Research Insights Archives

Markets Becoming More Efficient: The Disappearing Index Effect

Greenwood and Sammon’s findings of a disappearing index effect provides further support for the findings of McLean and Pontiff, Does Academic Research Destroy Stock Return Predictability? 2016. Once anomalies are well recognized by the market they decline and may even disappear, though limits to arbitrage can allow them to persist. Their findings also provide support for Andrew Lo’s The Adaptive Markets Hypothesis (2004). The bottom line is that markets are becoming more efficient, raising the hurdles for active managers to generate alpha.

Accessing Private Markets: What Does It Cost?

By quantifying how non-performance-based fees dominate the cost structure, this research questions whether current fee models effectively align with investor interests, which could influence future fee arrangements and industry standards.

Using Trading Volume to Optimize Portfolio Construction and Implementation

The authors of the research discussed developed a machine learning model that can accurately predict trading volume for individual stocks. They then demonstrated how this model can be used to construct a portfolio that outperforms a traditional market-cap weighted portfolio.

DIY Trend-Following Allocations: November 2024

Full exposure to domestic equities. Full exposure to international equities. Full exposure to REITs. No exposure to commodities. Full exposure to intermediate-term bonds.

Can Artificial Intelligence outsmart seasoned equity analysts?

If the task is to identify a firm’s true profitability, can AI outsmart seasoned analysts?

Academic Anomalies Formed After Information Events

The hurdles to adding alpha for active managers are getting higher—investment practitioners make use of it as soon as or shortly after it is available.

FinTech Credit and Entrepreneurial Growth

Access to automated online credit boosts sales, transactions, and customer capital for firms, particularly in regions underserved by traditional banks.

Artificial Intelligence, Textual Analysis and Hedge Fund Performance

There’s no reason to think that the use of AI should lead to persistent fund outperformance, with any advantages gained likely being short lived.

Artificial intelligence, firm growth, and product innovation

AI-powered growth concentrates among larger firms and is associated with higher industry concentration. Our results highlight that new technologies like AI can contribute to growth and superstar firms through product innovation.

The Sahm Rule as a Recession Indicator

Because the Sahm rule focuses solely on the unemployment rate, caution is warranted before assuming it is signaling a recession.

Global Factor Performance: October 2024

The following factor performance modules have been updated on our Index website.

Reading the WSJ May Make You a Better Economist

How can textual analysis of business news, specifically The Wall Street Journal (WSJ), be used to measure the state of the economy?

The Hidden Cost of Index Replication

An index-tracking approach generally lacks flexibility, which detracts from performance, leaving returns on the table. Intelligent design can overcome such issues. For example, an S&P 500 Index could choose to rebalance one month ahead of the scheduled reconstitution, minimizing the impact of reconstitution. Direct index funds are already engaging in such strategies with ETFs.

DIY Trend-Following Allocations: October 2024

Current Exposures: Full exposure to domestic equities. Full exposure to international equities. Full exposure to REITs. No exposure to commodities. Full exposure to intermediate-term bonds.

Analysts set price targets using trailing P/E ratios

Trailing twelve-month P/E ratios account for 91% of the variation in analysts’ price targets. We construct a new kind of asset-pricing model around this fact and show that it explains the market response to earnings surprises.

Can Skewness Identify Future Outperforming Mutual Funds

While the skewness metric did demonstrate that it could select funds with managers skilled a security selection, the fund’s expenses and implementation meant that the fund was just about able to cover its expenses, and that was before the negative impact of active management on after-tax returns—and the finding was not statistically significant at even the 10% level of confidence.

The Economics of Private Equity

The paper examines key factors that influence the performance and success of private equity investments. Specifically, it focuses on the importance of manager selection, the role of LP sophistication and skill, the relationship between fund size and performance, the potential misalignment of incentives between GPs and LPs, and the benefits and risks associated with co-investment opportunities.

Data-driven Approach to Clustering Similar Macroeconomic Regimes

Knowing what economic regime we might be in won’t provide you with the crystal ball allowing you to foresee what geopolitical events will drive markets, whether “black swans” will appear, or identify whatever unexpected events or government policy actions will drive markets.

Trend-Following Filters – Part 8

This article describes digital filters derived from time series regression models that can be used as technical analysis tools. The filters are analyzed from a digital signal processing (DSP) frequency domain perspective to illustrate their properties. Example charts of the filters applied to the S&P 500 index are also included.

Investors trade Cryptos and Trad-Fi Differently

Retail traders are contrarian in stocks and gold, yet the same traders follow a momentum-like strategy in cryptocurrencies. The differences are not explained by individual characteristics, investor composition, inattention, differences in fees, or preference for lottery-like assets. We conjecture that retail investors have a model where cryptocurrency price changes affect the likelihood of future widespread adoption, which leads them to further update their price expectations in the same direction.

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