The main takeaway for investors is that Kelly, Moskowitz, and Pruitt demonstrated that past return characteristics are strongly predictive of a stock’s realized exposures to common risk factors, providing direct evidence that price trend strategies are in part explainable as compensation for common factor exposures—past returns predict betas on factors and those factors have high average returns.
Private investment opportunities seem to have been filling investors' portfolios. These investment vehicles come with a discount to the assets value to pay investors for taking on illiquidity risk. Readers of this article are treated to the development of a theory and a practical model that quantifies the illiquidity discount.
We are calling it quits for the holidays. Most of us have kids and Santa is coming to town!
We'll talk research and educate investors next week.
Here are the Top 5 content pieces this year (Based on traffic):
Do mutual funds create unnecessarily complex disclosures and fee structures to obfuscate weak net performance? Yes.
Value stocks are historically cheap compared to the past. Given this fact, a natural question is the following, "After the last two times Value had a "peak" of the factor being cheap, how did it do the subsequent five years?"
This is the second article in a series on women in leadership roles. To dig deeper into where women are in finance we analyzed 36,499 functional positions for the COO, CCO, and CTO roles in 29 countries, including 25 developed markets and Brazil, Russia, India, China (the “BRICs”). All public and private firms in the finance industry were included regardless of market capitalization or other characteristics.
We've been suffering through the deepest and longest drawdown in values history. Looking for a scapegoat to explain the lackluster performance many have pointed to low interest rates as the root cause of the underperformance. The question is have interest rates impacted value in the past?
In theory green stocks should have lower expected returns, this however, is not what we've seen. So the question is what has caused the outperformance of green stocks? And has that outperformance cost value investors their returns?
Despite the fact that a company’s internally generated intangible investments create future value, under current U.S. generally accepted accounting principles, internally developed intangibles are not included in reported assets. While research and development is an important intangible asset, so too is branding. Omission of an increasingly important class of assets reduces the usefulness and relevance of financial statement analysis that uses book value.
factor performance modules have been updated
Can market sentiment be derived from the tunes that your fellow countrymen are listening to? According to the research summarized here you'll find that there is important market information buried in the listening habits of Spotify users.
Most readers are familiar with p-hacking and the so-called replication crisis in financial research (see here, here, and here for differing views). Some claim that these research challenges are driven by a desire to find 'positive' results in the data because these results get published, whereas negative results do not get published (the evidence backs these claims).
But this research project identifies and quantifies another potential issue with research -- the researchers themselves! This "noise" created by differences in empirical techniques, programming language, data pre-processing, and so forth are deemed "non-standard-errors," which may contribute even more uncertainty in our quest to determine intellectual truth. Yikes!
Using data on 65,000 stocks from 23 countries, they evaluated the performance of the Fama-French factors, examining the factor premia in global markets to verify their robustness across different company size categories and geographical regions. Their data sample covered the period 1987-2019.
Current Exposures:
Today we summarize an investigation into the usefulness of Prospect Theory and Narrow Framing to evaluate whether a new model can help explain 22 prominent market anomalies.
Due to the surprising headline that treasury bills seemingly outperform stocks, practitioners are starting to ask: Should I invest in individual stocks?
About a year and a half ago, after one of the worst relative drawdowns the value factor has ever seen, I wrote a piece showing the value factor was cheap relative to history. Since then, value strategies are on a solid run (look at pretty much any type of value strategy and I think you'd agree). Today? The valuation spread between the cheapest 10% and the universe of stocks is cheaper. We are at levels beyond 1999 by some measures.
There was really only one question investigated in this research: Are social preferences and values the main drivers of an SRI investors' choice of SRI mutual funds?
One of the big problems for the first formal asset pricing model developed by financial economists, the CAPM, was that it predicts a positive relationship between risk and return. However, empirical studies have found the actual relationship to be basically flat, or even negative. Over the last 50 years, the most “defensive” (low-volatility or low-beta, low-risk) stocks have delivered both higher returns and higher risk-adjusted returns than the most “aggressive” (high-volatility, high-risk) stocks.
We get the following question at least 1x a day: "How do I start an ETF? Because we have so many requests for information on the topic of "How to Start an ETF?", Wes asked that I compile a list of materials on the topic and a "FAQ" to address all of your burning questions.
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