Quant Mashup - Capital Spectator
Research Review | 10 March 2023 | ETFs [Capital Spectator]
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
- 2 months ago, 11 Mar 2023, 04:47pm -
Research Review | 17 February 2023 | Risk Analysis [Capital Spectator]
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
- 3 months ago, 17 Feb 2023, 06:20pm -
Research Review | 20 Jan 2023 | ETFs and Related Strategies [Capital Spectator]
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
- 4 months ago, 23 Jan 2023, 01:10pm -
Research Review | 9 Dec 2022 | Valuation Analysis [Capital Spectator]
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
- 5 months ago, 11 Dec 2022, 09:29pm -
Research Review | 7 Oct 2022 | Interest Rates and Inflation [Capital Spectator]
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
- 7 months ago, 7 Oct 2022, 10:42am -
Research Review | 2 Sep 2022 | Trading Costs and Market Frictions [Capital Spectator]
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
- 9 months ago, 2 Sep 2022, 09:35am -
Research Review | 5 August 2022 | Multi-Factor Strategies [Capital Spectator]
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
- 9 months ago, 10 Aug 2022, 10:21am -
Research Review | 8 July 2022 | Factor Investing [Capital Spectator]
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
- 10 months ago, 8 Jul 2022, 09:32pm -
Research Review | 10 June 2022 | Risk Premia Sources [Capital Spectator]
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
- 11 months ago, 10 Jun 2022, 12:08pm -
Research Review | 15 April 2022 | Risk Factor Premia [Capital Spectator]
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
- 1 year ago, 18 Apr 2022, 10:30am -
Research Review | 18 March 2022 | Commodities and Inflation [Capital Spectator]
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
- 1 year ago, 18 Mar 2022, 09:32pm -
Research Review | 11 February 2022 | Financial Crises [Capital Spectator]
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
- 1 year ago, 11 Feb 2022, 08:25am -
Research Review | 14 January 2022 | Inflation [Capital Spectator]
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,
- 1 year ago, 14 Jan 2022, 09:15am -
Research Review | 23 December 2021 | ETFs [Capital Spectator]
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
- 1 year ago, 23 Dec 2021, 11:36am -
Research Review | 26 November 2021 | Bitcoin and Crypto [Capital Spectator]
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
- 1 year ago, 28 Nov 2021, 08:41pm -
Research Review | 8 October 2021 | Dynamic Portfolio Strategies [Capital Spectator]
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
- 1 year ago, 8 Oct 2021, 11:06am -
Research Review | 17 Sep 2021 | Financial Shocks And Crises [Capital Spectator]
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
- 1 year ago, 20 Sep 2021, 11:11am -
Managing Data Outliers With Quantile Regression: Part I [Capital Spectator]
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
- 1 year ago, 8 Sep 2021, 09:09pm -
Research Review | 13 August 2021 | Market and Asset Analytics [Capital Spectator]
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
- 1 year ago, 13 Aug 2021, 10:43am -
Modeling US Stock Market Expected Returns, Part III [Capital Spectator]
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
- 1 year ago, 11 Aug 2021, 01:29pm -
Research Review | 16 July 2021 | Forecasting [Capital Spectator]
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
- 1 year ago, 18 Jul 2021, 12:43pm -
Modeling US Stock Market Expected Returns, Part I [Capital Spectator]
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
- 1 year ago, 15 Jul 2021, 10:01am -
Research Review | 25 June 2021 | Tail Risk [Capital Spectator]
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
- 1 year ago, 25 Jun 2021, 10:11pm -
Estimating Fair Value For The 10-Year Treasury Yield, Part II [Capital Spectator]
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
- 2 years ago, 25 May 2021, 11:47am -
Research Review | 14 May 2021 | Stock Returns [Capital Spectator]
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
- 2 years ago, 17 May 2021, 09:45am -
Estimating Fair Value For The 10-Year Treasury Yield [Capital Spectator]
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,
- 2 years ago, 12 May 2021, 10:53am -
Research Review | 30 April 2021 | Interest Rates & Yield Curves [Capital Spectator]
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,
- 2 years ago, 1 May 2021, 06:05am -
Research Review | 9 April 2021 | Bitcoin [Capital Spectator]
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
- 2 years ago, 12 Apr 2021, 10:49am -
Research Review | 19 March 2021 | Forecasting [Capital Spectator]
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
- 2 years ago, 21 Mar 2021, 12:31pm -
Research Review | 26 February 2021 | Inflation [Capital Spectator]
The Increased Toxicity of the U.S. Treasury Security Market Scott E. Hein (Texas Tech University) January 2, 2021 This short research paper documents the fact that exclusively watching for rising yields on conventional U.S. Treasury securities to reflect increased inflationary fears in the U.S. is
- 2 years ago, 26 Feb 2021, 11:40am -
Research Review | 12 February 2021 | Equity Factor Risk [Capital Spectator]
Why Are High Exposures to Factor Betas Unlikely to Deliver Anticipated Returns? Chris Brightman (Research Affiliates) et al. January 11, 2021 By choosing investment strategies that intentionally create exposure to factor betas, investors may be obtaining uncompensated risks. We show across a wide
- 2 years ago, 15 Feb 2021, 11:05am -
New Research Tries To Solve For Beta Risk’s “Failure” For Stocks [Capital Spectator]
At the core of modern finance is the proposition that beta (market) risk is the dominant factor that drives performance. But numerous empirical tests of the capital asset pricing model (CAPM) over the decades suggest otherwise. There have be various attempts to adjust CAPM to find a closer mapping
- 2 years ago, 29 Jan 2021, 10:35am -
Research Review | 15 January 2021| Forecasting [Capital Spectator]
Long-Term Stock Forecasting Magnus Pedersen (Hvass Laboratories) December 17, 2020 When plotting the relation between valuation ratios and long-term returns on individual stocks or entire stock-indices, we often see a particular pattern in the plot, where higher valuation ratios are strongly
- 2 years ago, 15 Jan 2021, 09:45am -
Research Review | 13 November 2020 | Factor Investing [Capital Spectator]
Resurrecting the Value Premium David Blitz (Robeco) and Matthias X. Hanauer (Technische Universität München) October 15, 2020 The prolonged poor performance of the value factor has led to doubts about whether the value premium still exists. Some have noted that the observed returns still fall
- 2 years ago, 15 Nov 2020, 09:18pm -
Research Review | 16 October 2020 | Index Investing [Capital Spectator]
Does Joining the S&P 500 Index Hurt Firms? Benjamin Bennett (Tulane University), et al. July 20, 2020 We investigate the impact on firms of joining the S&P 500 index from 1997 to 2017. We find that the positive announcement effect on the stock price of index inclusion has disappeared and the
- 2 years ago, 17 Oct 2020, 10:39am -
Profiling Diversification Attributes With Principal Components [Capital Spectator]
The holy grail of portfolio design is combining assets so that returns are relatively stable if not higher, risk is generally lower and the overall mix delivers stronger risk-adjusted performance that’s not otherwise available through owning the components separately. Diversification, as the
- 2 years ago, 8 Oct 2020, 10:35am -
Research Review | 28 August 2020 | Portfolio Strategy [Capital Spectator]
Fire Sale Risk and Expected Stock Returns George O. Aragon (Arizona State U.) and Min S. Kim (Michigan State U.) July 29, 2020 We measure a stock’s exposure to fire sale risk through its ownership links to equity mutual funds that experience outflows during periods of systematic outflows from the
- 2 years ago, 31 Aug 2020, 12:07pm -
Research Review | 7 August 2020 | Gold [Capital Spectator]
Is Gold a Hedge or Safe Haven Asset during COVID–19 Crisis? Md Akhtaruzzaman (Australian Catholic University), et al. May 15, 2020 The COVID–19 pandemic has shaken the global financial markets. Our study examines the role of gold as a safe haven asset during the different phases of this
- 2 years ago, 7 Aug 2020, 10:39pm -
Are Asset Class Correlations At A New Permanently High Plateau? [Capital Spectator]
The coronavirus crisis reordered many things in economics and finance and you can add asset correlations to the list. After markets crashed in March, followed by a strong (so far) rebound, asset classes have continued to move with an unusually deep and broad degree of unison. High, or at least
- 2 years ago, 29 Jul 2020, 09:44am -
Research Review | 17 July 2020 | Smart Beta Revisited [Capital Spectator]
The Smart Beta Mirage Shiyang Huang (University of Hong Kong), et al. June 2020 We document sharp performance deterioration of smart beta indexes after the corresponding smart beta ETFs are listed for investments. Adjusted by aggregate market return, the average return of smart beta indexes drops
- 2 years ago, 18 Jul 2020, 10:13am -
Research Review | 3 July 2020 | Business Cycle Analysis [Capital Spectator]
Forecasting Macroeconomic Risk in Real Time: Great and Covid-19 Recessions Roberto A. De Santis (European Central Bank) July 2020 We show that financial variables contribute to the forecast of GDP growth during the Great Recession, providing additional insights on both first and higher moments of
- 2 years ago, 3 Jul 2020, 11:38am -
Research Review | 12 June 2020 | Forecasting [Capital Spectator]
Breaking Bad Trends Ashish Garg (Research Affiliates), et al. May 7, 2020 We document and quantify the negative impact of trend breaks (i.e., turning points in the trajectory of asset prices) on the performance of standard trend-following strategies across several assets and asset classes. The
- 2 years ago, 12 Jun 2020, 12:53pm -
Fat Tails Everywhere? Profiling Extreme Returns: Part II [Capital Spectator]
It’s long been established that stock market returns aren’t normally distributed and that fat tails (extreme returns that are unexpected for a normal distribution) apply. This has implications, of course, for portfolio design and management. The first question: What are the choices for managing
- 2 years ago, 5 Jun 2020, 10:14am -
Research Review | 22 May 2020 | Tail Risk [Capital Spectator]
The Law of Regression to the Tail: How to Mitigate COVID-19, Climate Change, and Other Catastrophic Risks Bent Flyvbjerg (University of Oxford) 13 May 2020 Regression to the mean is nice and reliable, regression to the tail is reliably scary. We live in the age of regression to the tail. It is only
- 3 years ago, 22 May 2020, 11:30am -
Profiling S&P 500 Drawdowns Since 1871 [Capital Spectator]
Longer is better for analyzing the stock market, which is why Professor Robert Shiller’s data set (with an 1871 starting date) is one of the great free resources on the internet for studying the history of US equities. With that in mind, let’s review how the current drawdown for the S&P 500
- 3 years ago, 19 May 2020, 10:30am -
Research Review | 24 April 2020 | Covid-19 Blowback [Capital Spectator]
Howell E. Jackson (Harvard Law School) and Steven L. Schwarcz (Duke U.) April 19, 2020 The coronavirus has produced a public health debacle of the first-order. But the virus is also propagating the kind of exogenous shock that can precipitate – and to a considerable degree is already precipitating
- 3 years ago, 25 Apr 2020, 12:04pm -
Managing Expectations: Comparing S&P 500’s Deepest Drawdowns [Capital Spectator]
In a previous post, I simulated S&P 500 drawdowns for perspective on what the current market correction may dispense in the weeks and months ahead. Let’s supplement that analysis by visually comparing the current and ongoing peak-to-market decline with the ten deepest drawdowns since 1950.
- 3 years ago, 3 Apr 2020, 09:39am -
Econometric GDP Models Struggle With Coronavirus Fallout [Capital Spectator]
The widespread disruption from the coronavirus pandemic is obvious to everyone, but economic nowcasting and forecasting models are only just beginning to reflect the damage to what had been a moderately expanding US economy. Thanks to the lag in economic data, which can arrive with as long as two to
- 3 years ago, 25 Mar 2020, 10:08am -
Managing Expectations By Simulating S&P 500 Drawdowns [Capital Spectator]
The US stock market tumbled again yesterday, falling to a 3-1/2-year low, thanks to expanding coronavirus threat. The economic outlook is grim, at least for the near term, and so the market is attempting to price in this stark change. The result, not surprisingly, is a sobering, rapid fall from
- 3 years ago, 24 Mar 2020, 11:14am -
Should You React To The Surge In Stock Market Volatility? [Capital Spectator]
The coronavirus that’s roiling world markets and raising questions about the economic outlook has triggered a familiar shock to stocks: higher volatility. Is this a reason to change your asset allocation, rebalance the portfolio or modify risk management decisions? Maybe, but maybe not. There is
- 3 years ago, 5 Mar 2020, 09:27am -