On most mainstream finance websites, a good chunk of the stories discuss the FED and where interest rates are going. Intuitively, this makes sense: The FED is arguably an extremely influential component of U.S. economy. But how do markets respond to the FED? Is the response rational, irrational, or

The subject of asset bubbles and market crashes has fascinated me for more than 20 years. As an options market maker for Susquehanna International Group (“SIG”), extreme price movements were a daily source of concern. I sat next to Jeff Yass for years and watched him manage option positions in

Peng Wang and Jon Spinney A version of this paper can be found here Want to read our summaries of academic finance papers? Check out our Academic Research Insight category. What are the research questions? Investors following a purely quantitative approach to asset allocation are often left with

Regression analysis is used all the time to assess how a portfolio “loads” on certain factors. The most common factor loadings examined are the market, size, value, and momentum factors. This can be an informative exercise, and there are nice tools online, such as portfolio visualizer, which

Changes in earnings are comprised of the expected earnings number plus any seasonal component of earnings. If the seasonal component is expected then it should not affect prices in an efficient market. However, unusual returns have been documented surrounding earnings announcements at the seasonal

ack and I will be attending the Evidence-Based Investing Conference tomorrow in NYC. We’re excited to participate and be part of the crowd. Be sure to give us a holler — love to discuss whatever is on your mind! Author rendering of the scene at EBI Historically, the conversations at EBI can end

This article examines a somewhat over-looked, but important, discussion that raged among academic researchers in the late 1990’s and early 2000’s. The topic: factors versus characteristics. What do you mean, “Factors versus characteristics?” We often highlight that the value premium can be

In this study, a two-factor risk model is developed assuming differing preferences for “sin” or “no-sin” stocks for two groups of investors. Social screens are built into the model by assuming a small percentage of investors are self-restricting, declining to invest in “sin” stocks.

Replicating Anomalies is arguably a “must read” for anyone who thinks about factor investing and is looking to improve their understanding of the space. Lu Zhang, and his colleagues, Kewei Hou and Chen Xue, spent nearly 3 years carefully compiling and replicating 447 “anomalies” identified

Wes recently challenged me with a unique proposition: Hey Ryan, read through this Replicating Anomalies paper and tell me what you think. Its a bit long, but I’m curious to hear your thoughts. Well, by “a bit long,” Wes really meant 144 pages of equations and reams of quantitative data on

When performing multiple-based valuations, which rely on the assumption that perfect substitutes should sell for the same price, it is very important to identify companies that are truly comparable. Most analysts use industry classifications. Lee et al. (2015) note that industry classifications are

Kelley Bergsma & Jitendra Tayal A version of this paper can be found here Want to read our short summaries of academic finance papers? Check out our Academic Research Insight category. What are the research questions Using data from CRSP and Compustat from 1989 to 2015 the research team

Trend-following strategies have historically been laughed at via the modern academic finance research community. Having first-hand knowledge of that community, we can verify that academic researchers are humans like the rest of us (we checked, academics aren’t robots), and they suffer from group

What are the research questions? Based on the evidence that tweets are faster than news in revealing new market information, but that news is regarded a more reliable source of information, the authors propose a superior trading strategy based on the sentiment feedback strength between the news and

Here is a link to our podcast on Behind the Markets Wes and Jeremy speak with Lu Zhang, The John W. Galbreath Chair, Professor of Finance, at the Fisher College of Business at The Ohio State University, and co-author of the paper, “Replicating Anomalies.” The team dig into the 3-year research

Academic research is amazing and incredibly useful for helping us better understand the complex world in which we live. In fact, academic research has literally rewired my brain at times. However, research isn’t perfect and the search for truth is messy. Data-mining. Overfitting. P-hacking.

One area in investing that is often overlooked by investors is trade execution, which relates primarily to commissions, bid-ask spreads, and price impact. Yet sometimes it is trade-execution alone that can make the difference between and profitable trade and an unprofitable one. In a new paper,

Title: Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis Authors: Karl V. Lins, Henri Servaes, and Ane Tamayo Publication: The Journal of Finance, Vol. LXXII, No. 4, August 2017 The present financial crisis springs from a

Those in the financial media have recently been writing multiple stories on a fascinating working paper, “Do Stocks Outperform Treasury Bills?” by Hendrik Bessembinder. We originally highlighted the paper on our blog in January. However, recent stories by those at the New York Times (here and

Landon Thomas Jr. recently wrote an article in the New York Times regarding our participation in the recent March for the Fallen Event. Landon’s article was well-written and provided a compelling narrative. However, much of the attention of the article was focused on Alpha Architect and my

Title: VOLATILITY WISDOM OF SOCIAL MEDIA CROWDS Authors: Ahmet K. Karagozoglu and Frank J. Fabozzi Publication: Journal of Portfolio Management, Winter 2017 (version here) What are the research questions? Using raw tweets from Twitter and StockTwits (“Trader Mood Data” from PsychSignal) a

Some things in life are naturally made for each other. Some examples include the following: Peanut Butter and Jelly Starsky & Hutch Value and Momentum So my ears perked up when the idea of combining VIX levels and Trend Following started making the rounds on finance twitter. Like any geek, I was

Now that the Federal Reserve has begun the process of raising interest rates, and has announced their intention to begin to unwind their policy of quantitative easing (reducing the amount of bonds in their portfolio, either by selling holdings or allowing holdings to mature), investors may be

As we have mentioned before, here, here and here, there is overwhelming evidence that the number of stock anomalies in the universe is much lower than originally thought. Most of the previous research papers attempt to filter out past anomalies in the literature (generally over 300+) by applying

Prof. Richard Price, an old friend, co-author, and Alpha Architect advisory board member, is working on some cool new co-authored research that requires audience participation! Dr. Price, alongside Professors Dipankar Ghosh, and Atul Rai, are conducting research to better understand what factors are

What are the research questions? Research has shown that dividends constitute a greater contribution to the returns of a value versus a growth strategy. However, the question remains as to whether or not dividends matter within a style category. For style investors, does dividend policy determine

In our final blog post, that finishes the trend-following series, we briefly review the results of the forward-tests of the profitability of various trend following rules in different financial markets: stocks, bonds, currencies, and commodities. The results of these tests allow us to better

Our firm is growing rapidly and we’re looking to hire new teammates (one initially, possibly another down the road). If you are passionate about investor education and helping us deliver affordable alpha, please reach out! We just posted a new job for an execution trader/researcher role. Jack and

The Standard and Poor’s (S&P) 500 index is a value-weighted stock index based on the market capitalizations of 500 large companies in the US. This index was introduced in 1957 and intended to be a representative sample of leading companies in leading industries within the US economy. Stocks in

In their seminal 1993 paper, “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency,” Narasimhan Jegadeesh and Sheridan Titman reported significant returns to buying winners and selling losers in the U.S. equity market, now referred to as the “cross-sectional

What are the research questions? Is there a consistent and reliable long term overreaction pattern in global equity markets? In US equity markets, buying long term losers and selling long term winners (also called long term price reversal) is a well-documented anomaly. Does it also exist in global

The difficulty in testing the profitability of trend-following rules stems from the fact that the procedure of testing involves either a single- or multi-variable optimization. Specifically, any trading rule considered in Part 3 has at least one parameter that can take many possible values. For

A common question asked in the factor investing field is the following — “how much of the model’s performance is driven by sector allocations, and how much is driven by security selection?” Our answer is to simply buy Value stocks or Momentum stocks, regardless of sector constraints. Why?

What are the research questions? By studying the trading data (provided by a German brokerage house) of a large (6,949) group of individual self-directed investors over the period from 2005-2010, the authors attempt at answering:(1) Do ETFs provide performance benefits to individual investor

We consider an investor and a financial market that consists of only two assets: one risky asset and one safe (or risk-fee) asset. An example of a risky asset is an investable stock market index. When it comes to the safe asset, even though financial theory assumes its existence, there are no

What are the research questions? Can the concepts contained in equity “factors” translate to the corporate bond market? Do single factor bond portfolios generate alpha? Do multifactor bond portfolios contribute additional value? What are the Academic Insights? YES. Using bond characteristics

A trend following strategy is based on switching between a financial asset and cash depending on whether the asset prices trend upward or downward. Specifically, when the strategy identifies that prices trend upward (downward), it generates a Buy (Sell) trading signal. A Buy signal is a signal to

Similar to some better-known factors like size and value, time-series momentum is a factor that historically has demonstrated above average excess returns. Time-series momentum, also called trend-momentum or absolute momentum, is measured by a portfolio long assets that have had recent positive

The folks at AQR are top-notch researchers and have written a ton of great papers. Some of their more famous papers are the following: Value and Momentum Everywhere A Century of Evidence on Trend Following Size Matters If you Control Your Junk (my favorite title of any paper ever published) In this

In spite of several efforts by researchers to overcome the estimation-risk problem (the use of estimate inputs based on sample information as if they were representative of the true population) which produces the so-called “wacky weights”, DeMiguel, Garlappi and Uppal (2009) present striking

In our context, a technical trading indicator can be considered as a combination of a specific technical trading rule with a particular moving average of prices. In two preceding blog posts we showed that there are many technical trading rules, as well as there are many popular types of moving

The article provides new empirical evidence on the state of market efficiencies in ETFs by studying the following questions: What is the magnitude of the ETF premiums across all US-listed ETFs and all underlying asset class and over time? In particular, what is the magnitude of “true” ETF

If you ask your typical long-only investor (or financial advisor) how momentum is doing this year they’ll likely say, “Amazing!” This statement will almost surely be based on the fact they own (or know about) the iShares “Momentum Factor” Fund (Ticker: MTUM). MTUM is on fire year to date

What are the research questions? Market globalization is said to be the culprit of decreased benefits of international diversification. In 1995, a US investor investing in Vodafone had exposure to 99% of UK based sales. The same investor in 2012 is exposed to UK sales only for 8% while at the same

In my previous blog post we considered the general weighted moving average. In this post we aim to give an overview of some specific types of moving averages. Specifically, we cover “ordinary” moving averages and mention some examples of exotic moving averages. Ordinary Moving Averages These are

What are the research questions? Do variations in aggregate measure of size and activity of sell-side analysts affect the quality of research produced by that industry? Do those same variations in aggregate measures of size and activity of sell-side analysts affect optimism bias in the research

One of the basic principles of technical analysis is that “prices move in trends.” Traders firmly believe that these trends can be identified in a timely manner and used to generate profits and limit losses. Consequently, trend following is arguably one of the most widespread market timing

Any frequent reader of our blog knows we are fans of momentum investing. At this point, investment professionals should know that momentum historically works, that momentum is painful, and we have our own opinions on how to implement momentum investing via our Quantitative Momentum Index. Sometimes

What are the research questions? Do factors offer superior diversification benefits relative to assets because factors are less correlated with each other? Does consolidating a larger set of assets into a smaller set of factors reduce noise? Are investors more skilled at relating current information

As my co-author Andrew Berkin, the director of research for Bridgeway Capital Management, and I explain in our new book, “Your Complete Guide to Factor-Based Investing,” there is considerable evidence of cross-sectional return predictability. Citing more than 100 academic papers, we present the