While both the S&P 500 and the Nikkei indices have recently hit all-time highs, the valuation and balance sheet data we have reviewed indicate that the downside risks in Japanese stocks appear to be far less than the risks in U.S. stocks. Evidence such as this helps explain why legendary investor Warren Buffett has been buying Japanese stocks.
Trading costs, discontinuous trading, missed trades, and other frictions, along with asset management fees can cause a shortfall between live and paper portfolios. The focus of this paper is to test an effective rebalancing method that prioritizes trades with the strongest signals to capture more of the factor premia while reducing turnover and trading costs.
Low short positions come from positive public news, while negative news can drive average short or extremely high short positions
The following factor performance modules have been updated on our Index website.
There is strong empirical evidence demonstrating that momentum (both cross-sectional and time-series) provides information on the cross-section of returns of many risk assets and has generated alpha relative to existing asset pricing models. Ma, Yang, and Ye’s findings provide another test of both robustness and pervasiveness, increasing our confidence that the findings of momentum in asset prices are not a result of data mining.
There is strong empirical evidence demonstrating that momentum (both cross-sectional and time-series) provides information on the cross-section of returns of many risk assets and has generated alpha relative to existing asset pricing models.
Higher volatility is associated with faster, initially stronger reversals, while lower turnover is associated with more persistent, ultimately stronger reversals
To date, the best metric we have for forecasting future equity returns and the ERP is current valuations. An interesting question is whether more complicated methods using newly developed machine learning models can provide superior forecasts.
The following factor performance modules have been updated on our Index website.
Momentum continues to receive much attention from researchers because of the strong empirical evidence.
Can AI models improve on the failures in predicting returns strictly from a practical point of view? In this paper, the possibilities are tested with a battery of AI models including linear regression, dimensional reduction methods, regression trees and neural networks. These machine learning models may be better equipped to address the multidimensional nature of stock returns when compared to traditional sorting and cross-sectional regressions used in factor research. The authors hope to overcome the drawbacks and confirm the results of traditional quant methods. As it turns out, those hopes are only weakly fulfilled by the MLM framework.
The justification for neutralizing sectors in factor strategies is a work in progress. To date, academic researchers haven't had an empirical model to mimic the impact of removing sector "effects" on the measurement and performance of factor strategies. The authors develop and test a two-component model to address the question of, "Is Sector Neutrality in Factor Investing a Mistake?"
While the empirical research on cross-sectional (long-short) momentum has shown that returns have been high, investors have also experienced huge drawdowns—momentum exhibits both high kurtosis and negative skewness. Since 1926 there have been several momentum crashes that featured short, but persistent, periods of highly negative returns. For example, from June to August 1932, the momentum portfolio lost about 91%, followed by a second drawdown from April to July 1933.
The following factor performance modules have been updated on our Index website.[ref]free access for financial professionals[/ref] Factor Performance Factor Premiums Factor Data Downloads
Studies have found that there is a correlation between stock market downturns and an increase in hospital admissions for mental illness, an increase in domestic violence, deteriorating mental health among retirees, and increased depression rates.
Convexity can provide explosive payoffs from unlikely events. It’s a powerful weapon to wield, but like most weapons, it could be inefficient or even dangerous in the hands of the untrained.
Strong empirical evidence demonstrates that momentum (both cross-sectional and time-series) provides information on the cross-section of returns of many risk assets and has generated alpha relative to existing asset pricing models.
In their two papers, Goulding, Harvey, and Mazzoleni showed that observed market corrections and rebounds carry predictive information about subsequent returns and showed how that information could be utilized to enhance the performance of trend-following strategies by dynamically blending slow and fast momentum strategies based on four-state cycle-conditional information.
Short squeezes are often associated with a large positive jump in the price of a stock. Filippou, Garcia-Ares, and Zapatero demonstrated that skewness-seeking investors try to identify securities that could experience a short squeeze in the near future and are willing to pay a premium for them. That results in an overvaluation of the options and, on average, negative returns. Investors are best served to avoid investments with lottery-like distributions. One way to do that is to turn a blind eye to social media sites like Robinhood and Reddit so you don’t get caught up in the hype and excitement. That’s another example of why retail investors are called “dumb money.” Forewarned is forearmed.
Be careful before acting on what is considered to be conventional wisdom. Make sure it’s supported by empirical evidence. In this case, the evidence makes clear that “cut your losses and let your profits run” should not be conventional wisdom.
© Copyright 2023 alpha architect | All Rights Reserved | Home | Terms of Use | Privacy Policy | Disclosures | Subscribe | Contact Us
