Global Factor Performance: December 2023
Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution Factor Data Downloads
A new twist on momentum strategies: Utilize overlapping momentum portfolios
Momentum investors utilize different timeframes to identify high momentum equities: past 6, 9, 12 months as an example. Obviously, there is a significant degree of overlap in momentum stocks identified across various past time frames. However, there has been little research focused on understanding the characteristics of momentum stocks formed on six and 12 months that overlap one another. The authors refer to the subset as “overlapping” stocks and suggest they constitute the largest proportion of the profitability of the momentum strategy.
The Magnificent Seven
When a small subset of companies makes up a large portion of a portfolio, for better or worse their returns will have a greater impact on overall portfolio results.
Global Factor Performance: November 2023
Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution Factor Data Downloads
Organization Capital and the Cross-Section of Expected Returns
This paper focuses on "organization capital," representing intangible assets in a firm's key employees that is not captured by classic value measures such as book-to-market. The authors propose a structural model to analyze the impact of organizational capital on asset prices and argue that shareholders perceive firms with high levels of organizational capital to be riskier than those with more physical capital.
Technology Spillover Impacts Stock Returns
The timelier adoption of new technology and the higher likelihood of large-scale technology adoption make the risk associated with technological innovation more systematic, which in turn increases returns required by investors for technology spillover recipients.
Dissecting the Idiosyncratic Volatility Puzzle
Idiosyncratic volatility (IVOL) is the volatility of a security that cannot be explained by overall market volatility—it is the risk unique to a particular security. IVOL contrasts with systematic risk, which is the risk that affects all securities in a market (such as changes in interest rates or inflation) and, therefore cannot be diversified away. On the other hand, the risks of high IVOL stocks can at least be reduced through diversification.
Factor Investors: Momentum is Everywhere
The Jegadeesh and Titman (1993) paper on momentum established that an equity trading strategy consisting of buying past winners and selling past losers, reliably produced risk-adjusted excess returns. The Jegadeesh results have been replicated in international markets and across asset classes. As this evidence challenged and contradicted widely accepted notions of weak-form market efficiency, the academic community took notice and started churning out research. As a result, a very large number of academic studies were published on momentum. The article summarized here has conveniently summarized 47 articles deemed as the highest quality and published in either the Journal of Finance, the Review of Financial Studies, or the Journal of Financial Economics, all three considered premier journals in the finance discipline. It is difficult to understate the importance of having a well-curated summary of momentum research. Keep it in your library.
Global Factor Performance: October 2023
Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution Factor Data Downloads
International Value Stocks Offering “More Bang for the Buck”
Over the very long term, while value stocks have been less profitable and have had slower growth in earnings than growth stocks, they have provided higher returns.
The Research and Development Factor
The higher returns to high R&D stocks represent compensation for heightened systematic risk not captured in standard asset pricing models.
Trend Following and Momentum Turning Points
Trend follower nerd alert: This study is important because it offers a comprehensive analysis of TS momentum strategies, its unifying framework that links performance to underlying variables, and its practical implications for investors seeking to enhance their understanding of momentum investing and improve their portfolio performance.
Global Factor Performance: September 2023
The following factor performance modules have been updated on our Index website.[ref]free access for financial professionals[/ref] Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution [...]
Do Short-Term Factor Strategies Survive Transaction Costs?
Short term return anomalies are generally dismissed in the academic literature "because they seemingly do not survive after accounting for market frictions.” In this research, short term “factors” are taken seriously and the authors argue the standard parameters may not apply for short horizons.
Dissecting the Investment Factor
Investment predicts returns because, given expected profitability, high costs of capital imply low net present value of new capital and low investment, and low costs of capital imply high net present value of new capital and high investment.
Evidence supporting factor-based seasonalities
Factor seasonality reflects its own stock-level equivalent. It is not an independent risk factor.
Value and Profitability/Quality: Complementary Factors
There are various measures of value and quality, with one being Marx’s gross profits-to-assets.
Global Factor Performance: August 2023
The following factor performance modules have been updated on our Index website.
Investor demand, rating reform and equity returns
The traditional financial theory attributes security returns to market- or factor-based risk, with no role ascribed to other influences. In this research, the authors argue for including investor demand as an additional variable in explaining returns. Can changes in investor demand generate systematic changes in security returns?
The Quality Factor and the Low-Beta Anomaly
The empirical evidence demonstrates that returns to the low-beta anomaly are well explained by exposure to other common factors, and it has only justified investment when low-beta stocks were in the value regime, after periods of strong market and small-cap stock performance, and when they excluded high-beta stocks that had low short interest.