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 domicile.(...)

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(...)

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 horizons.(...)

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 firms(...)

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 2016 book,(...)

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 quickly(...)

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(...)

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 are(...)

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 average,(...)

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(...)

In this article we examine the research about how artificial intelligence influences stock returns by analyzing a measurement of firm-level AI exposures called Alness. AI Narrative and Stock Mispricing Arka Bandyopadhyay, Dat Mai, Kuntara Pukthuanthong SSRN, Working Paper A recent version of the(...)

Negative exclusionary screening refers to an investment strategy in which socially controversial firms in particular sectors are excluded from the portfolio. The Global Sustainable Investment Review reports that, in 2020, more than $15 trillion (43% of total sustainable investments) were invested(...)

The past decade has witnessed a dramatic increase in spending on intangibles (not just research and development and advertising expenditures, but also expenses related to human capital) relative to tangible capital expenditures on plants and equipment. Given the change, it is not surprising that(...)

We recently hosted our 6th Annual Democratize Quant Conference (sign up here for updates). This post is a recap of what we learned at the conference and some resources we can make available to the public. The agenda for the 2023 conference is outlined below: Date Time Topic Presenter Notes 5/18(...)

This paper helps investors better understand drawdowns and recoveries, in terms of empirical facts, practical implications, and strategies for handling them. It shows the importance of the “interplay” between drawdowns and recoveries (which the authors call “submergence”), which should not be(...)

Abstract: In times of extreme macroeconomic events, including war, hyperinflation, or significant economic recessions, many investors believe gold investing is a safe haven. Is that belief warranted? Investors have concerns about the increased risks of inflation and a recession, Congress’ ability(...)

Momentum crashes are a blight on the performance of momentum strategies. Although there has been a fair amount of research on the topic, few practical solutions have emerged to mitigate the impact on portfolios. In this study, the authors document the outperformance of momentum stocks, made(...)

Given the strong empirical evidence demonstrating the persistence, pervasiveness, robustness, and implementability of premiums for the factors of size, value, momentum, and profitability in the cross-section of returns, investors may be tempted to gain exposure to those factors across industries(...)

A series of events has led to significantly increased interest in stock and options trading by retail investors: The arrival of investing platforms (such as Robinhood) with zero trading commissions and no account minimums. The COVID-19 pandemic, causing many workers to largely remain at home for(...)

The expense ratio aside, the cost of transacting in an ETF depends on the size of the bid/ask spread at any point in time during the trading day. The ETF investor should make evidence-based trading decisions since the bid/ask spread can range from 1 basis point (bp) to several hundred bps. What are(...)

Over the almost 100 years that we have had data for U.S. stocks, the value premium (the annual average difference in returns, relative to accounting measures, from buying stocks whose market prices are low versus stocks whose market prices are high) has averaged 4.4% per year (when using(...)

We will host our 6th annual “Democratize Quant” conference on May 18th via Zoom. The event is 100% free, but we do screen participants to enforce our “no spammers” policy. Request access Conference website Our speaker line-up is excellent, and we look forward to some exciting discussions. Date Time(...)

Stock momentum trading is popular in practice and extensively investigated in academic studies. The paper finds a new option momentum, extending a recent study by Heston et al. (2022), who show that options also display momentum. Our risk-based option momentum is substantially stronger, has a risk(...)

What are the Research Questions? Communication in social networks is not new. In fact, it goes back to coffee houses in the 17th century. According to Standage (2006), “the drama of the South Sea Bubble, a fraudulent investment scheme that collapsed in September 1720, ruining thousands of(...)

In our book “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I provided evidence that among the hundreds of equity factors identified in the literature, there were only five that met our criteria for investment. The factor must have provided a premium that was: persistent across(...)

What are the research questions? The authors argue that factor exposures are random variables governed by a specific distribution that drives the behavior factor exposures over time. Five factors are examined including value, momentum, quality, investment and low volatility, over 12 developed and(...)

This article analyzes six trend-following indicators from a digital signal processing (DSP) frequency domain perspective in which the indicators are considered as digital filters and their frequency response characteristics are determined. In addition, potential trading signals generated by each(...)

The authors ask the following questions: Does the rise of index investing change information production in the economy? Does it affect the informational efficiency of stock prices? What are the Academic Insights? The authors augment (and improve) the Grossman and Stiglitz (1980) model of endogenous(...)

The empirical evidence from studies such as the 2017 paper “A Century of Evidence on Trend-Following Investing” and the 2020 paper “Time Series Momentum in the US Stock Market: Empirical Evidence and Theoretical Analysis” has found that time-series momentum (TSMOM) has demonstrated above-average(...)

Here is a link to our recent chat with Isaiah Douglass and Josh Bennett. An overview of the conversation is below: On this week’s episode, Isaiah is joined by expert Dr. Wesley Gray, CEO of Alpha Architect, to discuss the concepts of value

This article deals with the degree of market vulnerability to spillovers from disruptions in the cryptocurrency markets. This study investigates the impact of the FTX collapse and bankruptcy across global financial markets. What do responses of financial markets to the collapse of FTX say about(...)