Peer-Reviewed Theory and Expected Stock Returns
The risk-based explanation provided by a peer-based review is a necessary ingredient for considering investment, but it is not a sufficient ingredient.
Crowded Trades Increase Crash Risks
Crowded equity positions in anomalies remain and have significant impacts in terms of risk and return dynamics.
Fifty Shades of Grey Swans: Timeless Risks with a Modern Twist
The world is complex and ever-changing; news travels at warp speed, events happen fast, and popular narratives can distract and mislead us. Many risks important for our portfolios are new, hidden, or nuanced in some underappreciated way—and likely to be misunderstood and mispriced in the markets. Other risks can hide in plain sight. Good risk management can be described as a balancing act that employs the first principles of investing, lessons from history, behavioral psychology, a little math, and even our imagination in service of our objective: to detect and defend against the risks we can foresee and fortify our portfolios against those we cannot. In short: we need informed creativity, not calculation.
The Financial Distress Puzzle
The empirical research findings demonstrate that the return premium generated by being long low-distress risk stocks and short high-distress risk stocks is persistent and that the capital asset pricing model (CAPM) and the Fama-French three-factor models cannot explain it. Hence, we have the distress puzzle, or anomaly.
Is now a good time to buy bonds?
As pundits wrestle over the cause, implications, and sustainability of the recent massive moves in interest rates, I’ll instead delve into the two terms most often blamed for these shifts in rates: R-star and the Term Structure Premium. Unfortunately, what most want—a measure of them—is unknowable. But we can benefit from understanding the theories and models behind these terms. We can glean guidance on what we need, namely a better understanding of the risks and rewards of buying longer-maturing bonds at current rate levels. I contend that now is a good time to secure future cash flows by buying bonds, although determining the precise amount to invest remains a challenge.
Technology Spillover Impacts Stock Returns
The timelier adoption of new technology and the higher likelihood of large-scale technology adoption make the risk associated with technological innovation more systematic, which in turn increases returns required by investors for technology spillover recipients.
Trend-Following Filters – Part 7
This article examines four digital filters commonly used for trend-following: moving average linear weighted moving average exponential smoothing time series momentum
How to Crush the CFPⓇ Exam ????: Part 2
As discussed in Part 1 of this blog series, the Certified Financial Planner (CFPⓇ) exam can be a stressful and intimidating experience. With eight areas of content to cover – both as siloed financial knowledge and also as an integrated approach to building a comprehensive financial plan – it's important to be organized and intentional in your study efforts.
International Value Stocks Offering “More Bang for the Buck”
Over the very long term, while value stocks have been less profitable and have had slower growth in earnings than growth stocks, they have provided higher returns.
ESG Preferences Negatively Affecting Market Efficiency
While ESG investors can express their values through their investments, they should expect lower returns from their portfolios—though they also will be taking less investment risk.
The Research and Development Factor
The higher returns to high R&D stocks represent compensation for heightened systematic risk not captured in standard asset pricing models.
How to Crush the CFPⓇ Exam ????: Part 1
Let’s talk about the right approach(es) and the proper study techniques you need to pass the CFPⓇ exam with confidence and get the certification you need to advance your career in finance and investing.
The case for the tax-free conversion of SMAs into an ETF via Section 351
This piece outlines the high-level benefits of the ETF structure, which boils down to market access, tax efficiency, and transparency. It covers the considerations for a 351 tax-free conversion and the mechanics and tax consequences of a 351 conversion.
Conditioning anomalies using retail attention metrics
By using a novel measure of investor attention, generated from InvestingChannel’s clickstream data on online financial news consumption, we can identify broad groups of stocks which are less efficiently priced and therefore where anomalies such as Value and Momentum are likely to produce greater cross sectional differentiation in returns. We also apply these groupings to proprietary ExtractAlpha stock selection signals.
Intangible Value: Modernizing the Factor Portfolio
The “Intangible Value Factor” (IHML) can play an additive role in factor portfolios alongside the established market, size, value, quality, and momentum factors. This Six-Factor Model avoids the problematic “anti-innovation” bias of traditional factor portfolios and can be easily implemented using ETFs.
Improving Performance by Avoiding Negatives of Index Replication
There are several significant, well-documented benefits of index funds. In addition to outperforming a large majority of actively managed funds, they tend to have low fees, low turnover (resulting in low trading costs and high tax efficiency), broad diversification, high liquidity, and near-zero tracking error (generally assumed to mean that they incur negligible trading costs).
Gold as a Safe-Haven Asset
I’ve received calls from clients inquiring about moving assets to gold. When I asked them why, three reasons dominated.
The Reddit Road to Riches?
No surprise: reddit message boards don't lead to alpha generation.
Novel explanations for risk-based option momentum
In this paper, we propose a cross-sectional option momentum strategy that is based on the risk component of delta-hedged option returns. We find strong evidence of risk continuation in option returns.
Trend-Following Filters – Part 6
This article analyzes six trend-following indicators from a digital signal processing (DSP) frequency domain perspective in which the indicators are considered as digital filters and their frequency response characteristics are determined.