Have Done Better than Others [Alpha Architect]
Mirror, mirror, on the wall – which is the fairest of them all? Recent commentary (to include a recent Barron’s article) seems to suggest that value is dead and may never come back. Of course, most of these comments revolve around the price-to-book valuation metric, which, as the Barron’s
- 6 years ago, 4 May 2018, 11:04am -
Are Trend-Following and Time-Series Momentum Research Results Robust? [Alpha Architect]
The authors discuss a variety of past research papers on time-series momentum but pay particular attention to the Moskowitz, Ooi, and Pedersen (“MOP”) 2012 JFE paper, “Time Series Momentum.” This paper is arguably the first paper in recent memory to crack the top-tier academic journals with
- 6 years ago, 28 Apr 2018, 09:02am -
The Costs of Implementing Momentum Strategies [Alpha Architect]
There are now hundreds of factors in what John Cochrane famously called the “zoo of factors.” However, there are only a small number that meet the requirements for investment that my co-author, Andrew Berkin, and I establish in our book, “Your Complete Guide to Factor-Based Investing”:
- 6 years ago, 26 Apr 2018, 11:17am -
The World's Longest Multi-Asset Momentum Investing Backtest [Alpha Architect]
As evidenced by the image below, interest in momentum research has taken off since the original 1993 Jegadeesh and Titman paper: Source: “Two Centuries of Multi-Asset Momentum (Equities, Bonds, Currencies, Commodities, Sectors and Stocks)”
- 6 years ago, 24 Apr 2018, 12:16pm -
Bond Investing: Reach for Safety [Alpha Architect]
Yield. Within almost any asset class, investors want to know, what is the “yield” on the investment? For some investors, this is the most important and only screen used when sorting funds. Mutual fund companies have found ways to feed the beast by “juicing” the dividend yield on equity
- 6 years ago, 18 Apr 2018, 01:40pm -
ESG and Factor Investing [Alpha Architect]
A growing number of investors are seeking to construct portfolios that simultaneously capture the 1) long-term factor premia ( value, momentum, size etc.) and 2) have attractive ESG profiles. The main research questions of the paper are as follows: Is the relationship between ESG and factor stable
- 6 years ago, 16 Apr 2018, 02:18pm -
Systematic Investment Strategies are Hot. But What Happens Next? [Alpha Architect]
How will systematic (“coordinated”) investing affect prices? What is the risk of increasingly coordinated holdings (crowding)? How does coordinated investing affect market microstructure and optimal execution? Is factor timing possible? What are the issues in the design of factor-based
- 6 years ago, 9 Apr 2018, 09:37pm -
Tail Risk Hedging: An Alternative Approach to Risk Management [Alpha Architect]
This article proposes tail risk hedging (TRH) as an alternative model for managing risk in investment portfolios. The standard risk management approach involves a significant allocation to hiqh-quality bonds. However, this approach has historically reduced expected returns over the long term (see
- 6 years ago, 5 Apr 2018, 12:33pm -
Timing Country Exposure with Value: A Valuation Measure Horserace [Alpha Architect]
Buy cheap. This is a motto many live by, not only in their daily lives but also in their investment philosophy. Historically, “buying cheap” stocks was a good idea (i.e., the so-called “value” premium). But how might valuation matter when it comes to country allocations? In other words,
- 6 years ago, 3 Apr 2018, 12:02pm -
How to Perform Investment Sentiment Analysis on Twitter [Alpha Architect]
What are the research questions? By studying tweets on thirty companies in the Dow Jones Index, the authors ask the following research question: Is it possible to develop a system for the detection and discovery of the popularity of special events on Twitter that may influence the financial markets?
- 6 years ago, 3 Apr 2018, 12:01pm -
Risk-Based Explanations for the Momentum Premium [Alpha Architect]
Most of the literature on the momentum factor has focused on behavioral explanations, generally either investor underreaction or overreaction. For example, in his paper “Explanations for the Momentum Premium,” Yale University professor Tobias Moskowitz points out: Underreaction results from
- 6 years ago, 27 Mar 2018, 11:13am -
Momentum Everywhere, Including in Factors [Alpha Architect]
Momentum is the tendency for assets that have performed well (poorly) in the recent past to continue to perform well (poorly) in the future, at least for a short period of time. In 1997, Mark Carhart, in his study, “On Persistence in Mutual Fund Performance,” was the first to use momentum,
- 6 years ago, 22 Mar 2018, 01:20pm -
Stock Buybacks are Bad? What About the Alternative [Alpha Architect]
Recently there has been a fairly active discussion within the financial media on the topic of stock buybacks, or share repurchases. This is probably due to the recent tax reform, which has caused many to question where companies will spend their additional profits now that firms (on average) will be
- 6 years ago, 20 Mar 2018, 02:17pm -
Is The US Stock Market Overvalued? Depends on which Model You Ask [Alpha Architect]
When stock prices reach a new high, investors start asking the question: Are stocks overvalued? To answer this question, investors have developed several alternative equity valuation models. Typically, each of this models compares the stock market’s current price level to a benchmark. Among
- 6 years ago, 15 Mar 2018, 09:54pm -
Do Relative-Value Strategies Beat Traditional Systematic Value Investing Strategies? [Alpha Architect]
Readers often send us great questions related to different ideas on systematic value strategies. The outcome of years of back and forth with readers and internal discussions is several books and hundreds of blog posts on the subject of value investing. So…What have we learned? We’ve learned a
- 6 years ago, 14 Mar 2018, 12:51pm -
Worried about extreme down markets? Consider formal portfolio risk models [Alpha Architect]
Are there variations in the methods that funds use to manage risk? Do hedge funds practicing risk management outperform other funds during periods of financial crisis? Are there differences in the type of risk management practices in terms of performance? Are there competing explanations that may
- 6 years ago, 12 Mar 2018, 12:56pm -
Are Long/Short Equity Strategies Worth the Fees? [Alpha Architect]
High net worth individuals, university endowments, and public pension funds have heavily invested in long/short equity hedge funds. But is the long/short equity asset class benefiting investors? The pitfalls of expensive financial products are well documented in the academic literature; however, the
- 6 years ago, 7 Mar 2018, 11:09am -
Macroeconomic factors and Tactical Asset Allocation [Alpha Architect]
The literature shows that macroeconomic factors can drive asset returns, however, economists and investment teams operate independently. In this paper, the authors attempt to bring macroeconomic discipline to tactical asset allocation by highlighting macroeconomic “dashboards:” The authors
- 6 years ago, 6 Mar 2018, 05:24am -
Retail Short Sellers: Trading Skill or Insider Trading? [Alpha Architect]
What are the research questions? This study uses a new classification system for informed vs. uninformed retail trades: short selling stocks without options available indicates more informed trading than short selling stocks with options available. Is there a difference in returns between shorted
- 6 years ago, 28 Feb 2018, 10:31pm -
Are Factors Better and More Diversifying Than Asset Classes? [Alpha Architect]
Factor investing promises outperformance at low cost. But to add value in a portfolio, it must deliver positive risk-adjusted returns and with low correlation to existing holdings. Historically, pure factor exposures have earned similar risk-adjusted returns to buying and holding plain vanilla asset
- 6 years ago, 23 Feb 2018, 09:17pm -
Podcast: Managed Futures and Trend-Following with Dr. Kaminski [Alpha Architect]
Here is a link to our podcast on Behind the Markets Wes and Jeremy chat with Katy Kaminski, Visiting Lecturer in Finance at the MIT Sloan School of Management and co-author of the book, “Trend Following with Managed Futures: The Search for Crisis Alpha.” They discuss trend following and managed
- 6 years ago, 22 Feb 2018, 08:05pm -
Explaining the Value Effect in Emerging Markets [Alpha Architect]
What are the research questions To most readers, it’s no surprise that our ears perk up a little bit anytime someone attempts to broaden the understanding of the value anomaly. The precise reason why high book to market equities have higher expected returns has been a long-standing debate among
- 6 years ago, 21 Feb 2018, 04:31pm -
How to Evaluate Multi-Asset Strategies [Alpha Architect]
What are the research questions? Institutional Investors are increasingly allocating to multi-asset strategies (p.17 ) as they seek to access greater diversity, liquidity, and reduced volatility (survey results from Greenwich Associates, 2015). The main research questions of the paper are as
- 6 years ago, 20 Feb 2018, 07:50pm -
Short Sellers Profitably Trade Prior to Credit Rating Agency Announcements [Alpha Architect]
What are the research questions? This research focuses on the relationship between the frequency of unexpected short selling behavior and abnormal returns surrounding credit watch and rating change announcements in the equity market. It is notable that it employs a unique database that affords the
- 6 years ago, 12 Feb 2018, 11:30am -
Time Series Momentum (aka Trend-Following): A Good Time for a Refresh [Alpha Architect]
Similar to some better-known factors like size and value, time-series momentum is a factor which has historically demonstrated above-average excess returns. Time-series momentum, also called trend momentum or trend-following, is measured by a portfolio which is long assets which have had recent
- 6 years ago, 9 Feb 2018, 09:32am -
The End of 60/40? The Case for Diversified Value, Momentum, and Carry Risk Exposures [Alpha Architect]
What are the research questions? Despite Peter Bernstein’s suggestion in 2003 that adherence to a fixed and undiversified policy portfolio is dangerous, benchmarks ( the most used of which is the 60/40) are as popular today as they were 15 years ago. The authors study the following research
- 6 years ago, 6 Feb 2018, 11:47pm -
Value and Momentum Factors in Fixed Income [Alpha Architect]
Smart beta (or factor investing) seems to be the product du jour in ETFs. There are so many different factor products available that just about every fund company seems to offer them…even Vanguard is launching their own suite of factor-based stock funds. Note that nearly all of these products are
- 6 years ago, 2 Feb 2018, 11:50am -
Monetary Policy Rate Uncertainty Predicts Higher Equity Volatility [Alpha Architect]
What are the research questions? Financial theory asserts a clear link between the risk-free interest rate and the pricing of equity securities, regardless of the time horizon. Therefore, the market’s opinion about the uncertainty of rates should improve models forecasting equity volatility in the
- 6 years ago, 31 Jan 2018, 02:17pm -
A Quantitative Strategy for Enhancing Merger Arbitrage [Alpha Architect]
Merger arbitrage, sometimes known as “risk arbitrage,” is an investing strategy in which the investor bets on announced M&A deals. After a merger is announced, shares of the target tend to trade below the offered price (due to deal uncertainty), representing the arbitrage spread; if the deal
- 6 years ago, 25 Jan 2018, 10:37pm -
Value and Momentum Factor Portfolio Construction: Combine, Intersect or Sequence? [Alpha Architect]
Wes asked that I contribute to the ongoing debates regarding the construction of value and momentum portfolios. There are three key research pieces on the topic, all with different viewpoints: Alpha Architect’s take AQR’s take Newfound Research’s Take I encourage everyone to dig into the three
- 6 years ago, 19 Jan 2018, 10:07am -
The Mother of All Momentum Research Reports. A Must Read! [Alpha Architect]
J.P. Morgan researchers, Marko Kolanovic and Zhen Wei, produced an incredibly detailed report on all aspects of momentum (one of our favorite topics!) Here is a link to the report 188 pages of pure effort and information. Here is a summary of what is examined in the research: As the virtually
- 6 years ago, 18 Jan 2018, 11:31am -