The authors hypothesize that impression management consideration can also significantly determine investors’ conversations. This, in turn, can cause investors to inadvertently propagate noise with wide-ranging implications for the quality of investors’ investment decisions and asset prices.
We recently hosted our Democratize Quant Conference (sign up here for updates).
This post is a recap of what we heard and some resources we can make available to the public.
Traditional finance theory suggests that stocks prices always reflect their fair market values based on publicly available information. Or in academic parlance, the "semi-strong" form efficient markets hypothesis serves as the null. What are the implications of this hypothesis? Well, the hypothesis suggests that the only reason a stock price will move is due to a shift in fundamentals (either through a change in expected cash flows or via the discount rate). But what about supply and demand shifts?
“Employees are our greatest asset” is a phrase often heard from companies. However, due to accounting rules requiring that most expenditures related to employees be treated as costs and expensed as incurred, the value of employees is an intangible asset that does not appear on any balance sheet. That leaves the interesting question of whether employee satisfaction provides information on future returns.
There is a “Pink” elephant in the room. The paucity of women in the key investment and decisión-making roles in finance is that “pink” elephant. While women are represented at 33%, 37%, and 63% in the law, medical, and accounting professions, respectively (Morningstar 2016), the percentage of female investment decision-makers in investment pales in comparison at less than 10%. And it gets worse if we look at sub-sectors. Take private equity, it’s 6% (Lietz, 2011), hedge funds at 3% (Soloway, 2011), or investment banking documented in this scorecard, at a global median of 0%.
After 40 years or so, quantitative investing has evolved into a thriving practice. A major feature of the quantitative approach involves developing underlying numerical models and testing them on a historical (data) record and then forecasting where alpha may be embedded into the prices of a set of stocks. Whether you agree or disagree with this approach, it is difficult to deny that with the advanced state of data access and computational skill, “quants will win the day in ESG investing”. Such is the premise of this article and happily, it is accompanied by a compelling argument.
The superior performance of low-volatility stocks was first documented in the literature in the 1970s—by Fischer Black in 1972, among others —even before the size and value premiums were “discovered.” The low-volatility anomaly has been shown to exist in equity markets around the world. Interestingly, this finding is true not only for stocks but for bonds as well. In other words, it has been pervasive...but
Who among us wouldn't want to be the savior that predicts a market crisis and saves our clients from losses in capital -- or even better -- profits from them? A central topic of interest for academics is whether there are more precise tools to predict financial crises. Those who believe so dedicate their efforts to finding early warning indicators.
The main takeaway is that because factor timing is a strategy “fraught with opportunity,” investors should accept the fact that all risk strategies go through extended periods of poor (and unforecastable) periods of poor performance. As Blitz noted: “Even though investor sentiment may be more effective than the other metrics, its discriminatory power remains limited because expected factor premiums are still positive in all instances.” Thus, the prudent strategy is one of diversifying across many unique sources of risk so that not all of your risk eggs end up in the wrong basket at the wrong time.
Carbon markets are quickly making their way to the forefront of Environmental, Social, and Governance (ESG) investing, as well as the finance community as a whole. The Kraneshares Global Carbon ETF, (Ticker: KRBN) (whose holdings I’ll dive into shortly) was one of the top 5 performing ETFs in 2021 on a % return basis (Ferringer, Best performing ETFs of the Year - etf.com). However, it doesn’t appear that 2021 was a one-hit-wonder for Carbon Markets, but instead, the beginning of a new and very real trend.
We will be hosting our 5th annual Democratize Quant conference later this month via Zoom. The event is 100% free but we do screen participants to enforce our "no spammers" policy. https://alphaarchitect.com/democratizequant/
Factor Updates for: Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution Factor Data Downloads
How well do quantitative investors navigate around the changes to the accounting standards that are endemic to the financial data used in quantitative strategies? The numbers reported on financial statements are wholly governed by regulation and by each firm’s interpretation of those accounting standards. So how do quants stick to their empirical evidence on old data methods or do they react in terms of the strategy when the change in standards is material?
As mind-bending as it sounds, although a company’s internally generated intangible investments generate future value, they are currently not accepted as assets under US GAAP. Omission of this increasingly important class of assets reduces the usefulness and relevance of financial statement analysis that uses book value. In fact, Amitabh Dugar and Jacob Pozharny, authors of the December 2020 study “Equity Investing in the Age of Intangibles,” concluded that the relationship between financial variables and contemporaneous stock prices has weakened so much for high intangible intensity companies in both the U.S. and abroad that investors can no longer afford to ignore the changes in the economic environment created by intangibles.
Full exposure to domestic equities. Half exposure to international equities. Full exposure to REITs. Full exposure to commodities. No exposure to intermediate-term bonds.
The literature shows that where we come from affects both how we perceive other people as well as how we are perceived by others. These perceptions can also affect economic behavior. In this study, the author analyzes the role of cultural biases in analysts’ stock recommendations in Europe.
Compared to mutual funds or separately managed accounts, ANY benefit from redeeming in-kind is a bonus. That being said, not all ETFs and situations are created equal when it comes to tax efficiency, and the "golden rule" always applies - when given the option, the IRS wants to create scenarios where they receive tax dollars now instead of later. Here are some big-ticket items that cause inefficiencies (read as taxes…), many related to the “golden rule” above.
This article examines the extent to which these assumptions hold and the extent to which investors should want them to hold. The authors deliver a clever quote from Mark Twain (or maybe it was Robert Frost) that nails the issue in simple terms: “Diversification behaves like the banker who lends you his umbrella when the sun is shining but wants it back the minute it begins to rain”. Nicely expressed!
Taken together, our results suggest that firms’ personnel expenditures reflect not just the cost of labor in the current period but also the investment in human capital contained within that cost, and that market participants fail to fully understand the opportunity and efficacy of human capital development embedded in the disclosure of the expense.
There are two general types of Kalman filter models: steady-state and adaptive. A steady-state filter assumes that the statistics of the process under consideration are constant over time, resulting in fixed, time-invariant filter gains. The gains of an adaptive filter, on the other hand, are able to adjust to processes that have time-varying dynamics, such as financial time series which typically display volatility and non-stationarity.
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