The 1997 publication of Mark Carhart’s paper “On Persistence in Mutual Fund Performance” led to the four-factor model, which added momentum to market beta, size, and value, becoming the workhorse model in finance—replacing the Fama-French three-factor model. The next major contribution came

The popularity of using volatility to inform portfolio strategies has grown as the research tying volatility-managed techniques and improved risk/return portfolio performance has proliferated in the literature. The portfolios examined in the empirical literature generally utilize conservative

The two basic rules of asset allocation are: i) identify assets with positive expected payoffs, and ii) ensure that the assets are not too highly correlated, so that diversification benefits can be harvested. Although the rules are simple, implementation is often complex. Equities have a positive

Time-series momentum (TSMOM) historically has demonstrated abnormal excess returns. Also called trend following, it is measured by a portfolio that is long assets that have had recent positive returns and short assets that have had recent negative returns. Trend following has attracted a lot of

News is now data. But how is this data associated with changes in stock market returns and risks, and is there predictive power in the news via the words used? This innovative paper asks and answers nine important questions about the interrelationship of news and stock market outcomes. How should

This project builds on research conducted by J. Piotroski, who published his paper Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers in 2000, offering a simple yet powerful framework to separate the winners from the losers in a value-investing

Historically Institutional investors have been considered the “smart money” in investment circles. What academic research has tended to show is that the smart money status of institutional investing has some chinks in its armor, as can be seen in a previous paper we summarized here. In this

Among the assumptions in the first formal asset pricing model, the CAPM, is that investors are risk-averse, they maximize the expected utility of absolute wealth, and they care only about the mean and variance of return. However, research has found that these assumptions don’t hold. In the real

We at ENJINE are big believers in the potential of machine learning (or as some call, “artificial intelligence”) to transform asset management. However, it’s fair to say that machine learning hasn’t received mass adoption in the industry – yet. There are some great primers to get you going

Many in the academic and practitioner research world are arguing that the reported B/P ratio is approaching it’s “expiration date” because of the importance of intangibles, R&D, brand value, and so on. While the determination of true “intrinsic value” remains in the domain of active

The price momentum and accruals (the difference between accounting earnings and cash flows—adjustments made for revenue that has been earned but not received, and costs that have been incurred but not paid) anomalies are two well-documented financial phenomena. Recent research has focused on

We all intuitively know we are better than average drivers, and if we’re investors, well we know we’re better than average there too. Frankly, we all put ourselves easily in the top 10%, at least. Those that are in the know will quote Buffet’s, “The Superivestors of Graham-and-Doddsville,”

We all became relatively aware of the CAPE ratio when Shiller predicted the 2000 internet bubble in his book “Irrational Exuberance,” then after he added a touch of robustness when he called the 2007 housing crisis 1 we all became intimately aware of it. Since that time CAPE has been utilized to

Can the excess returns of government bonds be predicted? This is a classic research question in finance academic research circles. Sometimes practitioners, who are often buried in the more exciting parts of the financial markets, tend to forget that government bonds (do they even belong in your

Every once in a while it’s effective to challenge the deep-seated ideas that have been utilized to construct your portfolio. Here at Alpha Architect continuously study the literature and conduct research to derive what we believe gives investors the best shot at winning over the long-haul. This

To any investor that has had the opportunity to experience a large collapse in the market, they can tell you that essentially there is nowhere to hide. Correlations of assets that were held to diversify a portfolio suddenly get very correlated in extreme market conditions aka the tails of the

The world has unquestionably be sent on a wild ride in 2020. We entered the year full of optimism and hope. Markets were at or near all-time highs, unemployment was low, living on easy street was good. Then the impact of COVID-19 ripped through the market and the economy with enough force to make

Editor’s Note: The ability of value investors to adhere to their investment strategy has been put to the greatest test ever. From January 2017 through March 2020, in terms of total returns, the Russell 3000 Growth Index outperformed the Russell 3000 Value Index by 51.7 percentage points (46.7% vs.

Among stock investors, a common strategy/belief held is Value investing — buying stocks that are relative cheaper on price/fundamental ratios. The idea behind why value investing works is that Value stocks are either (1) riskier and/or (2) have been mispriced by the market. In theory, these

Digital signal processing (DSP), specifically the use of digital filters, is embedded in many indicators used by technical analysts to study and make trading decisions using time series of stock, bond, currency, commodity, and other financial asset prices. This analysis takes a look at several of

What exactly is “sequence risk?” We’ll get more into the weeds of it, but for now, consider it the risk of loss when you can least afford it. Think of a client leaving their retirement party with their shiny new set of steak knives and then learning via the news that their enormous position in

In their paper “Time Series Momentum,” published in the May 2012 issue of the Journal of Financial Economics, Tobias Moskowitz, Yao Hua Ooi and Lasse Pedersen documented significant time-series momentum (trend) in equity index, currency, commodity and bond futures—delivering substantial

There is a large body of academic research demonstrating that the value premium has been persistent over long periods, pervasive across asset classes (stocks, bonds, commodities, and currencies) and also across and within industries, countries, and regions, robust to various fundamental metrics, and

In the search for more and better factors, this article examines the cross-sectional relationship between historical skewness (see Jack’s post here) and the returns on a robust set of assets and documents the premium for taking on skewness risk. The authors construct long/short portfolios across

Momentum in prices is the tendency of assets that have performed well recently (such as over the prior year) to outperform assets in the same asset class that have performed poorly over the prior year. For a more thorough review of momentum check out this post by Wes Gray. This phenomenon has been

Can we do impact investing that is both good for us and tastes better? In the past, if an investment had positive non-financial outcomes (positive impact), a return trade-off was expected. Today, some investors find that incorporating aspects such as diversity, stakeholders, and environmental

The positive trade-off between risk and expected return is the most fundamental concept in financial economics. Most investors are risk-averse. In order to hold higher-risk securities, they demand higher compensation in the form of higher expected returns. And risk-averse investors are more

As a general rule, we recommend you kick your spidey senses into high gear anytime there is a geek bearing formulas (especially if they are trying to sell you something). Simple is always a nice cheap default because complexity often leads to confusion, which leans to a need to have an expert, which

We are going to help make March for the Fallen a virtual event this year (September 26, 2020 at 8am). COVID is bad news, but we can turn lemons into lemonade…and we can still show gratitude for Gold Star Families by breaking into smaller groups and marching outdoors! We’ve already have 20 local

Get your popcorn ready, the quants are about to do battle… As with all good questions in academic research, there are two sides to the story. We recently published Matthew Bartolini’s blog post explaining the impacts of trading costs on the “Overnight Return Anomaly.” This paper, takes the

Two of most documented anomalies in the asset pricing literature are the momentum effect and the long-term reversal effect. Momentum is typically defined as the last 12 months of returns excluding the most recent month (i.e., months 2–12) because it tends to show a reversal, which some have

The profitability of trend-following strategies has been documented in a large number of empirical studies. The majority of these empirical studies find that these strategies are profitable in the long-run over periods ranging from 50 to 150 years. However, two issues of concern arise regarding the

Crisis Alpha is on everyone’s mind right now, maybe due to a bit of recency bias, but regardless of the reason thinking of and preparing for “tail-risk” is best done before it’s needed. Trend following is one such strategy that is rooted in academic research and is an enticing way to manage

What if your portfolio was only based on one idea? Something like “stocks always go up” or “value always beats growth.” You may be learning a humbling lesson right now that Mr. Market has taught us over and over again (and learning it the painful way). In this post, we’ll examine various

Whether they are selecting a manager, a factor, or a strategy, investors can make two types of mistakes. We thought we were hiring Peter Lynch, not this loser! A Type I error (or false discovery) when selecting a manager who turns out to be unskilled. That Warren Buffett guy is washed up, let’s

In perfectly efficient markets, option prices should not convey any new information or contribute to the price discovery of underlying assets. However, if markets are not perfectly efficient, traders with private information might prefer to transact in option markets over stock markets even though

At least once a year, the press and Twittersphere propagate the mistaken idea that investors can earn excess returns by buying the S&P 500 at the close of the market, then selling it at the open the next day. The logic is that by exposing themselves to only overnight returns, investors can seek

This study is one of several studies reviewed here and here, attempting to measure factor crowding. This article specifically examines the presence of factor crowding by estimating the correlation between market order flow with the magnitude of the factor signal to trade. They hypothesize that

We recently added a monster correlation matrix to our factor library data sheet that maps out the correlation of all the factors against every other factor. Here is a sample output that highlights the difference in the correlations between value factors and different quality factors. Note the big

Lu Zhang and his colleagues made some waves with their new paper, “Replicating Anomalies.” (now published in the RFS — congrats!). We have a summary of the paper here. Lu Zhang, and his colleagues, Kewei Hou and Chen Xue, spent nearly 3 years carefully compiling and replicating 447

The Securities and Exchange Commission (SEC) has called for more research and discussion on the impacts of ETFs. In a previous post, we covered why ETF’s have not screwed up correlations, liquidity, and alpha opportunities. However, here is another post from Wes that outlines arguments that ETFs

Recently I was invited to talk with Justin and Jack on the Excess Returns Podcast. I thank them for the opportunity and enjoyed the conversation! Below are some of the topics we discussed: Struggles in value and its long-term potential going forward. What would it take to convince you that value

From January 2017 through March 2020, the value premium, defined by HML (the return of high book-to-market stocks minus the return of low book-to-market stocks experienced a drawdown of 42 percent. 1 If we extend the period back to January 2007, the drawdown of about 51 percent is the largest ever.

Although there is widespread agreement that systematic value strategies have turned in at least a decade of underperformance, there is little agreement as to the underlying cause or cause(s). However, a number of rationalizations and critiques have emerged that question the long term viability of

Most of the time we make you “earn your education” by reading our posts to build up your knowledge of the latest and greatest academic research concepts. That said, we understand there are different ways to educate, which is why we’re experimenting with video and audio. In the videos below, 3

With the current market conditions and the wild ride we’ve all been on, we’ve pivoted our attention to focus on supplying academic research on responding to a crisis. This article investigates what the appropriate tactical adjustments investors should consider when making changes to their

The field of behavioral finance provides us with fascinating insights into individual investor behavior, including how individuals view risk, as well as the impact of those views on asset prices. Prospect theory plays a major role in explaining investor behavior. The theory, formulated in 1979 by

Now that market volatility is back, tail risk management strategies are gaining some attention. A lot of investors are dipping their toe into the water and exploring trend-following strategies on the S&P 500 — arguably the most popular U.S. stock market index.This paper explores multiple trend

We recently covered a paper by David Blitz that highlighted the potential problems with passively investing in “active” strategies. The research piece is great and surfaces a lot of great concepts. Like a lot of research we publish/summarize this article appears to “shoot Alpha Architect in

Attention all finance geeks. The latest and greatest from academic researchers is available for all to review. The WFA recently released their sessions. WFA is one of the more prestigious academic conferences and papers presented at the conference often find their way into top-tier academic