Rethinking the Stock-Bond Correlation Thierry Roncalli (Amundi Asset Management & University of Evry) February 2025 The stock-bond correlation is a basics of finance and is related to some of the fundamentals of asset management. However, understanding the stock-bond correlation is not easy. In

ChatGPT and Deepseek: Can They Predict the Stock Market and Macroeconomy? Jian Chen (Xiamen University), et al. February 2025 We study whether ChatGPT and DeepSeek can extract information from the Wall Street Journal to predict the stock market and the macroeconomy. We find that ChatGPT has

The Unintended Consequences of Rebalancing Campbell R. Harvey (Duke University), et al. January 2025 Institutional investors engage in trillions of dollars of regular portfolio rebalancing, often based on calendar schedules or deviations from allocation targets. We document that such rebalancing has

An Investigation into the Causes of Stock Market Return Deviations from Real Earnings Yields Austin Murphy (Oakland University), et al. December 2024 This research demonstrates that the simple difference between the current earnings yield on the S&P500 and the long-term real TIPS yield has

Limits to Diversification: Passive Investing and Market Risk Lily H. Fang (INSEAD), et al. September 2024 We show that the rise of passive investing leads to higher correlations among stocks and increased market volatility, thereby limiting the benefit of diversification. The extent to which a stock

Climate Risk and Predictability of Global Stock Market Volatility Mingtao Zhou and Yong Ma (Hunan University) March 2024 Our study investigates the informative role of climate risk in improving the predictability of global stock market volatility. By extracting the composite component from the four

Semivolatility-managed portfolios Daniel Batista da Silva (U. of Geneva) and M. Fernandes (Getulio Vargas Fnd.) July 2024 There is ample evidence that volatility management helps improve the risk-adjusted performance of momentum portfolios. However, it is less clear that it works for other factors

The Finance AI Challenge: An Evaluation of the Top Six Free Web-based AI Models David Krause (Marquette University) June 2024 This article evaluates six free web-based AI models-ChatGPT, Gemini, Copilot, Claude, Perplexity, and Meta AI-in their performance on finance-related tasks. Utilizing a

Regime-Based Strategic Asset Allocation Eric Bouyé and Jerome Teiletche (World Bank) April 2024 What should investors do in the presence of economic regimes? Researchers and practitioners usually address this topic from a tactical asset allocation point of view. In this article, we depart from the

Macroeconomic Announcement Premium Hengjie Ai (University of Wisconsin-Madison), et al. November 2023 The paper reviews the evidence on the macroeconomic announcement premium and its implications on equilibrium asset pricing models. Empirically, a large fraction of the equity market risk premium is

Market Risk Premium Expectation: Combining Option Theory with Traditional Predictors Hong Liu (Washington University in St. Louis), et al. December 2022 In general, the slackness between the Martin lower bound (solely based on option prices) and the market risk premium depends on economic state

A Changing Stock-Bond Correlation: Explaining Short-term Fluctuations Garth Flannery (BlueCove) and Daniel Bergstresser (Brandeis Intl Business School) December 2023 This paper builds on a framework that uses macroeconomic drivers to explain long-term variation in the correlation between stocks and

Optimal Portfolio Choice with Fat Tails and Parameter Uncertainty Raymond Kan (U. of Toronto) and Nathan Lassance (LFIN/LIDAM) December 2023 Existing portfolio combination rules that optimize the out-of-sample performance under estimation risk are calibrated assuming multivariate normally

Factor Zoo (.zip) Alexander Swade (Lancaster University) et al. October 2023 The number of factors allegedly driving the cross-section of stock returns has grown steadily over time. We explore how much this ‘factor zoo’ can be compressed, focusing on explaining the available alpha rather than

Financial “wisdom” is said to be cyclical rather than cumulative, but that’s unfair. At least in the dominion of portfolio management and design, academics and money managers have made great strides in decoding Mr. Market’s cryptic signals over the past half century. The challenge, having

Causes of Deviations from a Real Earnings Yield Model of the Equity Premium Austin Murphy and Zeina N. Alsalman (Oakland University) October 2023 A market-based forecast of inflation added to equity earnings yields explains much of the variation in stock market returns over multi-year horizons.

An ETF-Based Measure of Stock Price Fragility Renato Lazo-Paz (University of Ottawa) July 2023 A growing literature employs equity mutual fund flows to measure a stock’s exposure to non-fundamental demand risk – stock price fragility. However, this approach may be biased by confounding

Predicting Financial Crises: The Role of Asset Prices Tristan Hennig (International Monetary Fund), et al. August 2023 We explore the early warning properties of a composite indicator which summarizes signals from a range of asset price growth and asset price volatility indicators to capture

Expanding the Fama-French Factor Model with the Industry Beta Anatoly B. Schmidt (NYU Tandon School of Engineering) August 2023 Recently it was shown that the news-based stock pricing model (NBSPM) outperforms the momentum-enhanced five-factor Fama-French model (FF5M) for a representative list of

Betting on War? Oil Prices, Stock Returns and Extreme Geopolitical Events Knut Nygaard (Oslo Metropolitan U.) and L.Q. Sørensen (Storebrand Asset Mgt.) July 2023 We show that the ability of oil price changes to predict stock returns is largely limited to five extreme geopolitical events: the 2022

The Realized Information Ratio and the Cross-Section of Expected Stock Returns Mehran Azimi (University of Massachusetts Boston) January 2023 This study investigates the predictability of asset returns with the information ratio and its specific variant, the Sharpe ratio. We find that the realized

ETF Dividend Cycles Pekka Honkanen (University of Georgia), et al. February 2023 Exchange-traded funds (ETFs) collect approximately 7% of all U.S. corporate dividends, which they are required to redistribute to investors. How do the funds manage these dividend flows, and does such management have

Submergence = Drawdown Plus Recovery Dane Rook (Stanford University), et al. February 2023 Drawdowns and recoveries are often analyzed separately – yet doing so can leave investors with a distorted view of risk. Indeed, this problem is so commonplace that there’s no consistently-used term for

Do Sector ETFs Outperform Treasury Bills? Gow-Cheng Huang (Tuskegee U.) and Kartono Liano (Mississippi State U.) June 2022 Unlike individual stocks, more than 67% of sector ETFs have lifetime buy-and-hold returns that are higher than the T-bill rates. Thus, the majority of sector ETFs outperform

Preference for dividends and stock returns around the world Allaudeen Hameed (National University of Singapore), et al. November 2022 We find strong international evidence favoring dividend payout as a salient stock characteristic affecting expected stock returns. We find that dividend-paying stocks

The Factor Multiverse: The Role of Interest Rates in Factor Discovery Jules H. van Binsbergen (University of Pennsylvania), et al. September 2022 We study the importance of the decline in interest rates in the discovery of asset pricing anomalies. We investigate 153 discovered anomalies as well as

The Avoidable Costs of Index Rebalancing Robert D. Arnott (Research Affiliates), et al. May 2022 Traditional capitalization-weighted indices generally add stocks with high valuation multiples after persistent outperformance and sell stocks at low valuation multiples after persistent

Combining Factors Christoph Reschenhofer (Vienna University of Economics and Business) July 2022 While the academic literature primarily investigates factor exposures based on covariances (i.e. beta exposure), most practitioners apply characteristics-based scorings to obtain factor portfolios. It

Investing in Deflation, Inflation, and Stagflation Regimes Guido Baltussen (Erasmus University Rotterdam), et al. July 2022 We examine asset class and factor premiums across inflationary regimes. As periods of high inflation and deflation are relatively uncommon in recent history, we use a deep

Inflation as the Source of the Bond, Equity, and Value Premia Martin Tarlie (GMO) May 2022 A no-arbitrage pricing model with inflation as the only priced risk factor explains the bond, equity, and value premia observed in the United States over the past sixty years. Even though inflation is the only

A Look Under the Hood of Momentum Funds Ayelen Banegas and Carlo Rosa (Federal Reserve) February 2022 Momentum investing has surged over the past few years, with assets growing at three times the rate of conventional funds. Using a comprehensive dataset of US equity funds, this paper examines the

Performance of Gold as a Financial Asset During Different Phases of Financial Cycles Aniket Ranjan and Naveen Kumar (Reserve Bank of India) January 2022 The paper examines the fundamental relationship between gold and financial markets within the framework of unobserved components model. It measures

Financial Cycles – Early Warning Indicators of Banking Crises? Sally Chen (Bank for Int’l Settlements) and Katsiaryna Svirydzenka (IMF) April 2021 Can the upturns and downturns in financial variables serve as early warning indicators of banking crises? Using data from 59 advanced and emerging

The Time-Varying Relation between Stock Returns and Monetary Variables David G. McMillan (University of Stirling) November 2, 2021 The nature of the relation between stock returns and the three monetary variables of interest rates (bond yields), inflation and money supply growth, while oft studied,

Trading Down: The Effects of Active Trading on One-Month ETF Returns Ian Gray (Loyola Marymount University) December 15, 2021 Ark Investment Management (ARK), led by CIO Cathie Wood, has risen to prominence over the past few years because of its remarkable performance. Because of requirements for

We present a theoretical and empirical methodology that reflects the Cryptocurrency version of VIX, which we name it as CVIX (Crypto VIX), and captures the future 30 days forward Crypto risk (fear). Our framework is built on idiosyncratic and systematic Crypto risk, and is not based on the option

Time-Varying Factor Allocation Stefan Vincenz and Tom Oskar Karl Zeissler (Vienna U. of Economics and Business) September 15, 2021 In this empirical study, we provide evidence on how predictive information can be utilized to profitably allocate a cross-asset factor portfolio, covering various

We present a new database of banking-crisis interventions since the 13th century. The database includes 1886 interventions in 20 categories across 138 countries, covering interventions during all of the crises identified in the main banking-crisis chronologies, while also cataloguing a large number

One of the more difficult challenges for modeling is deciding how (or if) to deal with extreme data points. It’s a common problem in economic and financial numbers. Fat tailed distributions are standard fare in stock market returns, for example. Meanwhile, the dramatic collapse in the economy

Decomposing Momentum: Eliminating its Crash Component Pascal Büsing (University of Muenster), et al. July 15, 2021 We propose a purely cross-sectional momentum strategy that avoids crash risk and does not depend on the state of the market. To do so, we simply split up the standard momentum return

I recently outlined two models for estimating the US stock market’s return for the decade ahead. Let’s add a third model to the mix with the plan to take the average as a relatively robust forecast. The previous two models (see here and here) used valuation to estimate ex ante performance for

Forecasting the Long-Term Equity Premium for Asset Allocation Athanasios Sakkas (U. of Nottingham) and Nikolaos Tessaromatis (EDHEC) July 12, 2021 Long-term country equity premium forecasts based on a cross-sectional global factor model (CS-GFM), where factors represent compensation for risks

In recent posts I reviewed several basic applications for generating fair-value estimates for the 10-year Treasury yield, which can be used as a proxy for projecting return. Let’s expand this effort by forecasting performance for the US equity market over a 10-year window. The goal is developing a

Equity Tail Risk in the Treasury Bond Market Mirco Rubin (EDHEC) and Dario Ruzzi (Bank of Italy) December 23, 2020 This paper quantifies the effects of equity tail risk on the US government bond market. We estimate equity tail risk as the option-implied stock market volatility that stems from large

Earlier this month, I reviewed a model that estimates a theoretical level for the world’s most-important interest rate: the 10-year Treasury yield. In today’s follow-up, let’s consider a second model for additional context. The goal in this series is to select several models with an eye on

Long-Horizon Stock Returns Are Positively Skewed Adam Farago and Erik Hjalmarsson (University of Gothenburg) April 28, 2021 At long horizons, multiplicative compounding induces strong-to-extreme positive skewness into stock returns; the magnitude of the effect is primarily determined by

The world is awash in efforts to model a theoretical value for the stock market – the CAPE ratio, for example. But while the equities hog much of the attention on this front, similar analytics for the world’s most important interest rate are no less valuable. How to begin? Not surprisingly,

Forecasting Bond Risk Premia using Stationary Yield Factors Tobias Hoogteijling (Robeco Asset Management), et al. April 12, 2021 The standard way to summarize the yield curve is to use the first three principal components of the yield curve, resulting in level, slope and curvature factors. Yields,

How Much Bitcoin Should I Own? A Mathematical Answer Adam Grealish (Betterment) March 9, 2021 It goes without saying that this is a hard question to answer. But we can borrow a page from modern quantitative finance to help us arrive at a potential answer. For years, Wall Street “quants” have

Predictable Financial Crises Robin Greenwood (Harvard University), et al. March 2021 Using historical data on post-war financial crises around the world, we show that crises are substantially predictable. The combination of rapid credit and asset price growth over the prior three years, whether in