Larry Swedroe

The Value Factor and Deleveraging

By |January 13th, 2023|Research Insights, Factor Investing, Larry Swedroe, Value Investing Research|

How do you separate the signal from the noise? To have confidence that a factor premium, or strategy, isn’t just the result of data mining - a lucky/random outcome - we recommended that you should require evidence that the premium has been not only persistent over long periods of time and across economic regimes, but also pervasive across sectors, countries, geographic regions and even asset classes; robust to various definitions (for example, there has been both a value and a momentum premium using many different metrics); survives transactions costs; and has intuitive risk- or behavioral-based explanations for the premium to persist.

Expected Returns to Green Stocks

By |December 30th, 2022|ESG, Research Insights, Larry Swedroe|

The past decade has seen a dramatic growth in sustainable investing—applying environmental, social and governance (ESG) criteria to investment strategies. Investments considered environmentally friendly are often referred to as “green,” while “brown” denotes the opposite. Important questions for investors are: What are the expected returns to green stocks? What does their past performance tell us about their future expected returns? We begin by looking at what economic theory tells us our expectations should be.

The Performance of Multi-Factor Long-Short Portfolios in Various Economic Regimes

By |December 23rd, 2022|Research Insights, Factor Investing, Larry Swedroe|

To determine if a multi-factor approach has provided diversification benefits in terms of exposure to economic cycle risks, the research team at Counterpoint evaluated returns to multifactor long-short strategies, stocks, and 1-month T-bills in a variety of economic conditions (recession or no recession, high or no high inflation, and stagflation) over the period July 1963-August 2022.

The “Resurrected” Size Effect and Monetary Policy

By |December 9th, 2022|Research Insights, Larry Swedroe, Size Investing Research|

Given that tightening monetary policy increases economic risks, Simpson and Grossman provided compelling evidence of a risk explanation for the size factor. For those investors who engage in tactical asset allocation strategies (market timing), their evidence suggests that it might be possible to exploit the information. Before jumping to that conclusion, I would caution that because markets are forward-looking, they should anticipate periods of Fed tightening and the heightened risks of small stocks.

Market Risk and Speculative Factors

By |November 3rd, 2022|Research Insights, Factor Investing, Larry Swedroe|

Soroush Ghazi and Mark Schneider authors of the August 2022 study “Market Risk and Speculation Factors” decomposed the excess market return (the equity risk premium) into speculative (in the simple sense that it is negative, reflecting a premium investors pay to hold assets that are more subject to speculative demand) and non-speculative, or risk (in the simple sense that it is positive, a necessary characteristic for a factor to reflect compensation for risk) components.

The Short-Duration Equity Premium

By |September 15th, 2022|Research Insights, Factor Investing, Larry Swedroe, Academic Research Insight, Low Volatility Investing|

We examine the short-duration premium using pre-scheduled economic, monetary policy, and earnings announcements. We provide high-frequency evidence that duration premia associated with revisions of economic growth and interest rate expectations are consistent with asset pricing models but cannot explain the short-duration premium. Instead, we show that the trading activity of sentiment-driven investors raises prices of long-duration stocks, which lowers their expected returns, and results in the short-duration premium. Long-duration stocks have the lowest institutional ownership, exhibit the largest forecast errors at earnings announcements, and show the highest mispricing scores.

Brand Values and Long-Term Stock Returns

By |September 8th, 2022|Intangibles, Smarter in 10 Minutes, Factor Investing, Larry Swedroe, Academic Research Insight|

An equal-weighted portfolio of Best Brands (BBs) in the U.S. earns an excess return of 25 to 35 bps per month during the period 2000-2020. This result is remarkably robust across various factor models and therefore is not driven by exposure to common (risk) factors. The excess returns of the BB portfolio are not due to firm characteristics, industry composition, or small-cap stocks. We provide evidence suggesting that expensing investments in brands (instead of capitalizing them) and the tendency to underestimate the effect of brand name on generating future earnings are two mechanisms contributing to the excess returns.

How You Sort Matters in Sorting Factor Portfolios

By |September 1st, 2022|Research Insights, Factor Investing, Larry Swedroe, Academic Research Insight|

Non-standard errors capture uncertainty due to differences in research design choices. We establish substantial variation in the design choices made by researchers when constructing asset pricing factors. By purposely data mining over two thousand different versions of each factor, we find that Sharpe ratios exhibit substantial variation within a factor due to different construction choices, which results in sizable non-standard errors and allows for p-hacking. We provide simple suggestions that reduce the average non-standard error by 70%. Our study has important implications for model selection exercises.

Financial Markets Responding to Climate Risks

By |August 25th, 2022|ESG, Research Insights, Larry Swedroe, Academic Research Insight|

This paper provides new evidence showing that carbon transition risk is becoming increasingly material and is priced both in equity and debt markets. We find that there is a widespread price-earnings discount linked to corporate carbon emissions. This discount varies, however, by sector and trends differently in Europe than in the US. We also find that a small discount emerges for corporate bonds, although it is statistically significant only for small caps. Finally, we find evidence that the pricing discount also emerges, albeit to a smaller extent, for other greenhouse gas emissions.

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