Combining Value and Profitability Factors: the International Evidence
My October 29, 2020, article for Alpha Architect examined the research on the profitability factor. I then reviewed the findings of the June 2020 study [...]
The Explanatory Power of Factor Momentum
Momentum is the tendency for assets that have performed well (poorly) in the recent past to continue to perform well (poorly) in the future, at [...]
Predictability of the Value Premium Across Asset Classes
The value spread is the difference between the value signal in the long versus the short portfolio. This isn’t the first time we have hit [...]
Resurrecting the Value Premium
The dramatic underperformance of value stocks as defined by the HmL (the return on high book-to-market stocks minus the return on low book-to-market stocks) since [...]
Building a Better q-Factor Asset Pricing Model
Since the development of the first asset pricing model, the Capital Asset Pricing Model (CAPM), academic research has attempted to develop models that increase the [...]
Inflation and the Value Premium
The grand experiment of combining massive fiscal and monetary stimulus at a time when the economy is already recovering strongly—the Fed’s latest forecast for 2021 [...]
Is There a Replication Crisis in Finance?
In recent years the field of empirical finance has faced challenges from papers arguing that there is a replication crisis because the majority of studies [...]
Conditional Volatility Targeting
Financial economists have long known that volatility and returns are negatively correlated. Fischer Black documented this in his 1976 paper “Studies of Stock Price Volatility [...]
The Forecasting Power of Value, Profitability, and Investment Spreads
Studies such as the 2019 paper “Value Return Predictability Across Asset Classes and Commonalities in Risk Premia,” have demonstrated that while it is difficult to [...]
Do Security Analysts Follow the Academic Evidence?
As my co-author Andrew Berkin and I explain in our new book “Your Complete Guide to Factor-Based Investing,” there is considerable evidence of cross-sectional return [...]
The Quality Factor—What Exactly Is It?
The existence of a quality premium in stocks that has been persistent over time, pervasive around the globe, and robust to various definitions have been [...]
Is the Market Getting more Efficient?
Another Alpha Opportunity Bites the Dust In 1998, Charles Ellis wrote “Winning the Loser’s Game,” in which he presented evidence that while it is possible [...]
Value and Momentum and Investment Anomalies
The predictive abilities of value and momentum strategies are among the strongest and most pervasive empirical findings in the asset pricing literature. (here is a [...]
Is Size a Useful Investing Factor or Not?
In his famous 1981 paper, "The Relationship Between Return and Market Value of Common Stocks,” Rolf Banz found that small firms have higher risk-adjusted returns [...]
Profitability Factor Details: Taxable Income is Tied to Future Profitability and Returns
Robert Novy-Marx’s 2013 paper “ The Other Side of Value: The Gross Profitability Premium” not only provided investors with new insights into the cross-section of [...]
Trend Following Research: Breaking Bad Trends
Momentum is the tendency for assets that have performed well (poorly) in the recent past to continue to perform well (poorly) in the future, at [...]
Should Treasury Bills Be The Risk-Free Asset in Asset Pricing Models?
In virtually all studies on asset pricing and asset pricing models, the one-month Treasury bill is the choice as the risk-free rate. In his study [...]
Combining Value and Profitability Factors to Improve Performance
Prior Research on Value and Profitability Factors The 1997 publication of Mark Carhart’s paper “On Persistence in Mutual Fund Performance” led to the four-factor model, [...]
Equity Trend Following Performance Around the Globe
Time-series momentum (TSMOM) historically has demonstrated abnormal excess returns. Also called trend following, it is measured by a portfolio that is long assets that have [...]
Lottery Preferences and Their Relationship with Factor Investing
Among the assumptions in the first formal asset pricing model, the CAPM, is that investors are risk-averse, they maximize the expected utility of absolute wealth, [...]