Factors and Taxes
As a result of the trading required to capture the premiums that drive factor strategies investors may face significant tax liabilities. The challenge for the [...]
The Value of WallStreetBets Investment Research Recommendations
Wallstreetbets has become an increasingly prominent source of investment research. Do their recommendations have value?
DIY Trend-Following Allocations: August 2024
Full exposure to domestic equities. Full exposure to international equities. Full exposure to REITs. No exposure to commodities. Partial exposure to intermediate-term bonds.
Transitioning from an ETF to Direct Indexing? Bad Idea.
Many investors face the complex decision of whether to transition from a diversified ETF to direct indexing. When is this switch a poor investment choice? My findings suggest that many investors are better off avoiding it. Direct indexing remains attractive even with a decent amount of embedded capital gains, up to approximately 40% of initial investment, for investors in the highest marginal income tax bracket. However, for lower-tax investors with a marginal income tax rate of 22%, ETFs often prove more advantageous: when embedded capital gains exceed 10%, a consumption-focused investor is better off staying in an ETF. While the other benefits and costs of direct indexing are difficult to quantify, my results indicate that it is far from a universal solution. Investors with high embedded gains and lower tax rates should approach direct indexing cautiously.
Transaction costs for asset allocation and foreign exchange markets
Transaction costs have a first-order effect on the performance of currency portfolios. Proportional costs based on quoted bid–ask spread are relatively small, but when a fund is large, costs due to the trading volume price impact are sizable and quickly erode returns, leaving many popular strategies unprofitable.
The Negative Impact of Crowding on Active Fund Performance
The shrinking pool of public companies across which active funds can diversify their holdings, increases the risk of crowding, which the research we reviewed shows negatively impacts performance. That provides yet another reason for investors to choose to avoid playing the loser’s game of active management.
Using Bayesian Solutions to Resolve the Factor Zoo
We propose a novel framework for analyzing linear asset pricing models: simple, robust, and applicable to high-dimensional problems.
The Impact of Amortizing Volatility across Private Investments
The amortization of volatility should be of concern for private capital asset classes. In order to properly budget for beta risks, it is critical that investors in private assets understand the amount of systemic (beta) risk that will “wash” into their private portfolios.
Crypto owners know Crypto…but not finance
We find that a significant share of Canadian Bitcoin owners have low crypto knowledge and low financial literacy. We also find gender differences in crypto literacy among Bitcoin owners, with female owners scoring lower in Bitcoin knowledge than male owners.
Explaining the Performance of Low-Priced Stocks: The Penny Stock Anomaly
An efficient way to improve the expected performance of an equity strategy would be to systematically exclude penny stocks, as well with high asset growth and extreme past returns, especially if they have low profitability (and exclude funds that don’t screen out such stocks).
Global Factor Performance: July 2024
The following factor performance modules have been updated on our Index website.[ref]free access for financial professionals[/ref] Factor Performance Factor Premiums Factor Data Downloads
Overconfidence May Lead to Poor Emergency Planning
How does the perception of the need to hold emergency cash relate to overconfidence in one's degree of financial literacy? The answer is surprising.
Polluters Provide Higher Returns than Non-Polluters
Atilgan, Demirtas, and Gunaydin found that there has been a pollution premium for US stocks and that the premium translated into superior investment performance.
DIY Trend-Following Allocations: July 2024
Full exposure to domestic equities. Full exposure to international equities. Partial exposure to REITs. Full exposure to commodities. Partial exposure to intermediate-term bonds.
How do macroeconomic announcements impact household spending?
What are the primary factors contributing to the steep and persistent decline in U.S. consumption growth during the Great Financial Crisis of 2008-2009?
U.S. Companies Have Outperformed Japanese Companies, or Have They?
While both the S&P 500 and the Nikkei indices have recently hit all-time highs, the valuation and balance sheet data we have reviewed indicate that the downside risks in Japanese stocks appear to be far less than the risks in U.S. stocks. Evidence such as this helps explain why legendary investor Warren Buffett has been buying Japanese stocks.
Creating Better Factor Portfolio via AI
Trading costs, discontinuous trading, missed trades, and other frictions, along with asset management fees can cause a shortfall between live and paper portfolios. The focus of this paper is to test an effective rebalancing method that prioritizes trades with the strongest signals to capture more of the factor premia while reducing turnover and trading costs.
When Shorts Don’t Short
Low short positions come from positive public news, while negative news can drive average short or extremely high short positions
How to Track Retail Investor Activity in TAQ
This paper explores the effectiveness of the BJZZ algorithm, developed by Boehmer, Jones, Zhang, and Zhang (2021), in identifying and signing retail trades executed off exchanges with subpenny price improvements.
Private Equity May Not Be the Diversifier We Think (Due to Volatility Laundering), But Private Credit Could Be
Volatility laundering causes the risk-adjusted returns and the diversification benefits of private equity to be significantly overstated. However, the problem of volatility laundering is not a problem for all private investments, specifically not for high-quality, floating rate, private credit.