Quant Mashup - Alpha Architect 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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”:(...) 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)”(...) 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(...) 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(...) 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(...) 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(...) 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,(...) 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?(...) 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(...) 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,(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) 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(...) Surprise! Seeking Alpha Opinions Have Investment Value [Alpha Architect]What are the research questions? According to Datamonitor (2010), the influence of peer-based advice, such as user-generated ratings on Amazon.com or Yelp.com, is increasing while traditional advice (e.g., from Consumer Reports or the Michelin guide) is decreasing. This trend is starting to emerge(...) The Value Effect and Macroeconomic Risk [Alpha Architect]It has been well-documented that value stocks have provided higher expected returns than growth stocks. However, there is a great debate about the source of that premium: Is it risk-based or is it related to behavioral errors that create persistent mispricings? There are many papers presenting(...) Yes, Departing Outside Directors Are Aware of Fraud Before They Resign [Alpha Architect]What are the research questions? Is the rate of turnover for outside directors unusually high either before fraud is discovered by the firm, or during its commission? Are there regularities in the characteristics of outside directors who depart during the period in which the financial fraud is(...) Academic Research Papers and Presentations Galore! [Alpha Architect]It is that time of year again, the American Finance Association Annual Meeting is underway. The conference is in Philadelphia, starting today (January 5) and running through Sunday (January 7). This 3-day conference has 73 sessions, 246 papers and 12 presentations with no papers (general(...) Predicting Stock Returns Using Firm Characteristics [Alpha Architect]A few weeks ago, we did a deep dive into the factors versus characteristics debate. One of the reasons we’ve brought up this debate is due to the fact that “factor” loadings (from regressions) are arguably not as helpful as portfolio characteristics. In other words, knowing a portfolio P/E(...) The Tax Efficiency of Long-Short Strategies [Alpha Architect]Conventional wisdom can be defined as ideas that are so accepted that they go unquestioned. Unfortunately, conventional wisdom is often wrong. Two great 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(...) Predicting Long Run Stock Returns? It's All About the Payouts and the Real Economy [Alpha Architect]What are the research questions? Given the prevalence of buybacks as a form of corporate payouts, should they be explicitly included in supply-side models such as the dividend discount model (DDM) used to forecast of stock returns? Does the same superior performance extend to the prediction of(...) Stock Misplacement in Sized-Based Indices [Alpha Architect]There has been much discussion of the small-cap premium recently. Has its popularity cannibalized its utility? Are large firms preventing a level playing field? Will the small-cap premium exist going forward? This article does not address these concerns directly, but it does identify and analyze(...) The Returns to Value Strategies When Valuation Spreads Are Wide (Deep Value) [Alpha Architect]The academic research has generally found valuations, such as the earnings yield (E/P) (or the CAPE 10 earnings yield) and valuation spreads, have predictive value in terms of future returns. The higher the earnings yield, the higher the expected return, and the larger the spread in valuations(...) Book Review - Market Timing with Moving Averages [Alpha Architect]Trend-following is something I’ve struggled with for years — always felt like voodoo magic and data-mining. That said, I finally came around to appreciating the practice after a ton of research replication efforts, independent research. At the time I was investigating the topic there really(...)