Quant Mashup - Alpha Architect
Momentum Investing: Why Does Seasonality Matter for Momentum? [Alpha Architect]
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
- 8 years ago, 30 Nov 2015, 11:22pm -
International Evidence for our favorite Value metric: Enterprise Multiples [Alpha Architect]
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
- 8 years ago, 24 Nov 2015, 01:28pm -
Frog in the Pan: Identifying the Highest Quality Momentum Stocks [Alpha Architect]
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
- 8 years ago, 23 Nov 2015, 09:33pm -
Trend Following and Momentum Strategies for Global REITs [Alpha Architect]
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
- 8 years ago, 20 Nov 2015, 12:14pm -
Daily Academic Alpha: Solving the Idiosyncratic Volatility Puzzle [Alpha Architect]
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
- 8 years ago, 19 Nov 2015, 11:14am -
Bond Performance when Interest Rates Spike [Alpha Architect]
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
- 8 years ago, 18 Nov 2015, 11:52am -
David Dreman on Value Investing and Investor Overreaction [Alpha Architect]
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
- 8 years ago, 17 Nov 2015, 04:26pm -
How the Number of Firms and Holding Periods Affect Momentum Funds [Alpha Architect]
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
- 8 years ago, 16 Nov 2015, 12:37pm -
The World's Longest Trend-Following Backtest [Alpha Architect]
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
- 8 years ago, 9 Nov 2015, 12:58pm -
An interesting look at the size anomaly [Alpha Architect]
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
- 8 years ago, 4 Nov 2015, 01:35pm -
All firms can benefit from the positive influence of women [Alpha Architect]
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,
- 8 years ago, 29 Oct 2015, 03:53pm -
Which Asset Allocation Weights Work the Best? [Alpha Architect]
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
- 8 years ago, 27 Oct 2015, 12:19pm -
Turn Off Your Chief Economist: GDP Growth Doesn't Predict Stock Returns [Alpha Architect]
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
- 8 years ago, 22 Oct 2015, 04:40pm -
Insider Trading During the 8-K Trading Gap [Alpha Architect]
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
- 9 years ago, 21 Oct 2015, 04:01pm -
Surprise...Trading More is Profitable for Active Funds! [Alpha Architect]
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
- 9 years ago, 16 Oct 2015, 12:18pm -
Ben Graham Would be Proud: Fundamental Analysis Works [Alpha Architect]
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
- 9 years ago, 15 Oct 2015, 12:35pm -
Absolute Strength Momentum Investing Strategy [Alpha Architect]
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
- 9 years ago, 13 Oct 2015, 12:15pm -
Value Investing: The Pain Train has Arrived and it Sucks [Alpha Architect]
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
- 9 years ago, 13 Oct 2015, 03:39am -
Daily Academic Alpha: Momentum Investing and Asset Allocation [Alpha Architect]
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 &
- 9 years ago, 12 Oct 2015, 11:24am -
How Do Dividend Paying Stocks Affect the Value Investing Anomaly? [Alpha Architect]
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
- 9 years ago, 5 Oct 2015, 09:40pm -
Combining volatility, momentum, and trend in asset allocation [Alpha Architect]
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
- 9 years ago, 29 Sep 2015, 01:38pm -
Value and Momentum in Sports Betting [Alpha Architect]
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
- 9 years ago, 28 Sep 2015, 09:30pm -
The Active Share Debate: AQR versus the Academics [Alpha Architect]
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
- 9 years ago, 21 Sep 2015, 10:25am -
Can Investors Achieve Commodity Exposure via Equities? [Alpha Architect]
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,
- 9 years ago, 18 Sep 2015, 06:57am -
Corporate Sport Sponsorship and Stock Returns [Alpha Architect]
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
- 9 years ago, 16 Sep 2015, 08:31pm -
Factor Models Can Only Tell You So Much [Alpha Architect]
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
- 9 years ago, 11 Sep 2015, 11:07am -
Daily Academic Alpha: Pension Fund Returns and High Fees [Alpha Architect]
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
- 9 years ago, 10 Sep 2015, 11:03am -
Daily Academic Alpha: Misreaction to News Releases [Alpha Architect]
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
- 9 years ago, 9 Sep 2015, 10:33am -
New Book Relased: DIY Financial Advisor @ $14.99 [Alpha Architect]
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
- 9 years ago, 1 Sep 2015, 01:05pm -
Daily Academic Alpha: Fed Forecasts-Folly or Fact? [Alpha Architect]
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
- 9 years ago, 31 Aug 2015, 12:44pm -
Visualizing Stock Market Risk: 7/1926 to 6/2015 [Alpha Architect]
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
- 9 years ago, 28 Aug 2015, 12:27pm -
Combining Value and Momentum in Stock Selection and Market Timing [Alpha Architect]
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
- 9 years ago, 25 Aug 2015, 12:01pm -
Avoid Buying Put Insurance When You are Most Afraid [Alpha Architect]
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
- 9 years ago, 24 Aug 2015, 12:32pm -
Market Efficiency Hates Bad Weather [Alpha Architect]
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
- 9 years ago, 21 Aug 2015, 10:33am -
Crisis Alpha: Surprising Ways to Hedge Stock Portfolio Risk [Alpha Architect]
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
- 9 years ago, 19 Aug 2015, 09:22pm -
The Sustainable Active Investing Framework: Simple, But Not Easy [Alpha Architect]
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
- 9 years ago, 17 Aug 2015, 12:26pm -
Avoiding the Big Drawdown: Is Downside Protection Helpful or Heresy? [Alpha Architect]
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
- 9 years ago, 13 Aug 2015, 10:39pm -
Private Equity Replication with Leveraged Small-Cap Value Stocks [Alpha Architect]
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
- 9 years ago, 6 Aug 2015, 06:56pm -
Expensive Junk Stocks are Killing High-Quality Value Stocks, YTD [Alpha Architect]
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
- 9 years ago, 4 Aug 2015, 08:58pm -
Daily Academic Alpha: Warren Buffett Market Predictions [Alpha Architect]
Last week we had a fairly long post on a valuation based asset allocation strategy that might actually work. This post followed a couple of other research projects on the issue, which showed limited evidence for simple valuation-based timing strategies. Now there is a new paper on Warren Buffett’s
- 9 years ago, 3 Aug 2015, 12:45pm -
Betting Against Days to Cover [Alpha Architect]
Abstract: The short ratio — shares shorted to shares outstanding — is an oft-used measure of arbitrageurs’ opinion about a stock’s over-valuation. We show that days-to-cover (DTC), which divides a stock’s short ratio by its average daily share turnover, is a more theoretically
- 9 years ago, 30 Jul 2015, 11:06pm -
Algorithm Aversion - Why people don't follow the model! [Alpha Architect]
There are many studies showing that models beat experts, including the meta-study “Clinical versus mechanical prediction: A meta-analysis” by Grove et al. (2000). However, given this knowledge that models beat experts, forecasters still prefer to use the human (expert) prediction as opposed to
- 9 years ago, 29 Jul 2015, 11:03pm -
One way to beat the market? Be different! [Alpha Architect]
This study was inspired by Ben Carlson’s blog post a few months ago. Ben highlights Robert Hagstrom’s book “The Warren Buffett Portfolio.” The high level question is the following: How can one beat the market? Answer: To beat the market, you have to be different than the market. One simple
- 9 years ago, 27 Jul 2015, 12:01pm -
P/E “Attention” Strategies Earn Monthly Excess Return of 1% [Alpha Architect]
Active investors with limited attention and capital constraints use fundamental metrics to screen and sort potential investments. Price-earnings (P/E) ratios are extremely popular, and are typically calculated using four trailing quarters of net income. Changes in the rankings of published P/E
- 9 years ago, 23 Jul 2015, 10:45pm -
Market timing with Value and Momentum [Alpha Architect]
Yesterday we wrote a post showing a potential way to time the market using valuation-based signals. In the past we have also examined how to use momentum-based signals (moving average rules and time-series momentum) to time the market. A natural question is what happens when we combine the
- 9 years ago, 22 Jul 2015, 11:12pm -
Eureka! A Valuation-Based Asset Allocation Strategy that Might Work [Alpha Architect]
We’ve had a few posts showing that asset allocation systems relying on market valuation indicators (e.g., Shiller CAPE ratios) as a timing signal may end up in disappointment… Can market Valuations Be Effective Market-Timing Signals? Dissecting Goldman’s 99 Percentile Market-Timing Signal
- 9 years ago, 21 Jul 2015, 09:24pm -
Daily Academic Alpha: Why Women Should make MORE than Men... [Alpha Architect]
As the proud father of 3 kids (to include 2 daughters), this set of papers, while a bit off the wall, made me smile a bit. In short, there seems to be a negative relationship between women and lawsuits–the more women surround an organization, the less legal trouble the organization faces. It would
- 9 years ago, 17 Jul 2015, 11:03pm -
Daily Academic Alpha: Fresh Evidence on the Fama French 5-Factor Model [Alpha Architect]
The past few weeks we’ve highlighted a set of research papers that go back and forth on the validity of the Fama and French “5-factor model.” A sampling of the research: The Fama French 5-Factor Paper The Kewei, Xue, and Zhang (KXZ) 4-Factor Paper (critically assesses the FF 5-factor model)
- 9 years ago, 15 Jul 2015, 11:46am -
Daily Academic Alpha: Analyzing the Effects of Long-Term vs. Short-Term Investors [Alpha Architect]
Through the traditional lens of the efficient market hypothesis, market prices stick close to their fundamental values because professional investors with large amounts of capital counteract mispricings created by “dumb” or “retail” investors. For example, if Dan the DayTrader enters sell
- 9 years ago, 14 Jul 2015, 10:55am -
Our Free Tools Are Updated: Do-It-Yourself Investors Unite [Alpha Architect]
We’ve updated the technology behind our free tools for financial professionals. Unfortunately, this took a long time, but now that we’ve developed the framework, we’ll be able to launch new and better tools in the future. tools alpha The current core modules are the following: Allocation
- 9 years ago, 13 Jul 2015, 01:47pm -