Industry classification and the momentum factor
This paper finds that the level of industry classification plays a significant role in the performance of industry momentum strategies.
Global Factor Performance: June 2023
Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution Factor Data Download
Negative Screening and the Sin Premium
While most sin stocks in the IC method were also identified as sin in the TA method, there were 57 firm-year cases where a company showed up as sin only in the IC method—these were false positive sin stocks as identified in the IC method.
Intangible-Adjusted Profitability Factor
Not accounting for intangibles affects not just value metrics but other measures (such as profitability) that often scale by book value or total assets, both of which are affected by intangibles—and investors recognize at least some of their value.
2023 Democratize Quant Conference Recap and Materials
We recently hosted our 6th Annual Democratize Quant Conference. This post is a recap of what we heard and some resources we can make available to the public.
Reducing the Impact of Momentum Crashes
Momentum crashes are a blight on the performance of momentum strategies. Although there has been a fair amount of research on the topic, few practical solutions have emerged to mitigate the impact on portfolios. In this study, the authors document the outperformance of stocks, in terms of momentum, far away from their peak position relative to stocks very near their peaks. Turns out the outperformance is very large. It also accounts for the majority of negative momentum performance.
Pursuing Factor Premiums at the Industry and Country Level
This article examines the research conducted by Dimensional to determine the efficacy of an industry or country approach to factor investing.
Global Factor Performance: May 2023
Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution Factor Data Downloads
The Drivers of Booms and Busts in the Value Premium
John Campbell, Stefano Giglio, and Christopher Polk, authors of the March 2023 study “What Drives Booms and Busts in Value?,” sought to determine which factors drive value’s booms and busts. They interpreted the returns to the standard value strategy through the lens of Robert Merton’s intertemporal CAPM (ICAPM).
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Eric Balchunas, Cliff Asness, Kai Wu, Que Nguyen, Corey Hoffstein
Novel explanations for risk-based option momentum
In this paper, we propose a cross-sectional option momentum strategy that is based on the risk component of delta-hedged option returns. We find strong evidence of risk continuation in option returns.
Improving the Quality Factor by Incorporating Intangible Intensity
In this paper we explain the answer to the question of if intangibles can be used to improve the performance of the quality factor.
How factor exposure changes over time: a study of Information Decay
Factor strategies need to be rebalanced in order to maintain their factor exposure. But different factors decay at different rates and this affects how they should be rebalanced. For example, momentum needs to be rebalanced more than value. This study digs into these questions.
Global Factor Performance: April 2023
Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution Factor Data Downloads
Combining Reversals with Time-Series Momentum Strategies
Jiadong Liu and Fotis Papailias contribute to the momentum literature with their study “Time Series Reversal in Trend-Following Strategies,” published in the January 2023 issue of “European Financial Management,” in which they examined the reversal property of various financial assets.
Wes Discusses Value Investing Foundations with Isaiah Douglass
On this week's episode, Isaiah is joined by expert Dr. Wesley Gray, CEO of Alpha Architects, to discuss the concepts of value 🌱 investing.
Institutional Investors’ Impact on Factor Premiums
For anomalies that are risk-based, that is what we should expect to see because, while risk cannot be arbitraged away, cash flows can reduce the size of the premium. For the anomalies that are behavioral based, it appears that limits to arbitrage are still sufficient to allow them to persist post-publication.
Research and Development, Expected Profitability, and Expected Returns
Regardless of the model used, an anomaly for all models is that the empirical evidence demonstrates that stocks with high research and development (R&D) expenses have delivered a premium.
Are Short Covering Trades Informative?
The importance of the role played by short sellers has received increasing academic attention in recent years. Short sellers help keep market prices efficient by preventing overpricing and the formation of price bubbles in financial markets. Market efficiency is important because an efficient market allocates capital efficiently. If short sellers were inhibited from expressing their views on valuations, securities prices could become overvalued and excess capital would be allocated to those firms.
Compression: Can the Value Spread Expand Forever?
We believe owning deep-value stocks is potentially interesting at these valuation peaks. But as I said in the previous two times I wrote this, the spread can get more extreme. At some point, we'd like to stop talking about the valuation spread and its potential effect on forward expected returns...and see that spread COMPRESS!