Quant Mashup - Alpha Architect
Portfolio Allocations using Enterprise Multiples (and others) [Alpha Architect]
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?
- 7 years ago, 23 Aug 2017, 01:10am -
Academic Research Insight: Abusing ETFs [Alpha Architect]
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
- 7 years ago, 21 Aug 2017, 11:28pm -
Trend-Following with Valeriy Zakamulin: Performance Measurement and Outperformance Tests (Part 5) [Alpha Architect]
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
- 7 years ago, 18 Aug 2017, 10:19pm -
Academic Research Insight: Can Bond Portfolios Be "Factorized"? [Alpha Architect]
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
- 7 years ago, 15 Aug 2017, 01:23am -
Trend Following with Valeriy Zakamulin: Technical Trading Rules (Part 3) [Alpha Architect]
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
- 7 years ago, 11 Aug 2017, 01:06pm -
Diversification Benefits of Time Series Momentum [Alpha Architect]
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
- 7 years ago, 11 Aug 2017, 01:39am -
Volatility Premium, Covered Call Selling, and Knowing What You Own [Alpha Architect]
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
- 7 years ago, 8 Aug 2017, 11:54am -
Academic Research Insight: Diagonal Models versus 1/N Diversification [Alpha Architect]
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
- 7 years ago, 7 Aug 2017, 12:36pm -
Trend-Following with Valeriy Zakamulin: Anatomy of Trading Rules (Part 4) [Alpha Architect]
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
- 7 years ago, 4 Aug 2017, 02:16pm -
Academic Research Insight: Digging into ETF Trading Spreads [Alpha Architect]
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
- 7 years ago, 31 Jul 2017, 01:54pm -
Trick Question: How is the Momentum Factor Performing YTD? [Alpha Architect]
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
- 7 years ago, 24 Jul 2017, 11:50pm -
Academic Research Insight: When Does International Investing Make Sense? [Alpha Architect]
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
- 7 years ago, 24 Jul 2017, 11:49pm -
Trend-Following with Valeriy Zakamulin: Types of Moving Averages (Part 2) [Alpha Architect]
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
- 7 years ago, 21 Jul 2017, 12:41pm -
Academic Research Insights: Does the Scope of the Sell-Side Analyst Industry Matter? [Alpha Architect]
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
- 7 years ago, 18 Jul 2017, 10:46am -
Trend-Following with Valeriy Zakamulin: Moving Average Basics (Part 1) [Alpha Architect]
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
- 7 years ago, 14 Jul 2017, 12:28pm -
Avoiding Overpriced Winners: A Better Way to Capture the Momentum Premium? [Alpha Architect]
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
- 7 years ago, 12 Jul 2017, 12:54pm -
Academic Research Insight: Facts about Factors [Alpha Architect]
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
- 7 years ago, 10 Jul 2017, 01:10pm -
Do Security Analyst Recommendations Bet on or Against Academic Findings? [Alpha Architect]
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
- 7 years ago, 7 Jul 2017, 12:32pm -
Tactical Asset Allocation: Does the Day of the Month Matter? [Alpha Architect]
Most long-term approaches to investing, like tactical asset allocation or factor investing, are designed to trade infrequently, generally once a month or once a quarter. This is a feature, not a limitation. Trading infrequently forces a strategy to ignore day-to-day noise and focus on long-term
- 7 years ago, 29 Jun 2017, 11:53am -
Academic Research Insight: The Value of Crowsourced Earnings Forecasts [Alpha Architect]
What are the research questions? Are crowdsourced earnings forecasts from a source such as Estimize, useful in the capital markets by capturing new information about future earnings? Does a site such as Estimize add incremental accuracy when combined with the conventional, sell-side earnings
- 7 years ago, 26 Jun 2017, 11:05am -
Factor Investing: Evidence Based Insights [Alpha Architect]
I will be talking on the Factor Investing panel at the upcoming Evidence-Based Investing Conference in Dana Point, CA next Sunday –Tuesday. I am excited for the opportunity to chat, and figured I would highlight a few thoughts we have on the topic going into the event. First, what is “evidence
- 7 years ago, 22 Jun 2017, 12:19pm -
Academic Research Insight: The Strategic Timing of Earnings News [Alpha Architect]
Title: FURTHER EVIDENCE ON THE STRATEGIC TIMING OF EARNINGS NEWS: JOINT ANALYSIS OF WEEKDAYS AND TIMES OF DAY Authors: RONI MICHAEY, AMIR RUBIN, ALEXANDER VEDRASHKO Publication: JOURNAL OF ACCOUNTING AND ECONOMICS, 2016 (version here) What are the research questions? Do managers act to strategically
- 7 years ago, 19 Jun 2017, 01:25pm -
Active Share: Does it Predict Fund Performance? [Alpha Architect]
The Holy Grail for mutual fund investors is the ability to identify in advance, which of the active mutual funds (or ETFs nowadays) will outperform in the future. The evidence suggests this task is almost impossible. To date, the overwhelming body of academic research has demonstrated that past
- 7 years ago, 16 Jun 2017, 10:35am -
"Passive" Investing: Theory and Practice in a Global Market [Alpha Architect]
Purely passive investing is theoretically plausible, but practically impossible. That said, the practical implementations can often be “good enough.” As a theoretical index investor, you deploy capital, take a long snooze, and wake up some day to consume your portfolio. Unfortunately, the world
- 7 years ago, 14 Jun 2017, 09:25pm -
Academic Research Insight: Factors and the Road to Retirement [Alpha Architect]
Title: A WEALTH MANAGEMENT PERSPECTIVE ON FACTOR PREMIA AND THE VALUE OF DOWNSIDE PROTECTION Authors: LOUIS SCOTT AND STEFANO CAVAGLIA Publication: THE JOURNAL OF PORTFOLIO MANAGEMENT, SPRING 2017 (version here) What are the research questions? The article links two current hot topics: goal based
- 7 years ago, 12 Jun 2017, 10:11am -
Academic Research Insight: Concentration is King [Alpha Architect]
Title: PORTFOLIO CONCENTRATION AND PERFORMANCE OF INSTITUTIONAL INVESTORS WORLDWIDE Authors: NICOLE CHOI, MARK FEDEINA, HILLA SKIBA, TATYANA SOKOLYK Publication: JOURNAL OF FINANCIAL ECONOMICS, 2017 (version here) What are the research questions? Portfolios in international markets tend to be more
- 7 years ago, 6 Jun 2017, 08:59am -
The Dividend Disconnect: Behavioral Finance Strikes Again [Alpha Architect]
In the past we have discussed that some investors demand dividends. (Here is a nice post by Larry Swedroe on the topic and there are more holistic measures, such as shareholder yield, which are better predictors of future returns). A few posts we have on the topic highlight that CEOs cater to
- 7 years ago, 4 Jun 2017, 02:30am -
Portfolio Rebalancing Research: Momentum and Tolerance Bands [Alpha Architect]
If you are looking for research on stock selection, you’re in luck — the research is everywhere and has arguably been overdone. Get started with Moon Cycles & Stock Market Returns and The Congressional Calendar & Stock Market Returns to get a sense for how esoteric the research has
- 7 years ago, 31 May 2017, 06:30pm -
Academic Research Insight: Factor Investing Over the Long Run [Alpha Architect]
Title: FACTOR BASED INVESTING: THE LONG TERM EVIDENCE Authors: ELROY DIMSON, PAUL MARSH, AND MIKE STAUNTON Publication: THE JOURNAL OF PORTFOLIO MANAGEMENT, 2017, SPECIAL ISSUE (version here) What are the research questions? Is there out-of-sample (OOS) evidence for factor investing? What are the
- 7 years ago, 30 May 2017, 08:33am -
March for the Fallen: Get Fit with Alpha Architect [Alpha Architect]
As a former US Marine, Memorial Day is every day, however, Memorial Day is special because the time is set aside to reflect on those who paid the ultimate sacrifice. Enjoy and stay safe out there! In addition to enjoying the long Memorial Day weekend, we offer a unique opportunity to honor the
- 7 years ago, 26 May 2017, 08:56pm -
The Value Premium: Risk or Mispricing? [Alpha Architect]
One of the great debates in finance is whether the source of the value premium is risk-based or a behavioral anomaly. In our book, “Your Complete Guide to Factor-Based Investing,” my co-author Andrew Berkin and I present the evidence showing that there are good arguments on both sides. Thus,
- 7 years ago, 24 May 2017, 01:55pm -
Academic Research Insight: The Social Media Factor [Alpha Architect]
are to Editor’s Note: The Academic Research Insight will be a weekly short-form research summary on research that is directly related to investing. Elisabetta Basilico (a PhD and a CFA!) will be driving the effort, which will supplement our long-form summaries, in-house research, and general
- 7 years ago, 23 May 2017, 12:37pm -
A Direct Test of the Dividend Catering Hypothesis [Alpha Architect]
Why do CEOs decide to pay dividends? That is an interesting question, and one that academics have been researching for years. Miller and Modigiliani in 1961 show that if one assumes perfect and efficient capital markets, and investors should have no preference as to whether or not a firm pays
- 7 years ago, 18 May 2017, 12:32pm -
Chinese Market Anomaly - The Factor Killer? [Alpha Architect]
The Oracle of Omaha just commented on the Chinese stock market in this year’s Berkshire’s annual meeting: …Markets have a casino characteristic that has a lot of appeal to people, particularly when they see people getting rich around them. And those who haven’t been through cycles before are
- 7 years ago, 12 May 2017, 09:20pm -
Do Trading Costs Destroy Factor Investing? [Alpha Architect]
There are a number of recent studies that propose a more rigorous criteria for evaluating the practical significance of factors published in academic research journals. First, Harvey, Liu, and Zhu (2015) argue that a t-stat of 3 should be replacing the old 2 as a rule for statistical significance.
- 7 years ago, 11 May 2017, 02:51am -
(Fight) the Fed Model [Alpha Architect]
Over the past few years, we’ve been asked questions related to the relationship between stock prices and interest rates. Forms of the question typically look like the following: If interest rates rise, what happens to stock prices? What is the relationship between stocks prices and bond yields?
- 7 years ago, 4 May 2017, 11:59am -
Swedroe Spotlight: Enhancing Momentum Strategies Via Idiosyncratic Momentum [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. The momentum effect is one of the most pervasive asset pricing anomalies documented in the financial literature: Stocks
- 7 years ago, 2 May 2017, 11:42am -
The Capacity of Smart Beta Funds - Larger than Previously Thought? [Alpha Architect]
ETFs and factor investing are on the tip of everyone’s tongue these days. Factor investing is being couched as a “new” thing, despite the fact that institutional investors have been deploying these strategies for years. (See this working paper discussing the effective use of smart beta
- 7 years ago, 28 Apr 2017, 10:03pm -
Tactical Asset Allocation and the US 60/40 Benchmark [Alpha Architect]
Our firm Allocate Smartly provides independent analysis of Tactical Asset Allocation (TAA) strategies. TAA strategies dynamically allocate to broad asset classes like stock indices, bond indices or gold. Unlike a traditional buy & hold portfolio, TAA is able to increase allocation to assets
- 7 years ago, 27 Apr 2017, 12:48pm -
Academic Factor Exposure Versus Fund Factor Exposure [Alpha Architect]
Tomorrow I’ll be sitting with Pat O’Shaughnessy and Ben Johnson to discuss “Straight Talk About Smart Beta.” Here is a link to the big Morningstar event. In preparation for our discussion we were spitballing ideas and Ben brought up the concept of helping investors understand the
- 7 years ago, 26 Apr 2017, 12:42pm -
Great Academic Finance Research Papers at WFA 2017 [Alpha Architect]
There are several big academic finance conferences that attract the best research and the best researchers in one bullpen — the AFA and the WFA meetings. We chatted about the AFA event last January (be sure to check that out). But now it is the WFA’s turn. I attended the WFA a few years back in
- 7 years ago, 25 Apr 2017, 03:07pm -
"Alternative" Facts about Formulaic Value Investing [Alpha Architect]
A new paper, “Facts about Formulaic Value Investing,” is making the rounds and professes to plunge a dagger directly into the heart of systematic value investors. Half of my inbox is filled with questions regarding this paper, since we are considered by some — rightly or wrongly — to be
- 7 years ago, 22 Apr 2017, 09:46pm -
Value and Momentum Investing in Frontier Stock Markets [Alpha Architect]
Value and Momentum investing have been studied across many different markets and asset classes (Asness et al 2013) and have shown to be effective factors. A working paper, “Frontier Stock Markets: Local vs Global Factors” by Douglas W. Blackburn and Nusret Cakici examines Value and Momentum
- 7 years ago, 18 Apr 2017, 01:08pm -
Swedroe Spotlight: Does Market Sentiment Help Explain Momentum? [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 academic to use
- 7 years ago, 17 Apr 2017, 12:21pm -
Introduction to a Basic "Quant" Match Making Service [Alpha Architect]
We were recently asked by Aaron Brask, one of our guest bloggers, why we don’t provide a “job board” on our site. Aaron works for several large family offices and he says it is incredibly difficult to find intellectually honest talent. Aaron also pointed out that we have a unique community of
- 7 years ago, 13 Apr 2017, 11:44am -
How are ETFs Affecting the Stock Market: Is There a Dark Side to ETFs? [Alpha Architect]
The Dark Side of ETFs? Sounds interesting, and in my humble opinion, an image of Darth Vader on page 1 would be a great addition to the paper. The paper, “Is there a dark side to exchange traded funds? An information perspective,” written by Doron Israeli, Charles M. C. Lee, and Suhas A.
- 7 years ago, 12 Apr 2017, 08:36pm -
Looking to Improve your Factor Investing? Examine the Trend of Profits [Alpha Architect]
A few years ago, the profitability “quality” factor was originally proposed by Robert Novy-Marx. Here is a snippet from the abstract of the paper: Profitability, measured by gross profits-to-assets, has roughly the same power as book-to-market predicting the cross-section of average returns.
- 7 years ago, 4 Apr 2017, 07:17pm -
Factor Investing: The Fama French 5-Factor Model on Chinese A-Shares [Alpha Architect]
Each year I teach my “seminar in investments” course at Drexel, which consists of the Masters in Finance students and a handful of geeky MBA students. The first few weeks of the course involve an introduction to various investment frameworks and how to navigate the source academic literature.
- 7 years ago, 31 Mar 2017, 12:31pm -
Rebalance Your Portfolio? You are a Market Timer and Here's What to Consider [Alpha Architect]
In this piece I examine various way in which an investor can think about their active market timing decisions, often labeled with the innocuous term “rebalancing.” Rebalancing a portfolio is the finance version of “eat your vegetables” — the advice is taken as gospel, but very few people
- 7 years ago, 23 Mar 2017, 08:29pm -
Dual Momentum with Stock Selection [Alpha Architect]
Gary Antonacci may not be happy to learn that his "Dual Momentum" label has been pirated by a team of academics (Huang, Zhang, and Zhou)(1)(2) in a new paper that explores the combination of price and fundamental momentum stock-picking strategies. The authors also investigate the common
- 7 years ago, 14 Mar 2017, 05:04pm -