The past few years in the stock market have been pretty crazy. And the pinnacle of “crazy” was during March 2020 — peak chaos in the stock market. Below is a chart of US large-cap stocks and small-cap stocks in 2020. Note the monster crash in March — watch out below! Source: koyfin.com As an

Near the end of 2021, I wrote an article noting that value portfolios looked historically cheap based on valuation spreads. I found that in the next five years (after the peak), Value investing performed quite well.(1) Following this post, I have received numerous questions related to the following

The objective of research into asset pricing is to determine which characteristics are most important for predicting returns and then build simplified models using as few factors as possible—to tame the so-called “zoo of factors”—while still providing a high level of explanatory power. In

Breaking new ground, the authors present a novel view on the nature and source of “momentum” that differs from our current understanding of momentum, whether it be industry momentum, residual, or any other version of momentum. Explanations of the source of profitability for momentum strategies

Despite the fact that a company’s internally generated intangible investments create future value, (Summary) under current U.S. generally accepted accounting principles, internally developed intangibles are not included in reported assets. While research and development (R&D) is an important

In “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I established criteria that must be met before considering investing in a factor-based strategy. We established the criteria to minimize the risks that any findings were the result of data-mining exercises. Data mining occurs

Relative sentiment is an indicator that measures the positions, flows, and attitudes of institutional investors compared to those of individual investors–where institutions typically consist of large asset managers, insurance companies, pension funds, and endowments. In some instances,

In “Your Complete Guide to Factor-Based Investing” Andrew Berkin and I provided six criteria that had to be met in order to determine which exhibits in the “factor zoo” are worthy of investment. For a factor to be considered, it must meet all of the following tests. To start, it must provide

In this article, the authors explore an alternative measure of consumer demand from a unique dataset of individual credit and debit card daily transactions ( available one week after the transaction was made on average) from January 2013 to December 2019. They ask the following: Can more timely

We were recently asked what we thought about bonds as an investment. A lot of this was inspired by my comments on bonds via a discussion on how I personally invest. I’ll repost what I said on bonds below: What are your thoughts on bonds and commodities? In general, I’m not a fan of corporate

What are the research questions? Theories abound in the financial literature explaining the drivers of momentum and reversal in one way or another. Not surprisingly, most portray the role of public and private information as key to the underlying relationships and weigh the type of information

In our book “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I presented the evidence demonstrating that momentum, both cross-sectional (CSMOM) and time-series (TSMOM), has provided a premium that has been found to be persistent across time and economic regimes, pervasive

Just recently we posted the trend-following weights for our Robust Asset Allocation model. Something interesting happened — the model suggested zero exposure to every asset, except commodities(1) source: https://alphaarchitect.com/indexes/trend/#trendasset My knee-jerk reaction was, “Wow, never

What are the Research Questions? There is abundant literature on the relationship between the business cycle and future stock returns. The traditional view is that stocks are rationally priced to immediately reflect investors’ expectations about future economic activity and that expected excess

As Sam Adams and I explained in our new book, “Your Essential Guide to Sustainable Investing,” 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 (green

In our last installment, we reviewed the performance–across four regions–of a machine-learning-based Sentix relative sentiment model for tactical asset allocation. The regions included: the USA, Europe, Japan, and Asia ex-Japan (referred to as USA, EUR, JPN, and AEJ, respectively, in the charts

Short sellers play a valuable role in keeping market prices efficient by preventing overpricing and the formation of price bubbles in financial markets. Market efficiency is important because an efficient market allocates capital efficiently. If short sellers were inhibited from expressing their

Twitter is an interesting dataset for researchers interested in consumer beliefs. (200 million monthly active users worldwide (Elon Musk may disagree!) and about 10 million active users in Italy in 2019 (AGCOM 2020)). Inflation expectations are at the heart of any consumption and investment decision

Empirical research, including the 2017 paper “A Century of Evidence on Trend-Following Investing,” has found momentum to be a persistent and pervasive factor in returns of not only stocks but other asset classes as well, including bonds, commodities, and currencies. Recent empirical research on

With a capitalization of $1.3 trillion, cryptocurrencies are now (2022) roughly 50% of the value of US dollars and coins. What was once a fad, has now become prominent and increasingly diverse from an investor’s point of view. In response, this article discusses five key features and concepts

Recent research shows that B/M is losing explanatory power (Asness et al. 2015, Fama-French 2015, Hou et al. 2015). Some have theorized that the decrease in effectiveness in B/M is due to the increasingly large value of intangible assets. Forty years ago the market was dominated by Kodak, General

Christoph Reschenhofer contributes to the factor-based investment literature with his April 2022 paper, “Combining Factors,” in which he investigated the performance of multifactor portfolios formed via a combination of stock characteristics scores. He began by noting that while “the finance

A lot of people ask me how I invest my own money, and I am always happy to oblige. But I have never discussed the topic in the public (unlike my friend Meb, who has a great post dedicated to the subject). However, this past week Justin and Jack asked if they could grill me on my personal portfolio

Ron Kaniel, Zihan Lin, Markus Pelger, and Stijn Van Nieuwerburgh contribute to the asset pricing literature with their January 2022 study “Machine-Learning the Skill of Mutual Fund Managers” in which they used machine learning in the form of an artificial neural network to examine the universe

Can the returns from running factor strategies be enhanced if institutional investors selectively and actively participate? Most of the evidence presented in this paper would suggest the answer is an unqualified YES. The authors argue this would require institutional investors to possess and then

This post focuses on the costs and benefits of including generic broad-based emerging market exposures in one’s portfolio (Note, we do not discuss factors/freedom/etc.). The analysis is not meant to be exhaustive and/or highly complex. Nor is it meant to sway the reader in one direction or the

By the middle of 2019, we had been running an ensemble of relative sentiment(1) indicators in live asset management for several years. One of the components of that ensemble was a strategy that looked at Sentix sentiment indices. For those unfamiliar with Sentix (a German company), every week it

Cryptocurrency investing is a widely debated topic and one can find plenty of debates on Twitter discussing the fed, fiat currencies, and inflation. Regardless of where you fall on the crypto spectrum, we try and focus on research-centric takes on various investment themes whenever possible. The

Since the 1992 publication of “The Cross-Section of Expected Stock Returns” by Eugene Fama and Kenneth French factor-based strategies and products have become an integral part of the global asset management landscape. While “top-down” allocation to factor premiums (such as size, value,

Market commentators sometimes suggest that the equity ETF market is just a bunch of “index funds” that all do essentially the same thing: deliver undifferentiated stock market exposure. How true is that statement? Fortunately, we can test the hypothesis that the ETF market is roughly a few

Traditional asset pricing theory holds that the workings of information networks among investors are good descriptors of equity markets. Investors that are “better informed” about fundamentals and who trade earlier than less well informed investors will receive higher returns. As the” better

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 the asset pricing literature, momentum is generally defined over the short-, medium- and long-term in the

Not long ago, GameStop stock rose like crazy in only a few hours with the effects of broker-dealer options hedging spurred by retail investor buying pressure. And from February to March 2020, options trading activity was also pointed to as a contributor to stock swings in the Covid-19 selloff. The

Investors care about more than just returns. They also care about risk. Thus, prudent investors include consideration of strategies that can provide at least some protection against adverse events that lead to left tail risk (portfolios crashing). The cost of that protection (the impact on expected

n my past life as a rower, I spent a lot of time figuring out which way the wind was blowing: Would it be a headwind and slow things down? Or would it be a tailwind and shorten the race? But a tailwind that went against the current could cause choppy water…which would slow things back down.

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 presented the evidence of a

Plenty of research ( most recently, Cziraki et al. 2021) shows that insider buys contain value-relevant information while insider sales include little to no information. But what about the action of “not trading”? The authors of this study ask the following: Are the trades of portfolio insiders

Short answer up front–very little.(1) This was a simple question posed to me by one of our blog readers–what impact does excluding stocks trading at 10x P/S have on a Momentum portfolio? A good question–especially for those who are “value” investors that are interested in momentum. For

Outperforming the market, before expenses, is a zero-sum game—if one group of active investors outperforms, another group of active investors must underperform. Is there a group of sophisticated investors who persistently exploit more naïve investors? The body of research has found that before

Value and momentum are two of the most powerful explanatory factors in finance. Research on both has been published for over 30 years(1). However, it was not until recently that the two had been studied in combination and across markets. Bijon Pani and Frank Fabozzi contribute to the literature with

In this article, the authors expound on the importance of the factor “revolution” in finance. Factor investing has moved from a bedrock position to a future of innovation and disruption. With respect to factors the authors discuss where we have been and what can we look forward to. What are the

The 2014 study by Andrea Frazzini and Lasse Pedersen, “Betting Against Beta,” established strong support for low-beta (as well as low-volatility) strategies. The authors found that for U.S. stocks, the betting against beta (BAB) factor (a portfolio that holds low-beta assets leveraged to a beta

A common mistake made by many passive investors is that they view all index funds in the same asset class as “commodities(1)”, often considering only the expense ratio when making their investment choices. However, not all index funds are alike, and not all passively managed funds (what I refer

In this research, the authors explore the role of financial intermediaries in contagion or comovements in pricing efficiency. Specifically, lead market makers (LMMs) like Goldman Sachs, Cantor Fitzgerald, RBC Capital Markets, and others, have funding constraints that may influence their ability to

As the chief research officer of Buckingham Strategic Partners, the issue I am being asked to address most often is about fixed income strategies when yields are at historically low levels and inflation risk is heightened due to the unprecedented increase in money creation (through quantitative

The growth of ETFs has been explosive (and we aren’t helping the matter via ETF Architect which facilitates low-cost high quality ETF white label services). At the end of 2020, there was roughly $5.4 trillion invested in ETFs in the United States, representing more than 25% of US market trading by

Firm characteristics such as size, book-to-market ratio, profitability, and momentum have been found to be correlated with expected returns. The predictive power of these characteristics may stem from their industry component, their firm-specific component, or both. For example, while the study

How investors understand and use central bank communications, aka FEDSPEAK, is oftentimes cryptic and difficult to analyze. This study attempts to provide some clarity to this issue by applying textual analysis to both high-frequency price and communication data, to focus on episodes whereby stock

We can define an investment bubble as an irrational strong price increase—implying a predictable strong decline. The efficient market hypothesis (EMH) implies both the absence of bubbles and that the future return is unpredictable. In his Nobel Prize lecture, the father of the EMH, Eugene Fama

One of the most established tenets in social psychology science states, “When considering what content to share in their social interactions, people primarily contemplate what impressions their sharing could create among receivers and whether those impressions are consistent with who they are or