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Quant Mashup - Alpha Architect
Is The Value Premium Smaller Than We Thought? [Alpha Architect]
From 2017 through March 2020, the relative performance of value stocks in the U.S. was so poor, experiencing its largest drawdown in history, that many investors jumped to the conclusion that the value premium was dead. It is certainly possible that what economists call a “regime change” could
- 1 year ago, 4 Feb 2022, 10:12am -
What Explains the Momentum Factor? Frog-in-the Pan is Still the King [Alpha Architect]
A lot of ink has been spilled on a seemingly simple question: Why does the momentum factor exist? We have done our fair share contributing to the question and our collective conclusions are in our book Quantitative Momentum. We walked away from the question and determined the following: We will
- 1 year ago, 2 Feb 2022, 09:31am -
Portfolio Strategies for Volatility Investing [Alpha Architect]
The most basic tenet of financial theory is that risk and expected return are related. One widely used measure of risk is volatility. As far back as 1976, with the publication of Fischer Black’s “Studies of Stock Price Volatility Changes,” financial economists have known that volatility and
- 1 year ago, 27 Jan 2022, 09:02pm -
The Best Strategies for Dealing with Inflation? Factors and Trend-Following [Alpha Architect]
Inflation — what’s that? … It has been quite a while since inflation has been considered a problem. Today, however, the angst surrounding the possibility of a resurgence in inflation is real and “top of mind” for investors. If the current fear becomes a reality, how should investors react?
- 1 year ago, 27 Jan 2022, 09:01pm -
Factor Investing in Sovereign Bond Markets [Alpha Architect]
In our 2016 book “Your Complete Guide to Factor-Based Investor” Andrew Berkin and I recommended that due to the risks of data mining (or p-hacking)—researchers torture the data until it confesses—for you to consider investing in a factor it should have demonstrated a premium that was:
- 1 year ago, 14 Jan 2022, 09:15am -
Trend-Following Filters – Part 4 [Alpha Architect]
Previous articles in this series examine, from a digital signal processing (DSP) frequency domain perspective, various types of digital filters used by quantitative analysts and market technicians to analyze and transform financial time series for trend-following purposes. An Introduction to Digital
- 1 year ago, 12 Jan 2022, 11:19am -
Asset Allocation and Private Market (i.e. illiquid) Investing [Alpha Architect]
Allocations to illiquid assets(1) have become increasingly popular, thus requiring asset managers to consider portfolio-wide liquidity characteristics. Although determining the price of illiquidity is a challenge for investors, the construction of a portfolio that includes liquidity constraints can
- 1 year ago, 11 Jan 2022, 01:38am -
What Do Mutual Fund Investors Really Care About? [Alpha Architect]
Itzhak Ben-David, Jiacui Li, Andrea Rossi, and Yang Song contribute to the literature on the behavior of individual investors with their July 2021 study “What Do Mutual Fund Investors Really Care About?”, published in the July 2021 issue of The Review of Financial Studies. They began by noting
- 1 year ago, 7 Jan 2022, 10:15am -
Understanding Momentum Investing [Alpha Architect]
Momentum, the tendency of past winner stocks to outperform past loser stocks over the next several months, is one of the most well-documented and well-researched asset pricing anomalies. In our book, “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I present the evidence of a
- 1 year ago, 30 Dec 2021, 12:31pm -
Our Top 5 Geeky Finance Posts for 2021 [Alpha Architect]
We are calling it quits for the holidays. Most of us have kids and Santa is coming to town! We’ll talk about research and educate investors next week. Here are the Top 5 content pieces this year (Based on traffic): Even God would get fired as an Active Investor Does Gamma Hedging Actually Affect
- 1 year ago, 23 Dec 2021, 11:37am -
Value investing: What history says about five-year periods after valuation peaks [Alpha Architect]
No matter how you slice it, Value stocks are historically cheap compared to the past. There have been numerous articles on this topic, such as Ryan’s post here, Larry Swedroe’s post here, and more recently, Cliff Asness’ post here. Cliff’s post is one picture, shown below. 1 Source:
- 1 year ago, 22 Dec 2021, 11:06am -
The Relationship Between the Value Premium and Interest Rates [Alpha Architect]
Value stocks sharply underperformed growth stocks from 2017 to 2020, exacerbating a longer period of lackluster performance dating back to the Global Financial Crisis. The Death of Systemic Value Investing is not new news for frequent readers of the blog nor are the possible pathways to Resurrecting
- 1 year ago, 18 Dec 2021, 05:20am -
You Thought P-Hacking was Bad? Let's talk about "Non-Standard Errors" [Alpha Architect]
Most readers are familiar with p-hacking and the so-called replication crisis in financial research (see here, here, and here for differing views). Some claim that these research challenges are driven by a desire to find ‘positive’ results in the data because these results get published, whereas
- 1 year ago, 4 Dec 2021, 11:40am -
Size, Value, Profitability, and Investment Factors in International Stocks [Alpha Architect]
The current workhorse asset pricing model is the Fama-French five-factor model (2015), which added the profitability and investment factors to their original (1992) three factors of market beta, size, and value—increasing the model’s explanatory power. Nusret Cakici and Adam Zaremba contribute
- 1 year ago, 4 Dec 2021, 11:38am -
Can Prospect Theory Explain the Value and Momentum Factors? [Alpha Architect]
Traditional finance academics lean towards risk-based models to explain why various return characteristics, such as value and momentum, predict returns. But there is another school of thought often referred to as ‘behavioral finance.’ This field has some of its own ideas (see below) on why
- 1 year ago, 29 Nov 2021, 11:10pm -
Should We Never Invest in Individual Stocks? [Alpha Architect]
Hendrik Bessembinder published a fascinating paper, which finds that nearly all publicly traded stocks in the U.S. — if held as buy and hold investments — underperform Treasury bills. This finding is incredibly surprising and interesting. Of course, when bold claims are made, they tend to
- 1 year ago, 28 Nov 2021, 08:41pm -
The Value of the Value Factor: Cheaper now than a year ago? [Alpha Architect]
About a year and a half ago, after one of the worst relative drawdowns the value factor has ever seen, I wrote a piece showing the value factor was cheap relative to history. Since then, value strategies are on a solid run (look at pretty much any type of value strategy and I think you’d agree).
- 1 year ago, 24 Nov 2021, 10:05am -
Chasing Low Beta Loses Alpha [Alpha Architect]
One of the big problems for the first formal asset pricing model developed by financial economists, the CAPM, was that it predicts a positive relationship between risk and return. However, empirical studies have found the actual relationship to be basically flat, or even negative. Over the last 50
- 1 year ago, 20 Nov 2021, 08:36am -
Factor Investing Deep Dive with Jack Vogel [Alpha Architect]
Ben and Cameron, which host the excellent Rational Reminder podcast, sit down with Jack Vogel and go through a laundry list of factor investing questions. The topics discussed: 0:27 Do long-only factor premiums survive transaction costs? 2:28 Would the market impact of rebalancing a fund like MTUM
- 1 year ago, 14 Nov 2021, 07:41pm -
The Vanishing Illiquidity Premium [Alpha Architect]
Liquidity—the ability to buy and sell significant quantities of a given asset quickly, at low cost, and without a major price concession—is valuable to investors. Therefore, they demand a premium as compensation for the greater risks and costs of investing in less-liquid securities. For example,
- 1 year ago, 11 Nov 2021, 08:02pm -
How Crazy is the Current Market? Not that Crazy. [Alpha Architect]
Eric Balchunas had a recent tweet that I found fascinating. Eric’s tweet merely captures the tip of the iceberg with respect to the current market environment, which certainly feels “bubbly.” 1 The gist of the tweet is that $META, which is an ETF from our friends over at Roundhill Investments,
- 1 year ago, 11 Nov 2021, 09:45am -
US Funds Have Surprisingly Large International Exposure [Alpha Architect]
Did you know that the percentage of foreign sales of the FTSE 100 is 76% and 43% for the SP500? This study investigates the power of indirect international exposure, that is international exposure through holdings of domestic stocks. The authors ask the following: What is the indirect international
- 1 year ago, 8 Nov 2021, 10:04pm -
Using Machine Learning to Predict Options Returns [Alpha Architect]
Though classical option pricing models assume that options are redundant assets, more recent research rejects this idea. However, research on cross-sectional predictors of option returns is relatively scarce and not very well understood. Contrarily, extensive literature examines cross-sectional
- 1 year ago, 4 Nov 2021, 10:09pm -
Do factors have a role in asset allocation? [Alpha Architect]
What is the role of factors in asset allocation? Should investors substitute factor exposures for asset classes in constructing strategic portfolios? Or should factors be used as an instrument to enhance the performance of asset class-based allocation schemes? There are still quite a few questions
- 1 year ago, 27 Oct 2021, 10:32am -
A History of Wealth Creation in the U.S. Equity Markets [Alpha Architect]
Hendrik Bessembinder contributes to the literature on the returns to public equity investment diversification benefits with his study “Wealth Creation in the US Public Stock Markets 1926-2019,” published in the April 2021 issue of The Journal of Investing. The study updated his 2018 paper, “Do
- 1 year ago, 24 Oct 2021, 09:13pm -
The Impact of ESG Scores on Asset Prices [Alpha Architect]
Sustainable investing has grown substantially in recent years, demonstrating that investor demand can be driven by nonfinancial issues such as environmental (E), social (S), and governance (G) characteristics. A full list of our posts on ESG can be found here. The demand from investors who have a
- 1 year ago, 14 Oct 2021, 11:48am -
Do Big Value Spreads Mean Big Returns to Value Strategies? [Alpha Architect]
Okay, we can’t keep it a secret, we are fans of value investing 1 So when Cliff Asness and his team at AQR write about value, we get excited. The analysis reported in this research confirms the relationship between static value strategies and future returns while incorporating the notion that the
- 1 year ago, 11 Oct 2021, 10:23pm -
ETF Liquidity Risks? A Discussion [Alpha Architect]
Because of the complexity inherent to ETF trading in the secondary market, there are frequent misunderstandings about the relationship between the liquidity of the underlying securities and the liquidity of ETFs. Sometimes we hear that ETFs have excess liquidity to the underlying and at others, ETFs
- 1 year ago, 8 Oct 2021, 11:06am -
Studying Financial Idea "Infection Rates" [Alpha Architect]
Previously, we have written about the Momentum of News, which highlights that lots of positive news can lead to future positive returns (without a look-ahead bias!). Today’s post builds on the concept that news (and sentiment?) are predictive for returns — which sounds intuitive. The writers of
- 1 year ago, 6 Oct 2021, 10:48am -
Value Investing and Intangibles [Alpha Architect]
Recent research, including the 2020 studies “Explaining the Recent Failure of Value Investing” and “Intangible Capital and the Value Factor: Has Your Value Definition Just Expired?,” have investigated the impact on U.S. value strategies of the increase in the relative importance of
- 1 year ago, 1 Oct 2021, 05:09am -
Macro risks and the term structure of interest rates [Alpha Architect]
The authors of this paper identify aggregate supply and aggregate demand shocks for the US economy utilizing macroeconomic data on inflation, real GDP growth, core inflation, and the unemployment gap. They then go on to extract how these shocks to supply and demand impact the term structure of
- 1 year ago, 27 Sep 2021, 09:45pm -
Crowding and Factor Premiums [Alpha Architect]
My March 23, 2021, article for Alpha Architect addressed the issue that in recent years the field of empirical finance has faced challenges from papers arguing that there is a replication crisis because the majority of studies cannot be replicated and/or their findings are the result of multiple
- 1 year ago, 25 Sep 2021, 11:04am -
ESG Ratings are Noisy. Buyer Beware [Alpha Architect]
ESG products have been flooding the market and it is difficult for investors to assess the ground truth. To make matters worse, with limited sample size periods and datasets, trying to determine “evidence-based” ESG insights, is challenging. Nonetheless, we’ve been covering the academic
- 1 year ago, 21 Sep 2021, 12:14pm -
Is Currency Momentum Factor Momentum? [Alpha Architect]
A large body of evidence, including the studies “Is There Momentum in Factor Premia? Evidence from International Equity Markets,” Factor Momentum Everywhere (Summary)” and “Factor Momentum and the Momentum Factor,” has demonstrated that momentum exists across financial markets (stocks,
- 1 year ago, 16 Sep 2021, 10:06pm -
Is The Value Premium Smaller Than We Thought? [Alpha Architect]
From 2017 through March 2020, the relative performance of value stocks in the U.S. was so poor, experiencing its largest drawdown in history, that many investors jumped to the conclusion that the value premium was dead. It is certainly possible that what economists call a “regime change” could
- 1 year ago, 10 Sep 2021, 11:48am -
Do Cryptocurrencies Improve Portfolio Diversification? [Alpha Architect]
Portfolio diversification benefits are often driven by correlation coefficients, but this analysis can get complicated, fast. Over time academics and practitioners have realized that it is not enough to simply calculate a correlation using short return intervals (daily?, monthly?) over a sample
- 1 year ago, 8 Sep 2021, 09:09pm -
Factor Timing Is Tempting [Alpha Architect]
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 Cycles,” examined the behavior of six Fama-French factors—market beta (MKT),
- 1 year ago, 3 Sep 2021, 10:55am -
Mutual Funds: Negative $125B in Value-Add? [Alpha Architect]
Elton, Gruber, and Busse (2004) as well as Hortacsu and Syverson (2004) suggest that mutual fund markets are not perfectly competitive and that fees do matter to investors. In contrast, the neoclassical view of mutual funds (see for example Berk and Green, 2004; Pastor, Stambaugh and Taylor, 2019
- 1 year ago, 1 Sep 2021, 10:49am -
International Tests of Factor Anomalies: Most Don’t Survive [Alpha Architect]
Since the development of the capital asset pricing model (CAPM) about 50 years ago, academic researchers have documented hundreds of “anomalies” that generate significant positive alpha. There are now so many that economist John Cochrane, in his 2011 presidential address to the American Finance
- 1 year ago, 27 Aug 2021, 09:46pm -
The Value Premium Might be Smaller Than We Originally Thought [Alpha Architect]
Remember HML? It was the original formulation for estimating the “value” premium published by Fama & French in 1992. In that seminal article, FF argued based on the results they obtained, that the risk of owning equity is multidimensional. One of those dimensions of risk they used was
- 1 year ago, 25 Aug 2021, 12:49pm -
The Impact of Goodwill on Stock Returns [Alpha Architect]
A firm’s stock price should reflect the value of both its tangible and intangible capital. While tangible capital has been widely studied, intangible capital has been receiving more attention due to its increasing importance in economic values. According to a December 29, 2020, Forbes article,
- 1 year ago, 20 Aug 2021, 10:38am -
Financial Media, Price Discovery, and Merger Arbitrage [Alpha Architect]
This paper contributes to the literature on understanding the limits of arbitrage and the resulting dynamics of price discovery. Specifically, it studies the context of "merger arbitrage," which is a well-known investment strategy and unless there are limits to arbitrage, this market
- 1 year ago, 17 Aug 2021, 10:46am -
Relative Sentiment and Market Returns [Alpha Architect]
This paper studies the relationship between aggregate investor attention and subsequent market returns over the following week. The authors create two different investor attention indicators—one for aggregate retail attention (ARA) and one for aggregate institutional attention (AIA). ARA is found
- 1 year ago, 12 Aug 2021, 01:05pm -
Value Investing and the Role of Intangibles [Alpha Architect]
Recent research, including the 2020 studies “Explaining the Recent Failure of Value Investing” and “Intangible Capital and the Value Factor: Has Your Value Definition Just Expired?,” have investigated the impact on U.S. value strategies of the increase in the relative importance of
- 1 year ago, 11 Aug 2021, 01:29pm -
The Active vs Passive: Smart Factors, Market Portfolio, or Both? [Alpha Architect]
While there may be debates about passive and active investing, and even blogs about the numbers of active funds that were outperformed by the market, history taught us that the outperformance of active or passive investing is cyclical. As a proxy for active investing, the paper examines factor
- 1 year ago, 5 Aug 2021, 01:03pm -
Factor Investing and International Markets [Alpha Architect]
nternational markets have been a fertile testbed for factor research because they offer an opportunity to test old ideas on new data. Much of the previous work studying factor structure and risk premia in international markets uses highly aggregated test assets, such as country portfolios, industry
- 1 year ago, 2 Aug 2021, 01:57pm -
The Benefits of Sin Stocks [Alpha Architect]
While environmental, social, and governance (ESG) investing continues to gain in popularity, economic theory suggests the share prices of “sin” businesses (typically those involved in the gambling, tobacco, alcohol, guns, and defense industries) will become depressed if a large enough proportion
- 1 year ago, 29 Jul 2021, 11:14am -
March for the Fallen 2021: Detailed Logistics Outline and What to Expect [Alpha Architect]
March for the Fallen (#MFTF) will happen on September 25, 2021. COVID can't kill the event this year! Action Item: Please let us know your trip details so we can support you as much as possible. Here are the links to prior updates if you'd like to review: Footwear and foot care
- 1 year ago, 28 Jul 2021, 11:06am -
The Role of Book-to-Market in Bond Returns [Alpha Architect]
My August 17, 2020, article for Advisor Perspectives, “Factor-Based Investing Beats Active Management for Bonds,” provided the evidence from a series of academic papers on the ability of common factors to explain the variation of returns of bond funds, results which have important implications
- 1 year ago, 26 Jul 2021, 10:18am -
Factor Investing in Sovereign Bond Markets: 221 years of evidence! [Alpha Architect]
Despite government bonds being one of the major asset classes invested in global portfolios, 30% of overall market capitalization according to Doeswijk, et al. (2020), little work has been done to investigate whether factors are present in the sovereign bond market. (Here is a deep dive into fixed
- 1 year ago, 21 Jul 2021, 12:36am -
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