Popular benchmarks in academic research studies to evaluate the performance of investment strategies are cap-weighted (market-, or value-weighted), and equal-weighted portfolios. Capitalization-weighted portfolios are used because they are the simplest and cheapest to implement, representing the

As professor John Cochrane observed, the literature on investment factors now fills a veritable “factor zoo,” with hundreds of options. How do investors select from among this huge array of possibilities? In order to minimize the risk that outcomes result from data mining, in our book “Your

Is there a defensive equity factor? Can one be built? Although it seems like an easy question, the answer is not straightforward. The authors of this piece argue for a careful assessment of factor strategies to deliver a defensive profile convincing enough to attract investors. A defensive

Arbitrageurs keep markets efficient by moving prices to reflect their fundamental values. However, anomalies can persist because of limits to arbitrage—the costs and risks of shorting. The costs and risks of shorting, however, are not the only risks that arbitrageurs face. The publication of

That riskier assets should command higher expected returns is the most basic of asset pricing theories. Clearly, financial distress is a risk characteristic, but it presents a puzzle, as there has not been a linear relationship between it and stock returns. For example, John Birge and Yi Zhang,

The question of whether stock returns are predictable is of long-standing interest to both academics and investment practitioners. Commonly accepted investment strategies, for example, will behave quite differently in the presence of stock return predictability. The research literature is unclear on

Because of the strong evidence, momentum continues to receive much attention from researchers. Out of the hundreds of exhibits in the factor zoo, one of just five equity factors that met all the criteria (persistent, pervasive, robust, implementable, and intuitive) Andrew Berkin and I established in

The study emphasizes the importance of integrating machine learning with other tools for investment managers, pension-plan administrators, financial advisors, and independent analysts to help investors select active mutual funds with positive alpha. It also highlights the significance of fund

The timing of equity factor premiums has a strong allure for investors because academic research has found that factor premiums are both time-varying and dependent on the economic cycle. For example, Arnav Sheth and Tee Lim, authors of the December 2017 study “Fama-French Factors and Business

Abstract: One of the problems for investment funds is that success contains the seeds of destruction as cash inflows follow outperformance. In his seminal 2005 paper, “Five Myths of Active Portfolio Management,” Jonathan Berk suggested asking, “Who gets money to manage?” He answered that

Market efficiency, higher trading costs and higher expense ratios are not the only hurdles to successful active management (market timing and individual security selection). For taxable investors, the burden of higher taxes raises the hurdle.(1) From 2002 until now, S&P Dow Jones Indices has

Momentum investors utilize different timeframes to identify high momentum equities: past 6, 9, 12 months as an example. Obviously, there is a significant degree of overlap in momentum stocks identified across various past time frames. However, there has been little research focused on understanding

Many retail investors focus on generating what they consider to be income, leading to the popularity of dividend-focused strategies. To take advantage of this demand, investment firms have marketed covered call strategies that are purported to not only generate income but also reduce volatility.

How long will it take for the current level of inflation to subside? If history is any guide, it could take quite a while. Across 198 policy interest rate hikes of at least 1%, a decrease of 1% in inflation took 2 to 4 years (Havranke and Rusnak, 2013). The authors of this research article conduct

Attracted by the glamour and potential for lottery-like returns, global private equity (PE) assets under management reached $4.2 trillion in 2022. PE involves pooling capital to invest in private companies by providing venture capital (VC) to startups or by taking over and restructuring mature firms

This paper focuses on “organization capital,” representing intangible assets in a firm’s key employees that is not captured by classic value measures such as book-to-market. The authors propose a structural model to analyze the impact of organizational capital on asset prices and argue that

The increasing role of intangible assets compared to physical assets in our economy has been accompanied by increased research into their impact on asset prices and returns. Studies such as the 2020 papers “Explaining the Recent Failure of Value Investing,” “Intangible Capital and the Value

Idiosyncratic volatility (IVOL) is the volatility of a security that cannot be explained by overall market volatility—it is the risk unique to a particular security. IVOL contrasts with systematic risk, which is the risk that affects all securities in a market (such as changes in interest rates or

This paper acknowledges the pivotal role of earnings calls in disseminating value-relevant information, with particular emphasis on the Q&A segment. However, it confronts the inherent challenge posed by the unstructured nature of language in these calls, complicating quantitative analysis. In

The Jegadeesh and Titman (1993) paper on momentum established that an equity trading strategy consisting of buying past winners and selling past losers, reliably produced risk-adjusted excess returns. The Jegadeesh results have been replicated in international markets and across asset classes. As

Financial time series that are structured as data sampled at a uniform time interval, e.g., hourly, daily, weekly, or monthly, are called discrete-time time series and referred to, from a digital signal processing (DSP) perspective, as being in the “time domain.” Technical market analysts

Over the very long term, while value stocks have been less profitable and have had slower growth in earnings than growth stocks, they have provided higher returns. Among the reasons are that value stocks have traded at substantial valuation discounts compared to growth stocks, and reversion to the

The first ETFs emerged in 1993 and closely tracked broad-based indexes for a low fee. Since then, the competitive situation in the ETF industry today has differentiated itself by adding a new breed of ETFs that reflected specialization into popular investment themes. When the evolution of the ETF

Environmental, social, and governance (ESG) investing continues to increase in popularity, with many institutional and individual investors incorporating ESG criteria into their investment decision-making process. Three main themes have driven this massive shift of assets: 1) Many investors are

The article explores the limitations of traditional country-level stock market indexes constructed based on issuing firms’ domicile. Additionally, it introduces a new type of national stock market index called the EMindex, which is based on companies’ business activities rather than their

Since the development of the CAPM, which explains about two-thirds of the variation of returns among diversified portfolios, academic research has attempted to find models that increase the explanatory power of the cross-section of stock returns. Models are not like cameras that provide an exact

Pump-and-Dump (P&D) schemes to manipulate the prices of cryptocurrencies are unlike the P&D schemes found in the equity market. They produce very large price distortions on the order of 65%, very large trading volumes of 13.5x the average, and generate very large profits to cryptocurrency

The article investigates time-series (TS) momentum strategies and their performance in financial markets based on various speeds or lookback horizons. The study aims to understand the connections between different speeds of TS momentum, unobservable variables like trend, turning points, and noise

The correlation between stocks and bonds should be a critical component of any asset allocation decision, as it impacts not only the overall risk of a diversified multi-asset class portfolio but also the risk premia one should expect to receive for taking risk in different asset classes. The problem

Short-term return anomalies are generally dismissed in the academic literature “because they seemingly do not survive after accounting for market frictions.” In this research, short-term “factors” are taken seriously, and the authors argue the standard parameters may not apply to short

Over the long term, low-investment firms have outperformed high-investment firms. This finding has led to the investment factor (CMA, or conservative minus aggressive) being incorporated into the leading asset pricing models—the four-factor q-theory model (market beta, size, investment, and

The research questions of the article are as follows: How can a Hidden Markov Model be applied to identify regimes of shifting inflation? What are the characteristics and descriptive information of the identified inflation regimes? Which economic variables are the determinants of inflation and how

As a general rule of thumb, the more complexity that exists in a Wall Street creation, the faster and farther investors should run. —David Swensen, Unconventional Success Structured products are packages of synthetic investment instruments specifically designed to appeal to needs that investors

Factor seasonality always seemed to be an idea that was too close to factor timing to help build factor strategies. Surprisingly, the authors find a substantial factor seasonality effect across global markets, suggesting that the assumption is unwarranted. This is the first study I have encountered

In his 2012 paper “The Other Side of Value: The Gross Profitability Premium,” Robert Novy-Marx demonstrated that profitability, as measured by gross profits-to-assets, had roughly the same power as book-to-market (value factor) in predicting the cross-section of average returns – profitable

The traditional financial theory attributes security returns to market- or factor-based risk, with no role ascribed to other influences. In this research, the authors argue for including investor demand as an additional variable in explaining returns. Can changes in investor demand generate

The low-beta anomaly for the capital asset pricing model (CAPM)—low-beta stocks outperform high-beta stocks—was first documented more than 50 years ago by Fischer Black, Michael Jensen, and Myron Scholes in their 1972 paper, “The Capital Asset Pricing Model: Some Empirical Tests.” In our

Abstract: We find that by using a novel measure of investor attention, generated from InvestingChannel’s clickstream data on online financial news consumption, we can identify broad groups of stocks which are less efficiently priced and therefore where anomalies such as Value and Momentum are

Running regressions on past returns is a great tool for academic researchers who understand this approach’s nuance, assumptions, pitfalls, and limitations. However, when factor regressions become part of a sales effort and/or are put in the hands of investors/advisors/DIYers, “the tool can

My August 4, 2022, Alpha Architect article examined the research demonstrating that cross-sectional momentum has provided a premium that has been found to be persistent across time and economic regimes, pervasive around the globe and across sectors and asset classes (stocks, bonds, commodities and

This study explores the degree to which fund concentration as measured by high tracking error or active share, affects the magnitude of excess returns and whether or not the likelihood of outperformance or underperformance are distributed similarly. Three methods of analysis were used to examine the

While sustainable investing continues to gain in popularity, economic theory suggests that if a large enough proportion of investors choose to favor companies with high sustainability ratings and avoid those with low sustainability ratings (sin businesses), the favored company’s share prices will

Value as an investment strategy has long been popular in both academia and among practitioners and is supported by valuation theory, which provides a framework for identifying the drivers of expected returns: the prices investors pay and the expected future cash flows investors will receive.

Since the discovery of the size, value, and momentum effects in the 1980s and 1990s, a plethora of other factors have been identified in the asset pricing literature, which led John Cochrane to coin the phrase “zoo of factors.” It has raised questions and led to research into how many factors

Developments in the use of Large Language Models (LLM) have successfully demonstrated a set of applications across a number of “domains”, most of which deal with a very wide range of topics. While the experimentation has elicited lively participation from the public, the applications have been

Abstract: The “Intangible Value Factor” (IHML) can play an additive role in factor portfolios alongside the established market, size, value, quality, and momentum factors. This Six-Factor Model avoids the problematic “anti-innovation” bias of traditional factor portfolios and can be easily

The article aims to explore the possibility that changes in fundamentals play a role in the attenuation of stock market anomalies, offering an alternative explanation to the prevailing arbitrage-based explanation. Can the changes in fundamentals explain the attenuation of anomalies? Choi, Lewis and

There are several significant, well-documented benefits of index funds. In addition to outperforming a large majority of actively managed funds, they tend to have low fees, low turnover (resulting in low trading costs and high tax efficiency), broad diversification, high liquidity, and near-zero

Many factor investors are familiar with “small-cap value investing,” which is a reasonable allocation for long-term investors who can tolerate a lot of volatility. Why are there so many small-cap value investors? Small-cap value investors have been told that the value premium is higher, on

Momentum strategies have been popular since the original Jagadeesh and Titman article was published in 1993. Variations on the strategies have employed calculating momentum on an individual and industry basis. For instance, in a 1999 study, Moskowitz and Grinblatt produced a positive and significant