We came across an interesting article in the Wharton Magazine blog titled “The Dangerous Data Fetishes of Sports Analytics” by Ian Cooper. The main point of the article is that some sports statistics do not add value. The main example Ian cites is the “PDO” variable which is used in hockey.

Although it has been very difficult to overcome our initial skepticism, we've finally accepted the notion that simple technical analysis may serve as an effective way to manage risk and to time markets. As John Adams said many years ago, "Facts are stubborn things." However, our

Investing in strategies that exploit the low volatility anomaly have grown in popularity in recent years. While low volatility based strategies may or may not beat the return of a market cap weighted index, by construction, they will likely deliver significantly reduced volatility. This reduction in

This paper develops a theory that explains why financial crises follow profitable lending booms. When agents exhibit the "availability heuristic" and there is a long period of banking profitability, all agents — banks, their investors and regulators — end up in an “availability

This paper documents that the path of credit spreads since a firm's last loan influences the level at which it can currently borrow. If spreads have moved in the firm's favor (i.e., declined), it is charged a higher interest rate than justified by current fundamentals, and if spreads have

We investigate various methods to express a 10-Year Treasury Bond allocation. The primary issue with Treasury Bonds is their lack of tax-efficiency. T-bond income (and CPI adjustments in the case of TIPS) are taxed as ordinary income--ouch! A 2.5% yield is pretty bad, but a 1.25% after-tax yield

Recently Discovered Research You Might Have Missed: Back test a set of trading rules from 1870 to 2010 (Zakamulin) A comparison of investor sentiment indicators (The Behavioral Quant) The Nonlinear Price Dynamics of U.S. Equity ETFs (Caginalp, DeSantis and Sayrak)

A friend of the blog was inspired by our Robust Asset Allocation discussion, and conducted some backtests using our proposed risk management framework: 50% simple moving average rule (MA) 50% time series momentum rule (TSMOM) For naming convenience, we call our 50/50 approach ROBUST. Our friend

Over the past 10+ years I've cultivated a laundry list of websites associated with financial economics. My primary focus has been identifying sources for new ideas that are creative, unique, and have application in the real-world. Interestingly enough, none of the sources I've identified

Using a new daily dataset for all stocks traded on the New York Stock Exchange, we study the impact of information asymmetry during the liquidity freeze and market run of October 1907 - one of the most severe financial crises of the 20th century. We estimate that the run on the market increased

There is sometimes confusion associated with so-called "momentum" strategies--we want to clear the muddy waters. We break momentum into two categories to differentiate between the different approaches to momentum: (1) Absolute, or time-series momentum: an asset classes' own past

Dong Lou splashed on the academic scene in 2009 and boy has he been busy! Prof Lou has some great papers out there that have inspired a lot of research and investing ideas at Alpha Architect. A few of our favorites: 'Consistent' Earnings Surprises We hypothesize that analysts with a

Book Overview One of the most fundamental choices for any investor is their approach to strategic asset allocation. What are the major asset classes to consider, and how much should be allocated to each asset class? For example, at a simplistic level, how much should one invest in stocks versus

We are probably most well known for our quantitative value investing strategies. The heart of our strategy is detailed in Wes' book, Quantitative Value (a reader's digest version is here). In the development of the Quantitative Value system there is no mention of the concept of

Crowdsourcing — when a task normally performed by employees is outsourced to a large network of people via an open call — is making inroads into the investment research industry. We shed light on this new phenomenon by examining the value of crowdsourced earnings forecasts. Our sample includes

Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not

Beware of focusing an investment decision on "yield." In this piece we want to highlight that investing in high dividend yield stocks--without considering the valuation--is probably a BAD idea. We've noticed that many market participants point to the historical performance of high

We use a comprehensive dataset from a German discount brokerage firm to investigate both the prevalence and effects of moving average trading heuristics among individual investors. We document an abnormal increase of 30% in individuals’ trading volume on signal days. More than one in 10 investors

This paper singles out the key roles of US equity skewness and kurtosis in the hedge fund return generating process. We propose a conditional higher‐moment model with location, trading, and higher‐moment factors to describe the dynamics of the equity hedge, event‐driven, relative value, and

Momentum Crash Management (Mahdi Heidari) The Risk Anomaly Tradeoff of Leverage (Baker and Wurgler) 3 Factor Dual Momentum: Value, Momentum and Low Volatility (RRSP Strategy) Tactical Asset Allocation - Research Review (The Capital Spectator)

Rebalance frequency affects value and quality factors in different ways: Value works better when assessed more frequently Quality factors work about the same, regardless of frequently. Other important findings: Value portfolios outperform the market, historically. Quality portfolios perform inline

We recently examined a handful of metrics related to S&P 500 valuations. P/E P/B TEV/EBITDA TEV/FCF TEV/GP Details on these metrics can be found here. Let's look at the high level summary as of Februa

A target price forecast scaled by current price provides the analyst’s assessment of the implied return to that stock over the stated forecast horizon. Using a simple valuation framework, we show that implied returns are a function of the expected dividend distribution, analysts’ private

We study whether commonly analyzed equity return predictors also predict corporate bond returns. Bond markets do price risk, but also are susceptible to delayed information transmission relative to equities. Specifically, equity market capitalization and firm profitability negatively predict bond

Existing studies show that firm asset and investment growth predict cross-sectional stock returns. Firms that shrink their assets or investments subsequently earn higher returns than firms that expand their assets or investments. I show that the superior returns of the low asset and investment

Manager Selection (Scott Stewart) Measuring the Size Effect with Capitalization-based ETFs (CXO Advisory) Asymmetric Reporting (Armstrong, Taylor and Verrecchia) The Piotroski F Score in the Australian Market: Performance & Fundamental Drivers (Charles Hyde) How Often Should You Take Tactical

This study sought to disentangle the effects of size and whether there are size and momentum effects on Jordan firm returns. Initial findings showed that size effect has important role in explaining returns. For momentum effect, while in general there is no momentum effect in Jordan firm market, the

The nation's recent financial crisis brought into sharp relief fundamental questions concerning the social function and purpose of the financial system, including its relation to the "real" economy. This Article argues that, to answer these questions, we must recapture a distinctively

Momentum in firm fundamentals, i.e., earnings momentum, explains the performance of strategies based on price momentum. Earnings surprise measures subsume past performance in cross sectional regressions of returns on firm characteristics, and the time-series performance of price momentum strategies

We examine the causal effect of limits-to-arbitrage on ten well-known asset pricing anomalies using Regulation SHO as a natural experiment. We find that asset pricing anomalies become weaker on portfolios constructed with pilot stocks during the pilot period. The effect is both statistically and

Understanding Options-Based Sentiment in the Stock Market (Traderfeed) What Do Accruals Tell Us About Future Cash Flows? (Barth, Clinch and Israeli) Look for People, Not for Alpha: Mutual Funds Success and Managerial Intellectual Capital (Naidenova, Parshakov and etal) Financial Education, Literacy

Barry has a nice piece in the Washington Post asking a simple question: What is the best valuation metric to assess if a stock is cheap or expensive? Jack and I were honored to see that Barry highlighted our 2013 Journal of Portfolio Management paper: Analyzing Valuation Measures: A Performance

Contrary to basic finance principles, high-beta and high-volatility stocks have long underperformed low-beta and low-volatility stocks. This anomaly may be partly explained by the fact that the typical institutional investor’s mandate to beat a fixed benchmark discourages arbitrage activity in

We were recently passed along an article suggesting that valuation spreads, or the spread in a valuation metric across the most expensive and least expensive stocks, matters for timing investments. We take this concept one step further and investigate if valuation spreads can help us time value and

The market is off to a rough start again today. ES has the potential to leave an unfilled gap down for the 2nd day in a row. This is a fairly rare thing to see happen, but is has often been followed by a gap up the next morning. This can be seen in the study below. 2015-03-04 image2 The stats here

What is Social Data? (MKTSTK) A Model of Cognitive Dissonance and Information (Matthew Kovach) Insider Trading in Commodities Markets (Andrew Verstein) New Asset Pricing Factors and Expected Bond Returns (Franke, Muller and Muller)

Investors have been worrying, at least for the last several years, that the market is overvalued. By some measures this is undoubtedly true. Just yesterday we highlighted that the Shiller CAPE is in the 94th percentile as of 1/31/2015. And as valuations have gone higher, the alarm bells in the press

As many are aware, economists aren't the funniest group in the crowd. Here are some sample jokes from the funniest economists out there--Yoram Bauman. Here is a sample economist joke: When Yorum told his dad that he wanted to use his Ph.D. in economics as the basis for a comedy career, his dad

We show that aggregate short interest is one of the strongest known predictors of the equity risk premium. High aggregate short interest predicts lower future equity returns at monthly, quarterly, semi-annual, and annual horizons. In addition, aggregate short interest outperforms a host of popular

An R Tutorial for Microsoft Excel Unsers (Revolutions) Backtesting A Basic ETF Rotation System in Excel (System Trader Success) Regulating CEO Narcissism (Bodt, Bollaert, and etal) Value, Momentum and market Timing (Filippou and Garcia-Ares) Speed of Information Diffusion

Our DO-IT-YOURSELF Investing Tool is Live! You can build your own stock selection and asset allocation models using our DIY Investing tools. How to Access the Tool? Step 1: Click "Our tools" tab from our main website page.

Our Asset Allocation Backtesting Tool is Live! You can build and backest your own allocation portfolio using our "Allocation Architect" tool. How to Access the Tool? Step 1: Click "Our tools" tab from our main website page. 1.1 Click to enlarge. Step 2: If you already have a

US News laundry lists their top 10 "Value Investing Funds," or Value Investing ETFs, in their recent article: http://money.usnews.com/funds/etfs/rankings/value-funds The criteria (and weighting) for selecting so-called "Value" ETFs are outlined below: Expense Ratio (30%) Tracking

Executive Summary: Dual Momentum, a concept pioneered by Gary Antonacci, intelligently combines elements of two types of momentum investing strategies -- absolute and relative momentum -- into a comprehensive asset allocation system. His paper shows that the combination of time-series momentum and

We decompose the abnormal profi…ts associated with well-known patterns in the cross-section of expected returns into their overnight and intraday components. We show that, on average, all of the abnormal returns on momentum strategies remarkably occur overnight while the abnormal profi…ts on the

The primary driver of long-horizon wealth is expected returns. Why would you invest in anything but stocks? Why isn’t your portfolio 100% stocks? Do you believe stocks are going to have the highest return? By the way, stocks have averaged 10% a year for a long period of time. Bonds have averaged

nvestors trying to make decisions on how to invest their savings face many complications that are frequently ignored in research papers on asset allocation. Often, it is assumed that a fixed lump sum of money is invested. But this is rarely the case in real world investing for the individual

Based on psychology theory, we propose that intuition can be a key element stimulating auditor skepticism, whereas overreliance on analytical processing can overwhelm auditors’ intuition thereby reducing skepticism. We test our expectations with an experiment containing responses from 85 senior

Some mutual funds purchase stocks before dividend payments to artificially increase their dividends, which we call "juicing." Funds paid more than twice the dividends implied by their holdings in 7.4% of fund-years examined. Juicing is associated with larger inflows, and is more common

We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. Market risk,