Robert Novy-Marx’s 2013 paper “The Other Side of Value: The Gross Profitability Premium” not only provided investors with new insights into the cross-section of stock returns, but also helped further explain some of Warren Buffett’s superior performance. (Wes Gray summarized that paper

“What is the correct benchmark for trend following?” This is a difficult question, and there really is no perfect answer. As many of our readers know, we are fans of trend following and trend-followed portfolios. For those unfamiliar with trend following, the idea is rather simple–invest in an

The CAPM was the first formal asset-pricing model. Market beta was its sole factor. With the 1992 publication of their paper, “The Cross-Section of Expected Stock Returns,” Eugene Fama and Kenneth French introduced a new-and-improved three-factor model, adding size and value to market beta as

Factors, or “style” investing, seems to be all the rage these days, including the use of factors in fixed income (here, here and here are good places to start). However, many of these strategies focus on CUSIP level bond selection. This means executing a strategy with a fair amount of turnover

Is it possible to time factors? (An old blog on the topic here and Jack discussing on a podcast here) Are there financial and economic indicators that can be used to predict factor returns? Are timing models just luck? What are the Academic Insights? YES. The authors use Fama-French 5 Factors

Not long ago I used to teach investment management courses to Master’s students (MBAs and MS Finance types). A core aspect of my course was so-called modern portfolio theory. We did a lot of math and problem-sets to make it feel like we were doing something useful. But I can summarize the core

“How can a q-theoretic model price momentum?” is a new paper by Robert Novy-Marx and goes right to the heart of an intense debate ongoing in empirical asset pricing — can neoclassic economic models explain the so-called momentum anomaly? A quote from the start of the paper, which answers the

The paper investigates the following research question: Are left-tail vs. right-tail correlations symmetric for the majority of risky assets (including size and styles)? Is left-tail vs. right-tail correlations between stocks and hedge funds styles symmetric? Is left-tail vs. right-tail correlations

Early in the summer, I was on a podcast with Corey Hoffstein discussing momentum investing. During the discussion, Corey asked me a question regarding risk versus mispricing, specific to the momentum anomaly. We frequently cite the behavioral explanation for momentum–investors tend to underreact

You can watch the video via the link below: Video Summary Ryan and I discuss three articles published on our blog this week. First, we examine a paper by Linda Zhang investigating the volatility of leveraged ETFs. Second, we discuss an article (and corresponding video and PPT slides from Wes)

We’ve covered momentum investing extensively over the years, to include 94 posts, a book on the subject, and numerous discussions on various podcast outlets. There are a few things one notices after thinking about a topic for so long: You forgot half of the things you read and/or wrote (yes, we

The paper investigates the following research question: What has the absolute risk behavior of leveraged products been historically? Did they behave as intended by design? Is the leverage multiple a reliable indicator of the volatility multiple? Is the leverage multiple a reliable indicator over

The 2014 study by Andrea Frazzini and Lasse Heje Pedersen, “Betting Against Beta,” found strong support for low-beta strategies. I’ve previously written on low-beta strategies here. This paper finds that, for U.S. stocks, the betting against beta (BAB) factor (a portfolio that holds low-beta

You can watch the video via the link below: Video Summary Ryan and I discuss three articles published on our blog this week. First, we examine a summary by Larry Swedroe that highlights the Betting Against Beta (BAB) factor and dives into two new papers examining when the BAB factor performs well.

Is it possible to build a simple systematic approach that beats investing in complex factor models? The research team here has proposed that a simple formula based on low return volatility, high net payout yield (dividends +/- stock buybacks), and strong price momentum gives investors exposure to

This article examines the magnitude of exposures to a set of systematic factors present in widely accepted Benchmarks (S&P500, the Russells, and MSCI global indices) and how they change over time. The authors use conventional style factors of value, size, quality, momentum, and minimum

Do users of social media provide valuable information about liquidity that can be used to predict future liquidity? Does social media provide useful information, over and above that provided by traditional, fundamental news sources? Do positive and negative sentiment have the same effects on

Imagine you are an alien. You land on planet earth in 1927 and are given a mission. You are told that you need to solve a problem: compound $1,000,000. The goal: compound your extraterrestrial face off. The options: FF_VAL: Top decile B/M, annually rebalanced, market-cap weighted. FF_MOM: Top decile

The paper investigates the following research question: Does persistence (out of sample performance) exist for alternative beta strategies sponsored by investment banks? Does adding complexity to a strategy increase the risk of backtesting overfitting? Do the strategies capture the factor exposure

Accruals are a part of any company’s financial reporting. For those unfamiliar with accrual accounting, a simple explanation is that accruals are adjustments made for (1) revenue that has been earned but not received and (2) costs that have been incurred but have not been paid. In short, one

Trading costs are a hot topic these days. The topic has sparked investor attention because of the rise of systematic factor investing strategies available via the ETF structure. It seems as if everyone is a “quant” these days, slinging money around like drunken pirates, destroying the price

Is there a relationship between real yields and short-term market valuation? Is there a relationship between inflation rates and short-term market valuation? Does the predictive power of the Shiller P/E improve by using yields and inflation? What are the Academic Insights? YES. The authors describe

The carry factor is the tendency for higher-yielding assets to provide higher returns than lower-yielding assets — it is a cousin to the value factor, which is the tendency for relatively cheap assets to outperform relatively expensive ones. A simplified description of carry is the return an

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. — attributed to Mark Twain. Mark Twain had some great insights. The quote above can apply to just about every aspect of life, including investing. This axiom is particularly relevant

As everyone who’s been invested for the last ten years knows, post-financial crisis stock returns have been incredible. The chart below highlights the total returns for the S&P 500 Index, the MSCI EAFE Index, the MSCI EEM Index, and the MSCI ACWI Index. The results are hypothetical results and

Coined by Rosenthal in 1979, the term file drawer problem refers to the notion that journal editors are biased toward accepting articles that include statistically significant results over those with nonsignificant results. The competition for increasing the citation count and improving journal

Factor investing research has a long storied past. Fama and French’s 1992 and 1993 papers arguably put factor investing “on the map,” but truth be told, factor investing is an old topic with roots grounded in the so-called arbitrage pricing theory. We have a longer piece on the history of

What are the research questions The presence of historical prices impacting future returns, i.e., momentum, has been well researched in the equity market, which we’ve covered here. We’ve also closely looked at momentum in bond markets here, here, and here. What the Bali, Subrahmanyam, & Wen

This is an important article for practitioners because it brings specific investing decisions that are often treated as afterthoughts, to the forefront in style-based investing. The authors propose that decisions made beyond the initial decision to invest in a style, such as value or momentum, are

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

What causes a stock’s price to move? A great question, and one that puzzles most market observers every day. Since this is puzzling, it is an entertaining topic to discuss–enter CNBC and the financial media. In the short-run, stocks prices can move for a variety of reasons … noise trading,

The paper investigates the following research question: Can machines allocate capital in the classic style of a value investor like Benjamin Graham or Warren Buffett? What are the Academic Insights? By connecting two broad and disparate areas (the innovative AI domain and the more old-fashioned

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

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

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

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

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

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

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

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?

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

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

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

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

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

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

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

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

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

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