Factor Investing

Intangible Value: Modernizing the Factor Portfolio

The “Intangible Value Factor” (IHML) can play an additive role in factor portfolios alongside the established market, size, value, quality, and momentum factors. This Six-Factor Model avoids the problematic “anti-innovation” bias of traditional factor portfolios and can be easily implemented using ETFs.

Fundamentals and the Attenuation of Anomalies

The article aims to explore the possibility that changes in fundamentals play a role in the attenuation of stock market anomalies, offering an alternative explanation to the prevailing arbitrage-based explanation

Improving Performance by Avoiding Negatives of Index Replication

There are several significant, well-documented benefits of index funds. In addition to outperforming a large majority of actively managed funds, they tend to have low fees, low turnover (resulting in low trading costs and high tax efficiency), broad diversification, high liquidity, and near-zero tracking error (generally assumed to mean that they incur negligible trading costs).

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.

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.

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).

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.

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.

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.

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