Predicting Stock Returns Using Firm Characteristics
A few weeks ago, we did a deep dive into the factors versus characteristics debate. One of the reasons we've brought up this debate is [...]
About Jack Vogel, PhD
Jack Vogel, Ph.D., conducts research in empirical asset pricing and behavioral finance, and is a co-author of DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His dissertation investigates how behavioral biases affect the value anomaly. His academic background includes experience as an instructor and research assistant at Drexel University in both the Finance and Mathematics departments, as well as a Finance instructor at Villanova University. Dr. Vogel is currently a Managing Member of Alpha Architect, LLC, an SEC-Registered Investment Advisor, where he heads the research department and serves as the Chief Financial Officer. He has a PhD in Finance and a MS in Mathematics from Drexel University, and graduated summa cum laude with a BS in Mathematics and Education from The University of Scranton.Everyone, Even a Passive Vanguard Investor, is a Factor Investor
Much has been made of Factor Investing, and even Vanguard is launching a suite of actively-managed factor ETFs. But even now, with Vanguard offering factor [...]
Do factor portfolios survive transaction costs?
Factor investing, and the associated intellectual battles, have raged for decades in academic finance journals. However, now that factor investing has gone mainstream via ETFs, [...]
Monetary Momentum
On most mainstream finance websites, a good chunk of the stories discuss the FED and where interest rates are going. Intuitively, this makes sense: The [...]
Factor Investors Beware: Positive SMB May Not Mean You Own Small-Caps
Regression analysis is used all the time to assess how a portfolio "loads" on certain factors. The most common factor loadings examined are the market, [...]
Do Portfolio Factors or Characteristics Drive Expected Returns?
This article examines a somewhat overlooked, but important, discussion that raged among academic researchers on the source of the value investing premium in the late 1990s and early 2000s—the topic: factors vs characteristics.
A Fund Flows Theory for Value and Momentum Investing
Value and Momentum Investing -- our two favorite factors. We talk about these phenomena on our blog all the time, and have given both rational and behavioral explanations as to why these may occur. However, very few in the finance community are direct investors into Value and Momentum securities -- the individual stocks (or bonds) themselves. Many use ETFs or mutual funds to gain access to these factors. Institutions generally do the same, either investing in hedge funds or managed accounts. This is delegated asset management, whereby one delegates the decision of the security selection onto a third-party manager. A by-product of delegation is that from time to time, the third-party manager must be assessed. While many may claim the process is most important, the performance is always taken into consideration. So what happens to a Value manager who is overweight the wrong industry? While the manager may be following the same process discussed ex-ante, the ex-post assessment may be that the manager needs to be fired due to underperformance.
Reconciling Individual Stock Returns and Factor Portfolio Returns
Those in the financial media have recently been writing multiple stories on a fascinating working paper, "Do Stocks Outperform Treasury Bills?" by Hendrik Bessembinder. We [...]
What Happens When you Data Mine 2 million Fundamental Quant Strategies
As we have mentioned before, here, here and here, there is overwhelming evidence that the number of stock anomalies in the universe is much lower than [...]
How ETF Trading Works: A Deep Dive Into ETF Market Making
Many in the financial service industry are now using ETFs to build portfolios. Some love the tax-efficiency of ETFs relative to mutual funds, while others use [...]
Portfolio Allocations using Enterprise Multiples (and others)
A common question asked in the factor investing field is the following -- "how much of the model's performance is driven by sector allocations, and how much is driven by security selection?" Our answer is to simply buy Value stocks or Momentum stocks, regardless of sector constraints. Why? Well a nice anecdote (but not data) is that investing in "cheap" technology stocks was not a great idea in the internet bubble crash.
Avoiding Overpriced Winners: A Better Way to Capture the Momentum Premium?
Any frequent reader of our blog knows we are fans of momentum investing. At this point, investment professionals should know that momentum historically works, that momentum [...]
A few highlights from The Evidence-Based Investing Conference (West)
Earlier this week, I attended the Evidence-Based Investing Conference (West) and spoke on "The Factor Zoo" panel. I present a few highlights / takeaways from the event before [...]
Factor Investing: Evidence Based Insights
I will be talking on the Factor Investing panel at the upcoming Evidence-Based Investing Conference in Dana Point, CA next Sunday –Tuesday. I am excited [...]
The Dividend Disconnect: Behavioral Finance Strikes Again
The first prediction in the paper is that "Capital Gains and Dividends Viewed as Distinct Desirable Attributes". But what does that mean? The authors highlight that when assessing stock positions, an investor has two options for how to assess the performance -- (1) simple price appreciation/depreciation or (2) total return. Note that price appreciation/depreciation is simply the price appreciation/depreciation on the position, while total return includes both the price appreciation/depreciation plus the dividend return. Directly from the paper: For many positions, either price changes or returns including dividends will yield the same category of gain or loss. However, some positions are at a gain when dividends are included, but at a loss without their inclusion. Do investors treat such positions as being at a gain or at a loss when evaluating whether to sell the position? This is equivalent to asking whether investors adjust for the mechanical decrease in shares price that results from dividend payments.
A Direct Test of the Dividend Catering Hypothesis
Why do CEOs decide to pay dividends? That is an interesting question, and one that academics have been researching for years. Miller and Modigiliani in [...]
(Fight) the Fed Model
Over the past few years, we've been asked questions related to the relationship between stock prices and interest rates. Forms of the question typically look like [...]
The Capacity of Smart Beta Funds — Larger than Previously Thought?
ETFs and factor investing are on the tip of everyone's tongue these days. Factor investing is being couched as a "new" thing, despite the fact that institutional investors have been deploying these strategies for years. (See this working paper discussing the effective use of smart beta strategies by institutional investors.) However, because factor investing is now directly accessible via ETFs, those who are unfamiliar with factor investing are asking questions about how these "new" funds will affect the market. Two burning questions many investors have: What is the overall capacity of smart beta funds? What is the capacity of momentum-based funds, specifically?
Value and Momentum Investing in Frontier Stock Markets
Value and Momentum investing have been studied across many different markets and asset classes (Asness et al 2013) and have shown to be effective factors. [...]
How are ETFs Affecting the Stock Market: Is There a Dark Side to ETFs?
The Dark Side of ETFs? Sounds interesting, and in my humble opinion, an image of Darth Vader on page 1 would be a great addition to [...]