Alpha Architect

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!

Global Factor Performance: March 2023

Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution Factor Data Downloads

Can We Improve Momentum Factor Investing via Salience Theory?

The contribution of salience theory to the theory of asset pricing turns out to be quite a profitable insight for momentum strategies.

Intangibles and the Value Factor

This figure shows the long, short and long-short leg performance of the intangible value factor in comparison to the traditional value factor. The performance is shown for each of the four regions: U.S., Europe, Japan and Asia Pacific between June 1983 and December 2021. The monthly returns are ex-post volatility scaled to 5% p.m

Does International Diversification Work?

In this article, the authors examine the research on the benefits of international diversification. Some argue that because equity markets generally crash simultaneously, there are no benefits to having equity diversification. The evidence from this paper rejects this hypothesis.

Inside the Minds of Expected Stock Returns

Non-traditional investor preferences play an important role in explaining the cross-section of expected stock returns.

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