The bottom line is that returns to the low volatility anomaly have only justified investing when low-volatility stocks were in the value regime, after periods of strong market performance, and when they excluded high-volatility stocks that have low short interest (providing clues as to how to improve its performance). This may be why live funds have been generating large negative alphas once we account for common factor exposures.
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.
Higher volatility is associated with faster, initially stronger reversals, while lower turnover is associated with more persistent, ultimately stronger reversals
Convexity can provide explosive payoffs from unlikely events. It’s a powerful weapon to wield, but like most weapons, it could be inefficient or even dangerous in the hands of the untrained.
We examine the research around the question of what the proper framework for building a defensive factor strategy is.
Covered calls implemented to deliver higher derivative income should be expected to have (1) lower total returns, (2) higher tax realizations along the path, and (3) a more negatively skewed return profile. Investors who allocate to these strategies for their income alone, without accounting for these other considerations, might have made a devil’s bargain
Idiosyncratic volatility (IVOL) is the volatility of a security that cannot be explained by overall market volatility—it is the risk unique to a particular security. IVOL contrasts with systematic risk, which is the risk that affects all securities in a market (such as changes in interest rates or inflation) and, therefore cannot be diversified away. On the other hand, the risks of high IVOL stocks can at least be reduced through diversification.
This paper investigates the effects of volatility scaling on factor portfolio performance and factor timing.
Atilgan et al. contribute to the momentum literature with “Momentum and Downside Risk in Emerging Markets.”
This time is almost always different, it seems, but the data suggest that things are typically always the same: chaotic and volatile. Stock market investors should be prepared for large short-term moves in stocks and they should be skeptical of narratives suggesting a causal relationship between environmental variables and future volatility.
Robin Greenwood, Andrei Shleifer, and Yang You authors of the study “Bubbles for Fama”, published in the January 2019 issue of the Journal of Financial Economics evaluated Fama's claim that stock prices do not exhibit price bubbles. Based on a fixed threshold for the industry price increases (e.g., a 100 percent price run-up during two consecutive years) to filter their events and to analyze what happens afterward, they examined U.S. industry returns over the period 1926‒2014 (covering 40 episodes) and international sector returns (1985‒2014).
As far back as 1976, with the publication of Fischer Black’s “Studies of Stock Price Volatility Changes” financial economists have known that volatility and returns [...]
Open Source Cross-Sectional Asset Pricing Andrew Chen and Tom ZimmermannWorking paperA version of this paper can be found here What are the research questions? There has [...]
Betting against correlation: Testing theories of the low-risk effect Cliff Asness, Andrea Frazzini, Niels Joachim Gormsen, Lasse Heje PedersenJournal of Financial EconomicsA version of this [...]
In perfectly efficient markets, option prices should not convey any new information or contribute to the price discovery of underlying assets. However, if markets are [...]
Mark Kritzman and Yuanzhen LiFinancial Analyst Journal, 2010A version of this paper can be found hereWant to read our summaries of academic finance papers? Check out [...]
A large body of research, including the 2017 study “Tail Risk Mitigation with Managed Volatility Strategies” by Anna Dreyer and Stefan Hubrich, demonstrates that while [...]
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