The dramatic underperformance of value stocks as defined by the HmL (the return on high book-to-market stocks minus the return on low book-to-market stocks) since 2017 has led many to question the existence of the value premium. The recent drawdown has been by far the largest ever experienced. From

When it comes to predicting long-term equity returns, several well-known indicators come to mind—for example, the CAPE ratio, Tobin’s Q, and Market Cap to GDP, to name a few. Yet there is another indicator without nearly as high of a profile that has outperformed the aforementioned indicators

Since the development of the first asset pricing model, the Capital Asset Pricing Model (CAPM), academic research has attempted to develop models that increase the explanatory power of the cross-section of stock returns. We moved from the single-factor CAPM (market beta), to the three-factor

This article focuses on “climate-aware” asset allocation and the associated impacts of higher temperatures on equity excess returns and risk. The objective of this research is to demonstrate how portfolios can incorporate climate change risk and rewards into the decision-making process. The

We are proponents of focused (i.e., 50 stock) long-only value and momentum factor strategies. 1 There are also plenty of incredibly talented systematic investing shops that build highly diversified factor portfolios with 500+ stocks. We take no stance on the "best" approach because there

The grand experiment of combining massive fiscal and monetary stimulus at a time when the economy is already recovering strongly—the Fed’s latest forecast for 2021 GNP growth is 6.5 percent—has led many investors to begin to worry about the risks of rising inflation. And strong growth is

This is the third article in a series of three, the first two are available here and here. Those articles focus on examining from a digital signal processing (DSP) perspective 1 various types of digital filters that are designed to model trends in time series, in order to illustrate their properties

The correlation between stock and bond returns is an integral component of hedging strategies, risk assessment, and minimization of risk in allocation decisions. In the context of those strategies, the stock-bond correlation is typically estimated using monthly return data over a recent previous

Investors are stuck between a rock and a hard place. On one hand, it is painful to buy bonds that deliver paltry yields near all-time lows (Figure 2). On the other hand, many investors’ risk tolerance, compliance guidelines or liabilities preclude them from reducing their fixed income allocations.

As of 2017, and in spite of the documented negative relationship between fund performance and use of ETFs, approximately one-third of US-domiciled, actively managed mutual funds held ETFs at one time or another. Active managers justifiably make use of ETFs to improve their portfolio management

There has been a wave of articles (and press) suggesting that academic research suffers from a replication crisis. A “replication crisis” simply means that other researchers are unable to replicate the results from prior research using similar experimental conditions. Psychology seems to be the

COVID is killing conference mojo overall, but we were able to host a short and sweet “Democratize Quant” conference this morning. The speakers were terrific and I personally learned a lot from them. This post is a recap of what we heard and some resources we can make available to the public.

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 testing of too many factors. For example, Paul Calluzzo, Fabio Moneta, and

The 2018 Global Sustainable Investment Review reports over $30 trillion invested with explicit ESG goals as of the beginning of 2018. In the words of the authors: There is a clear tendency for many investors to own ethical companies in a saintly effort to promote good corporate behavior while hoping

Financial economists have long known that volatility and returns are negatively correlated. Fischer Black documented this in his 1976 paper “Studies of Stock Price Volatility Changes.” This relationship results in the tendency to produce negative equity returns in times of high volatility. In

Jack Bogle, the founder of Vanguard, created a simple explanation for predicting future stock returns. The so-called “Occam’s razor” (law of parsimony) approach is an attempt to explain projected returns as simple as possible. Mr. Bogle’s model is pretty simple: Expected returns (nominal,

n January 2020, trading in bitcoin exceeded $930 billion and has certainly grown over the past year. Unlike nearly any other asset, bitcoin can be traded 24 hours a day, 7 days a week on trading platforms around the globe. While trading cryptocurrencies has become relatively frequent, the high

The low-risk effect (aka low volatility) is based on the empirical observation that assets with low risk have high alpha. Specifically in this research, the effect is defined as the risk-adjusted return spread between low-risk and high-risk portfolios and not just low-risk stocks. Since the low-risk

The momentum factor represents one of our core investment beliefs: buy winners. So when research presents itself that may contradict our beliefs it provides the opportunity to dig deeper and think harder about the factors we hold so dearly. Erik Theissen and Can Yilanci begin their paper by warming

Historically, as Richard Thaler pointed out in his book Misbehaving, financial academics have looked at humans as “Econs.” An Econ, unlike a human, values everything down to a penny before they make a decision, knows all possible alternatives, weighs them accurately, and always optimizes. 1 In

Studies such as the 2019 paper “Value Return Predictability Across Asset Classes and Commonalities in Risk Premia,” have demonstrated that while it is difficult to time investments based on their value spreads 1 which we’ve covered occasionally here and here, value spreads do contain

The subject of private debt and its associated performance characteristics has not been covered sufficiently in the academic literature. Relatively few research articles have attempted to characterize the returns and risk on the types of private debt strategies available to investors. This is true,

Asset pricing models are important because they help us understand which factors explain the variation of returns across diversified portfolios. However, models are not like cameras that provide a perfect picture of the world. If models were perfectly correct, they would be laws, like we have in

Environmental, Social, and Governance (ESG) investing has become a priority for a lot of investors. We have previously written on ESG being combined with factor investing here and here. However, if one chooses to ignore our previous musings on the subject and only pursue ESG, how would that decision

Editor’s note: Seeing how the results may have shifted since the “ARK phenomenon” would be a great robustness test for this paper. ETFs are growing at a rapid pace and becoming a significant contributor to intraday activity (and we are only making the problem worse!). Naturally, some will

If you’re a value investor who has determined that you have better things to do with your time, at some point you may have decided to outsource the investment task to a fund manager. And if you read our blog (especially this post) you’re probably looking to oursource to a systematic process

As my co-author Andrew Berkin and I explain in our new book “Your Complete Guide to Factor-Based Investing,” there is considerable evidence of cross-sectional return predictability. Citing more than 100 academic papers, we presented evidence of predictability for both equity and bond factors.

More and more evidence seems to suggest that social Media impacts daily momentum and volatility. Some hedge funds that were short GME the past couple of months should have read these blog posts. In a similar vein, there is plenty of twitter chatter on the topic and anecdotal evidence that during the

The existence of a quality premium in stocks that has been persistent over time, pervasive around the globe, and robust to various definitions have been well documented by studies such as “Buffett’s Alpha,” “Global Return Premiums on Earnings Quality, Value, and Size,” and “The Excess

Benjamin Graham, often considered a strong candidate for the “the father of quantitative value investing“, developed an investment strategy that involved purchasing securities for less than their “current-asset value”, “a rough index of the liquidating value”. We uncovered ten research

In 1998, Charles Ellis wrote “Winning the Loser’s Game,” in which he presented evidence that while it is possible to generate alpha and win the game of active management, the odds of doing so were so poor that it’s not prudent for investors to try. At the time, roughly 20 percent of actively

Part 1 of this analysis, which is available here, examines filters modeled on second-order processes from a digital signal processing (DSP) perspective to illustrate their properties and limitations. To briefly recap, a time series based on a second-order process consists of a mean a and a linear

Interest in factor investing was hot several years back but seems to have died on the back of poor relative performance and a move to hotter products in thematics and ESG. But, for better or worse, we haven’t moved on. We are boring and we trust the process. We still believe that markets do a

Although the ETF market has grown exponentially over the recent 20 years, ETFs that are less popular are not always liquid. A majority of the dollars flowing into ETFs are concentrated in 3 products, accounting for 46.7% of total ETF trading volume (see Figure 3 below). If the next 8 ETFs are

The predictive abilities of value and momentum strategies are among the strongest and most pervasive empirical findings in the asset pricing literature. (here is a deep dive) For example, the study “Value and Momentum Everywhere” by Clifford Asness, Tobias Moskowitz and Lasse Pedersen, published

The American Finance Association Annual Meetings are here. 1 The conference is virtual this year but that doesn’t mean the organization hasn’t done a good job collecting the brightest minds in academia to discuss hundreds of new finance research papers — a gold mine for new and exciting ideas!

Many traders use strategies based on trends that occur in stock, bond, currency, commodity, and other financial asset price time series in order to “buy low” and “sell high”. A trend is considered to be the overall direction of prices over a period of time. If prices have generally increased

This research is an update to “Documentation of the File Drawer Problem in Academic Finance Journals” published by the same authors in the Journal of Investment Management in 2018. A summary of that article can be found here. The “file drawer problem” refers to the idea that journal editors

In his famous 1981 paper, “The Relationship Between Return and Market Value of Common Stocks,” Rolf Banz found that small firms have higher risk-adjusted returns than large firms. This was one of the first major challenges to the capital asset pricing model (CAPM) and market efficiency in

Investing is never easy, but some times are easier than others. Buying US government bonds at 10%+ yields when inflation was steadily decreasing in the 1980s was probably less worrying than buying them today at negative real yields. In today’s world, bonds may have largely lost their

Robert Novy-Marx’s 2013 paper “ The Other Side of Value: The Gross Profitability Premium” not only provided investors with new insights into the cross-section of stock returns but also helped further explain some of Warren Buffett’s superior performance. Novy-Marx built upon a 2006 paper,

There are no “right” answers when it comes to financial markets. There are generally trade-offs to all decisions. For example, stocking picking can be incredible and crush every other investment approach; but stock picking can also be horrible. Similiarily, 100% systematic investing,

As equity trading moves to less regulated markets and off of exchanges across the world, mutual fund families have increasingly taken advantage of this opportunity to reallocate trades. Fund families are able to offset opposite trades of their affiliated funds within an internal market referred to

Finance literature is abundant with theories. As academics, we like to think these theories foster behaviors and choices by investors, which in turn translate into asset prices. To test these theories, scholars typically try to infer the validity of these assumptions by examining outcomes. The

Running a marathon is similar to being a value investor, especially in recent years where it seems more like an ultra-marathon. Both activities are painful experiences that require the ability to suffer and persist through physically and emotionally straining times. Moreover, value investors always

Shiller’s (1998) original CAPE ratio (the cyclically adjusted price of an equity index/10 year average of real earnings) used to predict long term equity returns, like every online recipe, has been improved over the years by various reviewers. A number of substitutes for real earnings have been

Momentum is the tendency for assets that have performed well (poorly) in the recent past to continue to perform well (poorly) in the future, at least for a short period of time. Initial research on momentum was published by Narasimhan Jegadeesh and Sheridan Titman, authors of the 1993 study

Do analysts actively exploit anomalies when they recommend stocks? Do analysts’ research efforts contribute to efficiency in the equity markets? Good questions. This research clarifies the relationship between established stock return anomalies and analyst recommendations. Given that anomalies are

In virtually all studies on asset pricing and asset pricing models, the one-month Treasury bill is the choice as the risk-free rate. In his study “The Risk-Free Asset Implied by the Market: Medium-Term Bonds instead of Short-Term Bills,” published in the September 2020 issue of The Journal of

This paper complements Doeswijk, Lam, and Swinkels’ 2014 paper, which documents the historical composition of the market portfolio. Doeswijk, Lam, and Swinkel stopped their research in building the “market portfolio,” but left the work of the market portfolios historical returns undone. In