A really interesting paper hit the NBER wires recently. The central argument of the paper is that “rock star” thought leaders dominate a field, but when they die, new thought leaders are able to emerge. In summary, there seems to be a cost and a benefit attached to a powerful intellectual: On

We show that interest rates drive mispricing at the turn of a tax period as investors face the trade-off between selling a temporarily-depressed stock this period and selling next period at fundamental value, but with tax implications delayed accordingly. We confi rm these patterns in US returns,

An interesting out of sample test on return drivers in the Vietnamese market from 2006 to 2014. Not surprisingly, value and momentum show some mojo - Liquidity as well…size, not so much. But size only matters if you control your junk, apparently. This is in line with our own research and the

I have a love-hate relationship with sin stocks. On one hand, my first big winning stock pick was Swisher Sweet Cigars, which nearly doubled a month after I bought it in 1998, thus proving that I was a stock picking genius and much self-satisfaction (at least until several years later when I lost

The efficient market hypothesis suggests that stock prices are always “right” in the sense that stock prices reflect all available information. Of course, during tax season, fundamentals go out the window: I’m selling my losers, and letting my winners ride! And I’m not the only investor

Having been a full-time academic financial economist in a former life (still dabble, when able), I became accustomed to my annual pilgrimage to the annual American Finance Association (AFA) meeting. For the uninitiated, the AFA annual meeting is a gathering of all the major brainpower in academic

Chief financial officers are responsible for managing the financial reporting process. We test whether the quality of a firm’s financial reports is a function of the effort expended by the CFO. Using golfing records to measure leisure consumption, we first show that CFOs consume more leisure when

Using a sample of 97 stock return anomalies documented in published studies, we find that anomaly returns are 7 times higher on earnings announcement days and 2 times higher on corporate news days. The effects are similar on both the long and short sides, and they survive adjustments for risk

Value investing was a lot easier in 2012 and 2013 when our value approach beat the market by a substantial margin and we had a reasonable edge on other active value players. But now that we have lived through 2014 and 2015, most value approaches (simple, complex, quant, human, small, large, etc.)

Awww…modern portfolio theory…that feel-good construct I teach to all of my graduate-level finance students each year. Simply input 1) a vector of expected returns and 2) a covariance matrix into your computer, and voilà, you have your optimal portfolio weights. Like all things viewed with the

Our Quantitative Momentum (QM) system seeks to identify stocks with the highest quality “momentum.” We consider the term momentum to mean a continuation of past returns—past winners tend to be future winners, while past losers tend to be future losers. How can we exploit this phenomenon? At

With Januaries (a month in which lagged "losers" typically outperform lagged "winners") excluded, the average monthly return to a momentum strategy for U.S. stocks was found to be 59 bps for non-quarter-ending months but 310 bps for quarter-ending months. The pattern was stronger

The enterprise multiple (EM) predicts the cross section of international returns. The return predictability of EM is similarly pronounced in developed and emerging markets and likewise strong among small and large firms. An international portfolio of low-EM firms outperforms a portfolio of high-EM

We test a frog-in-the-pan (FIP) hypothesis that predicts investors are inattentive to information arriving continuously in small amounts. Intuitively, we hypothesize that a series of frequent gradual changes attracts less attention than infrequent dramatic changes. Consistent with the FIP

This study investigates whether the risk adjusted returns of a global REIT portfolio would be enhanced by adopting a trend following strategy (which is an absolute concept), a momentum based strategy (which is a relative concept and requires individual country allocations), or indeed a combination

Kewei Hou and Roger Loh have a fun paper on the idiosyncratic volatility puzzle, which is set to be published in the Journal of Financial Economics. The idiosyncratic volatility puzzle is associated with the empirical evidence which suggests that stocks with higher idiosyncratic volatility

The prediction of higher interest rates has been ongoing since the government went all-in on a variety of so-called “inflationary” efforts. Inflation hasn’t happened and rates are still low across the yield curve. So-called “bond vigilantes,” having been wrong for 7 years now and are still

David Dreman is a personal hero of mine. Years ago, I stumbled on his book, “Psychology and the Stock Market: Investment Strategy Beyond Random Walk,” which was originally published in 1977. It had a huge impact on me. It’s timeless, with lessons that still apply to value investing today. It

We have already documented the returns to generic momentum investing strategies. Within the fund marketplace, many investors focus on fees and less on process. For example, Morningstar highlights the fees as “cost-efficient” for a specific momentum fund, MTUM. However, fees are only one part of

Were in the middle of an academic research project and we ran a simple long-term trend-following model from January 1, 1801 to September 30, 2015. Recently, there has been some research on the performance of trend rules over long periods here (and highlighted by CXO here). Our trend-following

Many of you are probably aware of the paper from AQR entitled, “Size Matters: When you control for your junk.” We loved the title so much we considered it one of our Top 5 Geeky, Yet Funny, Economic Paper Titles. Of course, great papers often go unread beyond the abstract because they are a bit

Marisa Mayer’s recent announcement that she is again pregnant, and does not plan to take maternity leave after her twins arrive, has once again raised the age-old question about how far women have really come in making a gender equitable workplace. While women are undoubtedly making progress,

Okay, we're sold on a closet-indexing approach to the markets. Now we're investigating a variety of smart-beta products available in the market that weigh a large portfolio of stocks with some algorithm. But a natural question arises when trying to pick smart beta ETFs: What is the optimal

In a sustained effort to try too hard, investors are constantly analyzing and assessing the growth rates of various markets around the world. The key assumption behind this analysis is that knowledge of these growth rates enhances their ability to predict the future and expected returns. This

SEC rules allow companies to delay the public disclosure of significant corporate events for up to 4 business days. This information is reported on an 8-K. This 4-day gap between an event and the disclosure creates an interesting situation. As an insider, if I know an 8-K is going to report news, I

Warren Buffett make it clear why frequent trading damages one’s wealth: “Wall Street makes its money on activity. You make your money on inactivity.” (source) But is activity always a bad thing? Implicit in Buffett’s quote is an assumption that frictional costs outweigh any benefits of

Here is an interesting working paper on the use of fundamental analysis in stock selection. The authors take a “machine learning” approach to building out statistical fair-value Ben Graham and David Dodd would be proud. Of course, this isn’t surprising if you’ve read our treatise on

Here we highlight an interesting working paper titled “Absolute Strength: Exploring Momentum in Stock Returns” by Gulen and Petkova (2015). The abstract is the following: We document a new pattern in stock returns that we call absolute strength momentum. Stocks that have significantly increased

A few months ago we highlighted a surprising result: cheap high-quality stocks were getting crushed by expensive junk stocks. The spread at the end of June was around 18%. Here is the chart from the old post (details on construction are in the original post): cheap hiqh quality versus expensive low

The results in this paper won’t surprise most who are regular readers, but the paper below does a nice job explaining things in a simple way. For more advanced asset allocation methods that use momentum one can check out past blogs on the subject here, here , and here. Momentum Investing &

Meb Faber tweeted an interesting question related to taxes, dividend payers, and the value premium the other day. I’ll summarize the heart of the question: How do dividend payers affect the value premium? Instead of pontificating on the issue, we decided to directly address the question via

The Efficient Market Hypothesis (EMH) has been widely called into question in the investment literature, through two main anomalies: timing and low-volatility anomalies. In this paper, we aim to combine the predictive power of timing and low-volatility strategies to deliver better risk-adjusted

As noted through our previous posts, we are big proponents of Value investing and Momentum investing strategies. We even highlight the best way to combine value and momentum. However, there is a new paper by Toby Moskowitz titled “Asset Pricing and Sports Betting” which examines how size, value

There is an interesting discussion in the geeky world of academic finance literature between the intellectual muscle at AQR and academia. aqr versus the academics on active share The discussion revolves around the following question: “Does Active Share matter?” This is an important topic for

This past year we examined the possibility of replicating commodity exposure via equities. The project was spurred by an insightful research report from MSCI, which showed some impressive results. Other research outfits have proposed similar concepts. The figure below, taken from the MSCI report,

The NFL is back!!! Unfortunately, the Eagles may need a new kicker…and now we have to listen to Wes talk trash about the Cowboys victory around the office. Tragic! In the spirit of the new NFL season, I figured it was a good time to highlight a newer paper titled “Corporate Sport Sponsorship and

Factor analysis has taken the professional consultant world by storm and we are slowly seeing this analysis being used more and more by sophisticated retail investors and investment advisors. And that’s great–factor analysis is a great tool. In fact, we discuss the use of the tool and how it is

Nobody can deny a simple empirical fact: higher fees are associated with lower returns, on average (Here is a great paper by Ken French on the costs of active investing). This finding, logically, leads investors to focus on low-cost solutions as opposed to high-cost solutions, all else equal. But do

Using a large dataset of news releases, we study instances of investors’ mistaken reaction, or misreaction, to news. We define misreaction as stock prices moving in the direction opposite to the news when it is released. We find that news tone predicts returns in the cross-section only upon the

We are happy to announce that our second book, DIY Financial Advisor, is finally available. For a limited time (and while supplies last) we are selling the book direct for $14.99! To get this deal you need to buy from the link below the main Amazon link. The first part of the book is dedicated to

Macroeconomic forecasting is incredibly difficult. The results from this paper suggest that the brainpower of the Fed’s 100 person economics team can predict 3 to 6 months out with a reasonable degree of success, but beyond that time horizon (e.g., 1-year), basic forecasting models perform just as

How crazy is current market action? Not that crazy. …and if you lived through 2008, definitely not that crazy. Seeing a -3%+ or a +3% observation is roughly a 1/100 event, or ~ 2.5 times a year. Obviously, return events are not independent and volatility tends to cluster, but the numbers above

Recently, we wrote two posts about how to combine Value and Momentum for stock selection purposes (Part 1 and Part 2). We followed this piece with a post on combining value and momentum for market timing purposes. In this post, we review the use of combined Value and Momentum for both stock

A timely piece on S&P 500 put option prices. The authors find that S&P 500 put options get too expensive during wild times because of 2 effects: Demand for insurance sky rockets (investor utility demands safety) Supply for insurance becomes restricted (credit constraints cripple market

Building on research in psychology, we predict that unpleasant weather negatively affects capital market participants’ moods and activity levels, causing a muted response to information events… The table below highlights that unpleasant weather seems to be correlated with slower market

Investing in the current environment is difficult. Most, if not all, asset classes have high nominal prices, suggesting low nominal expected returns. Not exactly exciting. And for many investors who are retired and/or have near-term liquidity needs, investing in equity exposures–while necessary to

The debate over passive versus active investing is akin to Eagles vs. Cowboys or Coke vs. Pepsi. In short, once our preference for one style over the other is established, it becomes a proven fact or incontrovertible reality in our minds. This post is not meant to convert a passive investor into an

Having your cake and eating it too is a great way to go. It’s great to have the cake, and it’s also great to eat the cake. But you can’t have it both ways. This trend continues when we speak with fellow investors: “Give me high, after-tax, net of fee returns, but with limited risk and

Of the major asset classes, private equity has recently had the best absolute returns. According to Cambridge Associates, the 25-year return on private equity was 13.5%, relative to 9.75% for the Russell 2000. Academic studies, surveyed recently by Steven Kaplan and Berk Sensoy, have consistently

In general, investors focused on affordable stocks with strong fundamentals have been taken to the cleaners year-to-date. Meanwhile, expensive stocks with poor fundamentals have been rocking! Some Basic Statistics: Below we document some core performance figures using Ken French’s data on