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

Quantitative factor portfolios generally use historical company fundamental data in portfolio construction. The key assumption behind this approach is that past fundamentals proxy for elements of risk and/or systematic mispricing. However, what if we could forecast fundamentals, with a small margin

When hunting for diversity, the typical investor considers only average correlations. However, when measuring an asset’s diversification benefits utilizing average correlations tend to mislead investors. For example, when both U.S. and non-U.S. equities produce returns greater than one standard

The lack of a statistically significant size premium in the U.S. since the publication of Rolf Banz’s 1981 paper, “The Relationship Between Return and Market Value of Common Stocks,” published in the Journal of Financial Economics, led many investors to question its use in building portfolios.

Tesla (TSLA) breached the $100 billion market capitalization in January 2020 and became the most valuable car manufacturer globally. However, valuing the company is challenging given the growth profile, complexity of the business, and erratic CEO. It is not yet profitable and cash flow is negative,

In this piece, David Blitz provides an interesting perspective on using the passive framework as a blueprint for constructing active (ETF-like) products. The article is not an empirical (no charts!) nor a theoretical (no analytics) analysis, but is focused on just one question: Is it efficient to

A common question we receive at Alpha Architect is the following: Why do you focus on EBIT/TEV as a value screen for stocks instead of the more traditional measures such as book to price? In short, we believe stocks are ownerships in businesses (I know that sounds crazy coming from a quant shop!).

Larry Swedroe recently wrote a post titled “Is there a Tail Risk Premium in Stocks.” This post is a good complement to Larry’s as this paper proposes two new measures of systematic tail risk and explores whether they are associated with a significant risk premium. The first measure, Extreme

Similar to some better-known factors, such as size and value, time-series momentum (TSMOM) historically has demonstrated abnormal excess returns. For the less familiar with trend following it’s worth your time to review Alpha Architects white paper on trend following here. TSMOM is measured by a

In the short video below, I show how to compute Active Share. The accompanying excel file with the formulas can be found here. I start by computing the active share for two hypothetical funds, and then examine the active share of a few live ETFs.

To describe the impact of social distancing, a theory of communication is developed and described comprehensively in this article. The focus is on the relative importance of worker interactions, the cost of those interactions and their impact on the size of wage subsidies intended as compensation

Building on the concepts presented in my Dividends Are Different article, here we present data and observations highlighting the relationship between inflation and 1) company fundamentals, 2) dividends, and 3) stock market movements. 1 We look at empirical data to investigate how inflation relates

Are you doing independent factor research? Have you spent countless hours on Ken French’s website? Do you run factor regressions for “fun”? Congrats — you are officially a finance geek and you will probably benefit from our new factor investing library. Our library has over 300 factors to

It has been well documented both that stock returns have much fatter tails than a normal distribution would generate, and that tail events occur much more frequently than a normal curve would predict. 1 For example, Benoit Mandelbroit and Richard Hudson examined the daily index movements of the Dow

Trend Following, as an investing strategy has delivered strong performance during market chaos (e.g., Global Financial Crisis of 2007–2009), but the strategy has gone through a significant drawdown (save the last few months where things are perking up!). We have seen dismal returns in the recent

Trend-following strategies are a lot like stock-picking strategies — there are endless approaches and varying levels of complexity. In this short piece, we explore the decision related to implementing basic trend-following strategies on either a daily or a monthly basis. Many traders intuitively

Given the recent market decline, we thought it would be helpful to review some of our blog posts from the past that may be relevant to the current crisis atmosphere. These posts focus on research that explores investment strategies that are believed to help investors manage risk and diversify their

When I was in the Marines we were “voluntold” to read a lot on the history of warfare. This mandate came from General Mattis’ desire that we lean on the 5,000+ years of fighting experience amongst us illustrious humans. Of course, history never tells you exactly what will happen in the future,

A large body of research, including the 2017 study “Tail Risk Mitigation with Managed Volatility Strategies” by Anna Dreyer and Stefan Hubrich, demonstrates that while past returns do not predict future returns, past volatility largely predicts future near-term volatility, i.e., volatility is

There is ample evidence in the literature that stock past returns predict future returns. One of the most comprehensive studies is Moskowitz et al. (2012), which shows that time-series momentum (TSM) is everywhere (they test it on 55 assets). 1 Later studies confirmed the results on even a broader

Figuring out exactly how to score companies on social issues isn’t as simple as tossing around a universal “ESG Ratio” that works for all. Instead, we have to dig into the details and find the nuanced answer to discover which companies are performing and delivering on social issues. This paper

The dramatic underperformance of the value premium since 2018, among the largest drawdowns in history, has led many to question its existence. It is certainly possible that what economists call a “regime change” could cause assumptions for why the premium should exist/persist to have changed.

What are the Research Questions? Planning for the expenditures needed to fund a successful retirement is one of the most important tasks individuals face, and it’s not an easy one. In fact, it is pretty common (and smart) for some investors to turn to a professional advisor to help guide them

If an investor would state today that in ten or twenty years most portfolios would include an allocation to cryptocurrencies, they would likely be laughed at. However, a similar response would have been encountered in the Internet Bubble and someone proposed to invest in low-risk stocks. During that

The volume of work that has been done on insider transactions is not inconsequential, we’ve covered a variety of research on the topic in several blog posts just a few of which are here and here. This is the first time we observe corporate insider’s ability to overcome biases as an indicator of

In this article, the author argues that alternative risk premia (ARP) strategies undergo an evolution that begins with their inception as a pure alpha -based strategy, continuing its metamorphosis into a pure beta strategy. The inevitable transformation is brought on by a number of factors and also

In my role as chief research officer for the Buckingham Family of Financial Services, I receive many questions from investors and advisors alike, asking me to address concerns they have that originate from articles they have read or statements they hear on the financial media. I thought it worth

Private and public companies face direct costs related to three types of climate risks: physical (i.e. extreme weather), regulatory (i.e. policies and regulations implemented to combat climate change), and technological (i.e. electric or fuel-cell-powered vehicles could disrupt traditional car