Is a Naive 1/N Diversification Strategy Efficient?
A simple 1/N factor diversification strategy will likely be at least as efficient as more “sophisticated” versions.
Institutional Investors’ Impact on Factor Premiums
For anomalies that are risk-based, that is what we should expect to see because, while risk cannot be arbitraged away, cash flows can reduce the size of the premium. For the anomalies that are behavioral based, it appears that limits to arbitrage are still sufficient to allow them to persist post-publication.
Comparing past and present inflation rates can be tricky
The objective of this article is to build better estimates of CPI headline and core inflation values so inflation comparisons over time are more reliable. The run-up in inflation we are currently experiencing is difficult to contextualize because it is inconsistent with past practices, weights on expenditures have changed, and the treatment of housing costs.
Research and Development, Expected Profitability, and Expected Returns
Regardless of the model used, an anomaly for all models is that the empirical evidence demonstrates that stocks with high research and development (R&D) expenses have delivered a premium.
Artificial Intelligence: the Past, the Present and the Future
This article examines the state of Artificial Intelligence (AI). We examine its history with an eye toward what it may mean for the world in years to come.
Are Short Covering Trades Informative?
The importance of the role played by short sellers has received increasing academic attention in recent years. Short sellers help keep market prices efficient by preventing overpricing and the formation of price bubbles in financial markets. Market efficiency is important because an efficient market allocates capital efficiently. If short sellers were inhibited from expressing their views on valuations, securities prices could become overvalued and excess capital would be allocated to those firms.
Can We Improve Momentum Factor Investing via Salience Theory?
The contribution of salience theory to the theory of asset pricing turns out to be quite a profitable insight for momentum strategies.
Intangibles and the Value Factor
This figure shows the long, short and long-short leg performance of the intangible value factor in comparison to the traditional value factor. The performance is shown for each of the four regions: U.S., Europe, Japan and Asia Pacific between June 1983 and December 2021. The monthly returns are ex-post volatility scaled to 5% p.m
Does International Diversification Work?
In this article, the authors examine the research on the benefits of international diversification. Some argue that because equity markets generally crash simultaneously, there are no benefits to having equity diversification. The evidence from this paper rejects this hypothesis.
Inside the Minds of Expected Stock Returns
Non-traditional investor preferences play an important role in explaining the cross-section of expected stock returns.
How Pervasive is Corporate Fraud?
In this article, we examine the research on the pervasiveness of corporate fraud (misconduct or alleged fraud), which is one of the (less emphasized) costs of public ownership.
It’s Always Darkest Just Before Dawn
Wide divergences between the valuations of cheap stocks relative to expensive stocks have preceded significant outperformance for value over the subsequent decade, as shown in this figure.
Do Gender Pay-Gap Disclosures Make a Difference?
The verdict is still out on the impact of legislation regarding firm disclosure rules on the gender pay gap (GPG). Results from recently published research are mixed.
Factor Returns and the Information in Valuation Spreads
Given that valuations provide information on equity returns, it should not be surprising to learn that valuation spreads provide information on future factor premiums.
Do Investors Pay Less Attention to Women (Fund Managers)? YES
This article examines the research on gender bias and fund management. Specifically, we will focus on the gender-based attention bias.
Should investors be indifferent to dividend impact on stock returns?
In their 1961 paper, “Dividend Policy, Growth, and the Valuation of Shares,” Merton Miller and Franco Modigliani famously established that dividend policy should be irrelevant to stock returns. As they explained it, at least before frictions like trading costs and taxes, investors should be indifferent to $1 in the form of a dividend (causing the stock price to drop by $1) and $1 received by selling shares. This must be true, unless you believe that $1 isn’t worth $1. This theorem has not been challenged since, at least in the academic community.
Political Beta
This example of research on political beta is an example of applying portfolio theory to problems associated with global politics.
Improving ESG Practices Boosts Valuations
This chart on creating shareholder value through ESG engagement is useful when evaluating if ESG practices boost valuations.
Institutional Investors and Corporate Carbon Footprint
This table of emissions and carbon intensity is relevant to the question of institutional investor influence over the carbon footprint.
Mitigating Risks with Factor Strategies
The following exhibit, which is useful to the subject of mitigating risks with factor strategies, provides the total return of the four benchmark portfolios and the five anomaly portfolios.