Alpha Architect

Market Risk and Speculative Factors

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.

Momentum Factor Investing: 30 years of Out of Sample Data

In this article, the author examines the research published over the last 30 years on momentum and its theoretical credibility. One of the original momentum articles was published by Jegadeesh and Titman in 1993, and is considered the seminal work on the topic. The research review contained in this publication begins with the 1993 work and confines itself to only the highest quality journals among the plethora of work that has been published on momentum.

Mind the Momentum Gap to Improve Performance

This article discusses the academic research about the Momentum Gap and the role that its predictive potential may have in reducing momentum crashes, hence possibly improving performance.

Bias in Beta and Implications for Empirical Asset Pricing

In this article, the author examines several important questions related to asynchronous trading, or the variation in trading frequency that occurs when trading stocks or other assets.

Are ESG strategies more effective for societal impact or performance?

In this article, we examine the research addressing the question of to what extent, if any, ESG strategies improve investment performance on a risk-adjusted basis, or if they are more effectively used for the societal impact they potentially have.

The Effect of Indexing on Price Discovery and Limits to Arbitrage

We discuss the academic research about the causal effect of indexing on arbitrage conditions and price discovery.

Is Democracy better for the stock market?

We examine the question of whether or not democracy leads to better possible outcomes for the stock market.

Lottery Demand and the Asset Growth Anomaly

It is well documented in the literature that over the long term, low-investment firms have outperformed high-investment firms—with the negative relation between asset growth (AG) and future stock returns particularly featured by the overvaluation of high AG stocks.

Pulling the curtain back: what do millionaires invest in?

In this article, we examine the academic research about what millionaires invest in.

Momentum Everywhere, Including Emerging Markets

Atilgan et al. contribute to the momentum literature with “Momentum and Downside Risk in Emerging Markets.”

Does Gender Affect Reactions to Market Sentiment Shifts?

Does gender matter in institutional investing?

The Relationship Between the Demand for Leverage and Management Fees

This article discusses what academic research says about the relationship between the demand for leverage and management fees.

Gender Pay Gap Transparency

In this article, we examine what the research says about gender pay gap transparency. We look at the research questions and academic insights with an eye toward why it matters.

High-Frequency Consumer Spending Data and the Cross-Section of Stock Returns

Consumer demand drives the cash flows of consumer-oriented companies. Thus, they should serve as a reliable source of information to predict future fundamentals above and beyond the information contained in financial statements and readily available market data.

Should Levered and Inverse ETFs Even Exist?

In this article, we explore Levered and Inverse ETPs (exchange-traded products); their purpose, the circumstances in which they tend to succeed and fail, and the research questions associated with them.

The Short-Duration Equity Premium

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.

Is Momentum a Separate Factor?

We find that factor momentum concentrates in factors that explain more of the cross section of returns and that it is not incidental to individual stock momentum: momentum-neutral factors display more momentum.

Brand Values and Long-Term Stock Returns

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.

ESG Ratings how do they Compare Across Data Providers?

Investments aligned with environmental, social, and governance (ESG) principles are rapidly growing globally. In the exchange traded fund (ETF) industry, this gives rise to the power of ESG rating firms that have the influence to direct capital flows into ETFs tracking the indexes. This article examines the issues of substantial ESG rating divergence across rating firms, the impact on investors’ choices, and the influence on the ETF industry. The divergence appears to be the greatest in social and governance components, and is often qualitative in nature. The author found that certain economic sectors are more prone to ESG rating divergence than others. She presents a case study about two ESG ETFs that are viewed quite differently under various rating lenses, and offers suggestions to investors, advisors, and analysts on how to research ESG ETFs, given the major rating divergence. The article concludes with ways the ETF industry could improve its practices collectively to better serve investors with clarity and to sustain the growth of ESG impact investments.

How You Sort Matters in Sorting Factor Portfolios

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.

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