The Sahm Rule as a Recession Indicator
Because the Sahm rule focuses solely on the unemployment rate, caution is warranted before assuming it is signaling a recession.
Reading the WSJ May Make You a Better Economist
How can textual analysis of business news, specifically The Wall Street Journal (WSJ), be used to measure the state of the economy?
The Hidden Cost of Index Replication
An index-tracking approach generally lacks flexibility, which detracts from performance, leaving returns on the table. Intelligent design can overcome such issues. For example, an S&P 500 Index could choose to rebalance one month ahead of the scheduled reconstitution, minimizing the impact of reconstitution. Direct index funds are already engaging in such strategies with ETFs.
Analysts set price targets using trailing P/E ratios
Trailing twelve-month P/E ratios account for 91% of the variation in analysts’ price targets. We construct a new kind of asset-pricing model around this fact and show that it explains the market response to earnings surprises.
Can Skewness Identify Future Outperforming Mutual Funds
While the skewness metric did demonstrate that it could select funds with managers skilled a security selection, the fund’s expenses and implementation meant that the fund was just about able to cover its expenses, and that was before the negative impact of active management on after-tax returns—and the finding was not statistically significant at even the 10% level of confidence.
The Economics of Private Equity
The paper examines key factors that influence the performance and success of private equity investments. Specifically, it focuses on the importance of manager selection, the role of LP sophistication and skill, the relationship between fund size and performance, the potential misalignment of incentives between GPs and LPs, and the benefits and risks associated with co-investment opportunities.
Trend-Following Filters – Part 8
This article describes digital filters derived from time series regression models that can be used as technical analysis tools. The filters are analyzed from a digital signal processing (DSP) frequency domain perspective to illustrate their properties. Example charts of the filters applied to the S&P 500 index are also included.
Investors trade Cryptos and Trad-Fi Differently
Retail traders are contrarian in stocks and gold, yet the same traders follow a momentum-like strategy in cryptocurrencies. The differences are not explained by individual characteristics, investor composition, inattention, differences in fees, or preference for lottery-like assets. We conjecture that retail investors have a model where cryptocurrency price changes affect the likelihood of future widespread adoption, which leads them to further update their price expectations in the same direction.
Adding Leveraged, Long-Short Factor Strategies to Improve Tax Alpha
Joseph Liberman, Stanley Krasner, Nathan Sosner, and Pedro Freitas, authors of the September 2023 study “Beyond Direct Indexing: Dynamic Direct Long-Short Investing,” examined if the utilization of leverage and long-short strategies motivated by the literature on factor-based investing could improve on the tax benefits of direct indexing and tax-loss harvesting.
Can smart rebalancing improve factor portfolios?
This paper provides new evidence on the efficacy of prioritizing transactions so as to focus portfolio turnover on the trades that offer the strongest signals and hence the highest potential performance impact.
The After-Fee Performance of Private Debt
Private debt funds are a rapidly growing segment of the private capital market. Isil Erel, Thomas Flanagan, and Michael Weisbach, authors of the April 2024 [...]
From Man vs. Machine to Man + Machine: The Art and AI of Stock Analyses
An AI analyst trained to digest corporate disclosures, industry trends, and macroeconomic indicators surpasses most analysts in stock return predictions. AI wins when information is transparent but voluminous. Humans provide significant incremental value in “Man + Machine,” which also substantially reduces extreme errors.
Evergreen Private Equity Funds Attracting Assets
Evergreen funds are a relatively new concept in the private equity (PE) world compared to traditional closed-end funds. They were introduced to address the negatives of the traditional way to invest in private equity which had been in the form of partnerships.
Fixing the poor performance of the book-to-market ratio
The authors effectively argue the case for intrinsic value and DCF based approaches to building Value factor strategies. The traditional value measures, especially the book-to-market ratio, are described as ineffective in today's market environment.
The Effect of ESG Strategies on Global Equity Returns
To determine the impact of sustainable investment strategies on equity returns, Romulo Alves, Philipp Krueger, and Mathijs van Dijk analyzed the relationship between ESG ratings and global stock returns. They found very little evidence that ESG ratings were related to global stock returns over the two-decade period.
High school financial education courses in the United States
This article provides detailed insights into how high school financial education policies are implemented at the local level.
Overvalued or New Paradigm?
Without question the topic of greatest debate among investors, including investment professionals, and financial economists, is whether or not the market, and the technology sector in particular, is overvalued. There are two very strong conflicting views regarding not only the current valuation of technology stocks, but also the valuation of the entire asset class of large-cap growth stocks. One side, I’ll call the “new paradigm” or “it’s different this time” school. The other side, I’ll call “the been there, done that” school. Its theme is those that don’t learn from the past are doomed to repeat the same mistakes. No two sides could have more different viewpoints. To understand each side, let’s imagine a dialogue between the two schools.
Factors and Taxes
As a result of the trading required to capture the premiums that drive factor strategies investors may face significant tax liabilities. The challenge for the [...]
The Value of WallStreetBets Investment Research Recommendations
Wallstreetbets has become an increasingly prominent source of investment research. Do their recommendations have value?
Transaction costs for asset allocation and foreign exchange markets
Transaction costs have a first-order effect on the performance of currency portfolios. Proportional costs based on quoted bid–ask spread are relatively small, but when a fund is large, costs due to the trading volume price impact are sizable and quickly erode returns, leaving many popular strategies unprofitable.