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Aktuelles Update aus der Forschung

Die akademische Forschung liefert laufend neue Erkenntnisse. Die Vielzahl der Studien macht es schwer, den Überblick zu behalten. Somit möchten wir in regelmässigen Abständen auf neue Forschungspapiere hinweisen, welche wir als besonders relevant zum Verständnis der Finanzmärkte und zum Verständnis der Lösungen von Finreon halten.
 
Topics

A comparison of two types of multi factor investing

Important findings:

  • In the field of factor investing, there is a distinction between two approaches: the top-down mixing of single factor portfolios and the bottom-up integration / aggregation of scores to obtain a multi factor portfolio.
  • Lately, there have been several papers touting the superiority of the aggregation of scores.
  • This paper shows that this superiority of score aggregation is likely a statistical fluke.
  • They find that the aggregation of scores leads to a higher sensitivity to the low volatility anomaly. The resulting risk reduction, however, does not increase the strategy returns.

Source:

Leippold, M., & Rueegg, R. (2017). The mixed vs the integrated approach to style investing: Much ado about nothing? European Financial Management.
 
The research paper can be obtained here.
 

A critical evaluation of top-down multi factor approaches

Important findings:

  • Bottom-up approaches to multi factor portfolio construction calculate each factor portfolio separately and aggregate those individual portfolios to a multi factor portfolio in a second step. Top-down approaches, in contrast, optimize all factor exposures jointly.
  • Over the last years, many proponents claimed the superiority of top-down approaches.
  • This study questions these claims as top down portfolios are heavy concentrated in few high factor exposure assets and require unrealistically strong assumptions regarding the link between returns and factor exposures. Moreover, they are much more susceptible to data mining.

Source:

Amenc, N., Goltz, F., & Sivasubramanian, S. (2018). Multifactor index construction: A skeptical appraisal of bottom-up approaches. The Journal of Index Investing, 9 (1), 6-17.
 
The research paper can be obtained here.
 

A decomposition of the value premium

Important findings:

  • The value characteristics of a stock (defined by book value to market value) can change due to two levers: (1) the change in the market value, (2) the change in the book value.
  • The complete value premium can be explained by changes in the market value.
  • Therefore, there are value stocks that do not receive a value premium (e.g. neutral market valuation with high book value) as well as growth stocks that receive a value premium (e.g. under-valued stocks despite low book value).

Source:

Gerakos, J., & Linnainmaa, J. T. (2017). Decomposing value. The Review of Financial Studies, 31 (5), 1825-1854.
 
The research paper can be obtained here.
 

A long-term analysis of trend following strategies

Important findings:

  • The article analyses the performance of trend following strategies since 1880.
  • In each decade, time series momentum delivered positive returns while being only moderately correlated to existing asset classes.
  • It showed a good performance in 8 out of 10 of the largest crisis periods and worked well in different market environments.

Source:

Hurst, B., Ooi, Y. H., & Pedersen, L. H. (2017). A century of evidence on trend-following investing. Unpublished Results.
 
The research paper can be obtained here.
 

A network approach explaining the connections between asset prices

Important findings:

  • The authors present a novel network approach to explain the comovements and dependencies of asset prices.
  • Explanatory factors serve as an input to describe these connections. This way, the relative importance of factors can be disentangled and changes in the network structure over time can be analyzed

Source:

De Carvalho, P. J. C., & Gupta, A. (2018). A network approach to unravel asset price comovement using minimal dependence structure. Journal of Banking & Finance, 91, 119-132.
 
The research paper can be obtained here.
 

A security selection strategy for US government bonds

Important findings:

  • This paper presents a security selection strategy on US treasury bonds, which identifies misvalued securities based on the Nelson-Siegel term structure model.
  • Despite the high liquidity and depth of the US treasury market, this strategy achieves a robust risk-adjusted alpha.

Source:

Nielsen, Y., & Pungaliya, R. S. (2017). Idiosyncratic returns and relative value in the US treasury market. Journal of Empirical Finance, 44 , 125-144.
 
The research paper can be obtained here.
 

Alternative weighting schemes for bonds

Important findings:

  • Alternative weighting schemes that do not weigh assets according to their market capitalization also work for corporate bonds.
  • The more inefficient and volatile the market the higher its outperformance potential.
  • A noise-in-price model can serve as an explanation.

Source:

Arnott, R. D., Hsu, J. C., Li, F., & Shepherd, S. D. (2010). Valuation-indifferent weighting for bonds. The Journal of Portfolio Management, 36 (3), 117-130.
 
The research paper can be obtained here.
 

An evaluation of factor timing

Important findings:

  • Variables that are used to forecast factor returns can be grouped in the categories sentiment, valuation, trend, economic environment and financial conditions.
  • Valuations appear useful for all factors for longer horizons, while trends work best for a horizon around one year.
  • Financial conditions (TED spread, term spread) appear to play a role for horizons longer than six months, especially for value, momentum, profitability and investment factors.
  • The economic environment appears to improve forecasts of value and investment factors for longer horizons.
  • Sentiment seems to forecast size and value factors positively, while profitability and investment factors are forecast negatively.
  • The use of timing is, however, difficult in practice as the relationships vary over time and the risk of cherry-picking data based on perfect hindsight (data mining) is substantial.

Source:

Bender, J., Sun, X., Thomas, R., & Zdorovtsov, V. (2018). The promises and pitfalls of factor timing. The Journal of Portfolio Management, 44 (4), 79-92.
 
The research paper can be obtained here.
 

An explanation for momentum and reversal

Important findings:

  • This paper proposes a theory to jointly explain time-series momentum and reversal.
  • The key assumption is that new information is not distributed instantly, but flows at an increasing rate.

Source:

Andrei, D., & Cujean, J. (2017). Information percolation, momentum and reversal. Journal of Financial Economics, 123 (3), 617-645.
 
The research paper can be obtained here.
 

An explanation for the outperformance of sin stocks

Important findings:

  • Historically so called sin stocks, i.e. stocks that invest in vices such as alcohol, tobacco, weapons or gambling delivered abnormal positive returns.
  • Using the factors profitability and investments from the new Fama French 5-factor-model, these abnormal returns can be fully explained. Therefore, there is no need to invest in sin stocks to harvest the premium.
  • There is no evidence of a distinct reputation risk premium for holding sin stocks.

Source:

Blitz, D., & Fabozzi, F. J. (2017). Sin stocks revisited: Resolving the sin stock anomaly. The Journal of Portfolio Management, 44 (1), 105-111.
 
The research paper can be obtained here.
 

An optimized value approach

Important findings:

  • In academic research, value is commonly measured as book value to market value (B/P), while in practice earnings to market value (E/P) are also regularly used.
  • This paper shows that a combination of both approaches outperforms each of the single approaches. Moreover, sector constraints help to improve performance.

Source:

Leshem, R., Goldberg, L. R., & Cummings, A. (2016). Optimizing value. The Journal of Portfolio Management, 42 (2), 77-89.
 
The research paper can be obtained here.
 

An ultra-long-term perspective on return predictability

Important findings:

  • Yearly equity returns over the last 400 years show that dividend yields can forecast expected returns.
  • Expected returns vary over time. This variation is related to the business cycle and expected returns are higher in recessions.

Source:

Golez, B., & Koudijs, P. (2018). Four centuries of return predictability. Journal of Financial Economics, 127 (2), 248-263.
 
The research paper can be obtained here.
 

Anomalies and company news

Important findings:

  • Returns on equity market anomalies are 50% higher on corporate news days and even six times higher in earnings announcement days.
  • Potential explanations for this observation are dynamic risk, mispricing due to biased expectations, or data mining.
  • The results of this paper hint towards mispricing due to biased expectations.

Source:

Engelberg, J., McLean, R. D., & Pontiff, J. (2018). Anomalies and news. The Journal of Finance, 73 (5), 1971-2001.
 
The research paper can be obtained here.
 

Anomalies cannot be explained by short selling restrictions

Important findings:

  • Short sell restrictions cannot explain seven well known anomalies.
  • Long-only strategies as well as strategies based on easy-to-short assets show substantial alphas.
  • Shorting costs are small compared to the profitability of the anomalies.

Source:

Bekjarovski, F. (2017). How do short selling costs and restrictions affect the profitability of stock anomalies? Unpublished Results.
 
The research paper can be obtained here.
 

CO2 emissions as proxy for productivity

Important findings:

  • A low carbon ratio (CO2 emissions relative to revenues) corresponds to a higher future profitability and higher equity returns. This observation also holds for industries that are barely impacted by CO2 taxes or other forms of pollution regulation.
  • The relationship is much more fundamental in the sense that the carbon ratio serves as a proxy for overall productive efficiency. The less inputs are required in production (which nearly all use some form of energy and thus emissions) to generate a certain amount of revenues, the more efficiently the business is run.
  • It is seemingly not the CO2 reduction per se that is impacting the performance, but the general productive efficiency which is approximated by the carbon ratio.

Source:

Garvey, G. T., Iyer, M., & Nash, J. (2018). Carbon footprint and productivity: Does the E in ESG capture efficiency as well as environment? Journal of Investment Management, 16 (1), 59-69.
 
The research paper can be obtained here.
 

Combining the Black-Litterman-Approach with predictive regressions

Important findings:

  • The Black-Litterman approach enables the integration of subjective views on expected returns into a strategic asset allocation.
  • This paper proposes an extension of the Black-Litterman approach. Herein, the return expectations and their uncertainty are estimated using Bayesian regressions.

Source:

Geyer, A., & Lucivjanska, K. (2016). The Black-Litterman approach and views from predictive regressions: Theory and implementation. The Journal of Portfolio Management, 42 (4), 38-48.
 
The research paper can be obtained here.
 

Interessenkonflikte von bankabhängigen Fonds

Wichtige Erkenntnisse:

  • Diese Studie analysiert die Performance von Aktienfonds, welche von den Asset-Management-Divisionen von Universalbanken verwaltet werden.
  • Bankunabhängige Fonds erzielen gegenüber angeschlossenen Fonds eine Outperformance von 92 Basispunkten pro Jahr.
  • Interessenkonflikte stellen eine mögliche Erklärung dar, da die Underperformance vor allem dort auftritt, wo Aktien von Kreditnehmern der Bank übergewichtet werden.
  • Angegliederte Manager unterstützen damit die Kreditvergabe der Banken und sichern damit ihre eigene Karriere zu Lasten der Fondsinvestoren.

Quelle:

Ferreira, M. A., Matos, P., & Pires, P. (2018). Asset management within commercial banking groups: International evidence. The Journal of Finance, 73 (5), 2181-2227.
 
Das Forschungspapier kann hier (eventuell kostenpflichtig) bezogen werden.
 

Construction of multi-factor portfolios

Important findings:

  • There are two different approaches to multi factor investing. The combination of factor portfolios or the combination of different signals (scores).
  • In concentrated portfolios with high factor exposures, a combination of different signals appears to be superior.
  • In well diversified portfolios with low factor exposures, in contrast, the combination of factor portfolios seems to deliver a higher information ratio.
  • Furthermore, the combination of factor portfolios is better suited to reach further investment objectives such as transparency in performance analysis, turnover control and the possibility to time factors.
  • Remark: The Finreon Multi Premia® approach combines factor portfolios.

Source:

Ghayur, K. K., Heaney, R., & Platt, S. (2016). Constructing long-only multi-factor strategies: Portfolio blending versus signal blending. Unpublished Results.
 
The research paper can be obtained here.
 

Crash Sensitivity as explanation for the momentum premium

Important findings:

  • This paper shows that the classical momentum premium can be to a large extent explained by the crash-sensitivity of stocks in the momentum portfolio.
  • This observation is not limited to the U.S., but holds across 23 international equity markets.

Source:

Ruenzi, S., & Weigert, F. (2018). Momentum and crash sensitivity. Unpublished Results.
 
The research paper can be obtained here.
 

Currency curvature as improvement of the currency carry strategy

Important findings:

  • Currency carry strategies focus on the short-term interest rate differential and invest in currencies with high interest rates.
  • By doing so, valuable information about the yield curve gets lost.
  • A strategy based on the curvature of the yield curve has a higher Sharpe ratio, a smaller return skewness as well as reduced crash risk compared to traditional carry strategies.

Source:

Dreher, F., Gräb, J., & Kostka, T. (2018). From carry trades to curvy trades. Working Paper.
 
The research paper can be obtained here.
 

De facto seniority of corporate bonds

Important findings:

  • The position in the maturity structure of an issuer has a substantial influence on the credit risk of a specific bond.
  • Bonds that are due relatively late in the maturity structure have higher credit risks, larger credit spreads and a higher correlation towards equities.
  • Therefore, bond-specific credit risk scores are important, whereas rating agencies perform their ratings on an issuer level.

Source:

Bao, J., & Hou, K. (2017). De facto seniority, credit risk, and corporate bond prices. The Review of Financial Studies, 30 (11), 4038-4080.
 
The research paper can be obtained here.
 

Demographic shift and inflation

Important findings:

  • Demographic shifts are considered to be a cause for the low inflation of the recent years.
  • This study tests this hypothesis empirically over many countries and a long time horizon. They find results which are consistent with the life cycle hypothesis.
  • This means that the inflation rises when the share of dependents (children, retirees) increases, whereas inflation recedes when the share of working age population increases.
  • This approach can explain a large part of the inflation reduction in the US since the 1980s, while it forecasts a higher inflation for the decades to come.

Source:

Juselius, M., & Takats, E. (2018). The enduring link between demography and inflation. Unpublished Results.
 
The research paper can be obtained here.
 

Differences between time series and cross sectional strategies

Important findings:

  • There are two groups of strategies to forecast returns: (1) strategies that time a single asset (time series strategies) and (2) strategies that select attractive assets relative to other assets (cross sectional strategies).
  • While cross-sectional strategies are market neutral (long-short) in their pure form, time series strategies have a time-varying long-exposure.
  • For individual stocks, both strategy types mainly differ due to this time-varying long exposure but work similarly well besides that.
  • Across asset classes, however, cross-sectional strategies achieve a superior performance.

Source:

Goyal, A., & Jegadeesh, N. (2017). Cross-sectional and time-series tests of return predictability: What is the difference? The Review of Financial Studies, 31 (5), 1784-1824.
 
The research paper can be obtained here.
 

Do equities outperform government bonds?

Important findings:

  • Most US stocks have a lifetime return that is lower than of one month US treasury bills
  • The best-performing 4% of all US stocks explain the whole excess return of equities over US treasury bills since 1926.
  • The right skewness of the US equity returns plays an often underestimated role.
  • The results help explaining, why poorly diversified active strategies mostly underperform the broad US stock market.

Source:

Bessembinder, H. (2017). Do stocks outperform treasury bills? Journal of Financial Economics.
 
The research paper can be obtained here.
 

Downside risk as driver of the equity risk premium

Important findings:

  • Most of the equity risk premium is a compensation of bearing downside risk. Upside risk, in contrast, is barely compensated.
  • Option-based strategies are therefore expected to yield a substantial underperformance in the long term.

Source:

Israelov, R., Nielsen, L., & Villalon, D. (2016). Embracing downside risk. The Journal of Alternative Investments, 19 (3).
 
The research paper can be obtained here.
 

Drivers of high valuations

Important findings:

  • In 2018, equity markets exhibited high valuation levels.
  • These high valuation levels do not seeming to be attributable to irrational growth expectations and there was rather a reduction over the last years.
  • In Europe and Switzerland, low interest rates seem to be the decisive driver for high valuations.
  • In the US, in contrast, high company profitability stands out as a driver of high valuations.

Source:

Zimmermann, H. (2018). Explaining the high P/E ratios: The message from the Gordon model. Journal of Investment Management, 16 (4), 64-78.
 
The research paper can be obtained here.
 

Dynamic factor investing

Important findings:

  • The authors analyze how factors can be optimally combined in a portfolio dynamically. To do so, they use time series as well as cross-sectional data to derive asset allocation signals.
  • While time series signals fail to significantly add value, cross-sectional signals lead to strong performance improvements.

Source:

Dichtl, H., Drobetz, W., Lohre, H., Rother, C., & Vosskamp, P. (2018). Optimal timing and tilting of equity factors. Unpublished Results.
 
The research paper can be obtained here.
 

Earnings forecasts add less and less value

Important findings:

  • The return gains from correct earnings forecasts have been diminishing substantially over the last 30 years.
  • While earnings were a good indicator for the company value created in former times, the business models of companies changed dramatically.
  • In the modern information and knowledge driven business world, those companies are successful that succeed in delivering constant product and process innovation.
  • Compared to earnings, nowadays strategic assets – meaning assets that enable a company to retain a long-term competitive advantage – are decisive.

Source:

Gu, F., & Lev, B. (2017). Time to change your investment model. Financial Analysts Journal, 73 (4), 23-33.
 
The research paper can be obtained here.
 

Effects of increased benchmarking

Important findings:

  • Benchmarking leads to a higher effective risk aversion, a reduced willingness to speculate and to obtain information.
  • A higher number of benchmark oriented investors reduces the information content of market prices, which leads to decreased prices of risky asset and an increased volatility.
  • At the same time, it opens up more opportunities for non-benchmarked investors to outperform benchmarked investors.

Source:

Breugem, M., & Buss, A. (2018). Institutional investors and information acquisition: Implications for asset prices and informational efficiency. Unpublished Results.
 
The research paper can be obtained here.
 

Efficient smart-beta strategies

Important findings:

  • A balanced risk allocation is decisive to efficiently harvest factor premia.
  • This way, the desired factor exposures are adequately taken, while avoiding concentration in unintended factors.

Source:

Alonso, N., & Barnes, M. (2016). Efficient smart beta. The Journal of Investing, 25 (1), 103-115.
 
The research paper can be obtained here.
 

Equity financing risk

Important findings:

  • This paper analyzes the impact of liquidity reserves, R&D investments and equity issuances on expected returns in the presence of equity financing risk.
  • High cash reserves relative to R&D investments increase the slack of companies, reduce the equity financing risk and thereby the expected returns.
  • Equity issuances reduce the equity financing risk and the expected returns decrease concomitantly.
  • Cash reserves and equity issuances have no impact on expected returns for companies with large internal resources.
  • A factor that harvests the equity financing risk achieves considerable excess returns which cannot be explained by common factor models but can itself subsume the Fama & French (2015) investment factor.

Source:

Medhat, M., & Palazzo, B. (2018). Equity financing risk. Unpublished Results.
 
The research paper can be obtained here.
 

ESG as a measure of risk

Important findings:

  • Environmental, social and governance (ESG) data contain valuable information about the risk of companies. Stocks with poor ESG exposure show an up to 15% higher volatility and an up to 3% higher beta.
  • Moreover, ESG data help forecasting future risk. Poor ESG exposures predict increased future risk.

Source:

Dunn, J., Fitzgibbons, S., & Pomorski, L. (2018). Assessing risk through environmental, social and governance exposures. Journal of Investment Management, 16 (1), 4-17.
 
The research paper can be obtained here.
 

Estimating expected returns based on a large number of firm characteristics

Important findings:

  • This paper presents a new approach to estimate expected returns from a large number of company characteristics.
  • This approach is based in 26 characteristics and outperforms other approaches to estimate expected returns.
  • Moreover, this approach shows that many asset price anomalies have commonalities.

Source:

Light, N., Maslov, D., & Rytchkov, O. (2017). Aggregation of information about the cross section of stock returns: A latent variable approach. The Review of Financial Studies, 30 (4), 1339-1381.
 
The research paper can be obtained here.
 

Estimating time-varying factor exposures

Important findings:

  • The authors develop a new method to estimate dynamic factor loadings based on company characteristics.
  • Using this approach, they can decompose performance in three distinct components: (1) constant factor exposures, (2) time-varying factor exposures and (3) security selection.

Source:

Ang, A., Madhavan, A., & Sobczyk, A. (2017). Estimating time-varying factor exposures. Financial Analysts Journal, 73 (4), 41-54.
 
The research paper can be obtained here.
 

Factor premia and the yield curve

Important findings:

  • Existing research mainly describes the yield curve using the three parameters level, slope and curvature.
  • This paper shows that common factors in other asset classes such as value, momentum and carry are related to the parameters of the yield curve.
  • The value factor can subsume the level, while momentum and carry subsume the slope and the curvature.
  • Moreover, the factors value, momentum and carry contain additional information regarding economic growth, inflation and the Cochrane & Piazzesi (2005) bond factor.

Source:

Brooks, J., & Moskowitz, T. J. (2017). Yield curve premia. Unpublished Results.
 
The research paper can be obtained here.
 

Factor premia in fixed income

Important findings:

  • Factors such as value, momentum, carry and defensive exist for government bonds as well as corporate bonds.
  • A long-short portfolio combining these four factor premia has a gross Sharpe ratio of 0.98 for government bonds and 2.52 for corporate bonds.
  • These factors offer attractive diversification characteristics and show low macroeconomic sensitivities.

Source:

Brooks, J., Palhares, D., & Richardson, S. (2018). Style investing in fixed income. The Journal of Portfolio Management, 44 (4), 127-139.
 
The research paper can be obtained here.
 

Factor strategies and transaction costs

Important findings:

  • This study analyses the number of company specific characteristics that are jointly significant in explaining the cross-section of equity returns.
  • They find that the number of relevant characteristics increases if transaction costs are taken into account.
  • Even though this finding may seem contra-intuitive at first glance, it is due to a combination of several characteristics reducing the turnover and therefore reducing transaction costs.
  • The presence of transaction costs is one reason why it may be warranted to consider a larger number of characteristics in asset pricing models.

Source:

DeMiguel, V., Martín-Utrera, A., Nogales, F. J., & Uppal, R. (2018). A transaction-cost perspective on the multitude of firm characteristics. Working Paper.
 
The research paper can be obtained here.
 

Factor timing skills of portfolio managers

Important findings:

  • The authors find no indication of successful timing of factor premia by fund managers.
  • Instead, timing of market, size and momentum factors is associated with future underperformance and undesirable risk characteristics.

Source:

Ammann, M., Fischer, S., & Weigert, F. (2017). Do mutual fund managers have risk factor timing skills? Unpublished Results.
 
The research paper can be obtained here.
 

Forecasting tail risk

Important findings:

  • It is possible to reduce tail risks without sacrificing much return for it.
  • Forecasting future skewness of returns in particular considerably benefits investors.
  • This approach helps improving classical diversification, which reduces volatility, but often fails in crises.

Source:

Xiong, J. X., Idzorek, T. M., & Ibbotson, R. G. (2016). The economic value of forecasting left-tail risk. The Journal of Portfolio Management, 42 (3), 114-123.
 
The research paper can be obtained here.
 

Fresh Momentum

Important findings:

  • The interaction of momentum and reversal in equity markets is an important topic.
  • This paper presents a strategy that differentiates between fresh and stale winners and losers by sorting by long-term as well as recent performance.
  • The strategy yields a considerable outperformance and cannot be explained by the classical momentum performance.

Source:

Chen, L., Kadan, O., & Kose, E. (2009). Fresh momentum. Unpublished Results.
 
The research paper can be obtained here.
 

Global Market Inefficiencies

Important findings:

  • The authors use a new methodology to determine the fair values of 25’000 stocks in 36 countries.
  • A trading strategy based on the deviations from the fair value delivers a significant outperformance, particularly in the Emerging Markets.
  • The alphas are correlated with transaction costs, but exceed them.
  • Thus, global markets are inefficient.

Source:

Bartram, S. M., & Grinblatt, M. (2018). Global market inefficiencies. Unpublished Results.
 
The research paper can be obtained here.
 

Hedging of risk factors

Important findings:

  • Risk factors can be hedged with only moderately reducing returns.
  • This holds for macro factors such as industrial production, unemployment and credit spreads as well as for reduced form asset pricing factors such as value, momentum and profitability.
  • Low beta version of factors yield a similar return as high beta versions such that asset pricing factors show significant alphas and the business cycle risk of macroeconomic factors can be substantially reduced.

Source:

Herskovic, B., Moreira, A., & Muir, T. (2018). Hedging risk factors. Working Paper.
 
The research paper can be obtained here.
 

Hierarchische Risikoparität als neuer Gewichtungsansatz

Wichtige Erkenntnisse:

  • Dieses Forschungspapier präsentiert einen neuen Portfolio-Gewichtungs-Ansatz, die sogenannte hierarchische Risikoparität.
  • Gegenüber der klassischen Risikoparität ist diese deutlich stabiler und kann mit unsaubereren Daten besser umgehen.
  • Daneben gelingt es der hierarchischen Risikoparität das Portfoliorisiko gegenüber der klassischen Risikoparität zu reduzieren.
Quelle:
Lopez de Prado, M. (2016). Building diversified portfolios that outperform out of sample. The Journal of Portfolio Management, 42 (4), 59-69.
 
Das Forschungspapier kann hier (eventuell kostenpflichtig) bezogen werden.
 

How do mispricing alphas disappear?

Important findings:

  • The conventional wisdom states that the return reduces as investors correct for mispricing.
  • However, this paper shows that this relationship is more complex. First, the returns even increase, as prices increase to correct for the misevaluation. Only in the long term, returns diminish.
  • Therefore, when an anomaly attenuates, past returns will considerably overestimate the expected returns for the future.

Source:

Penasse, J. (2017). Understanding alpha decay. Unpublished Results.
 
The research paper can be obtained here.
 

How to measure trends?

Important findings:

  • Two common trend measures are time-series momentum and moving-average crossovers.
  • This paper shows that both measures are empirically as well as theoretically very similar.
  • In the general form, both approaches are mathematically equivalent, where past prices and returns as well as the time horizon are decisive drivers.

Source:

Levine, A., & Pedersen, L. H. (2016). Which trend is your friend? Financial Analysts Journal, 72 (3), 51-66.
 
The research paper can be obtained here.
 

Idiosyncratic momentum

Important findings:

  • Idiosyncratic momentum (residual momentum) returns a significant premium and it cannot be explained by other asset pricing factors including momentum.
  • The most common explanations for the momentum premium cannot explain the superiority of idiosyncratic momentum compared to traditional momentum.
  • Idiosyncratic momentum does not only exist in the U.S., but can be observed globally.

Source:

Blitz, D., Hanauer, M. X., & Vidojevic, M. (2017). The idiosyncratic momentum anomaly. Unpublished Results.
 
The research paper can be obtained here.
 

Idiosyncratic momentum pays off globally

Important findings:

  • Idiosyncratic momentum is momentum that has been adjusted for market movements.
  • It reduces the risk compared to the classical momentum strategy and shows a sizeable alpha.
  • These results are not limited to the U.S. equity market, but hold for 21 additional international markets.
  • In particular, it holds for Japan, where classical momentum does not seem to work.

Source:

Chaves, D. B. (2016). Idiosyncratic momentum: U.S. and international evidence. The Journal of Investing, 25 (2), 64-76.
 
The research paper can be obtained here.
 

Idiosyncratic volatility, quality and returns

Important findings:

  • The relationship between idiosyncratic volatility and returns is widely discussed since Ang et al. (2006).
  • This study argues that the influence of idiosyncratic volatility is context dependent.
  • They hypothesize that quality companies profit from idiosyncratic volatility, as the volatility rather occurs on the upside. Junk companies, in contrast, suffer from idiosyncratic volatility, as the volatility rather occurs on the downside.
  • While the empirical results support the return relationship for quality companies, the results are mixed for junk companies.

Source:

Wang, X. (2017). Will firm quality determine the relationship between stock return and idiosyncratic volatility? A new investigation of idiosyncratic volatility. Journal of Asset Management, 18 (5), 388-404.
 
The research paper can be obtained here.
 

Improving the Shiller P/E for forecasting equity returns

Important findings:

  • The cyclically adjusted Shiller P/E performs well in predicting long term equity returns. It, however, fails for short term predictions.
  • The authors find that this is due to the normal level von the Shiller P/E varying with the macroeconomic conditions (real interest rates, inflation).
  • Adjusting the P/E for the current macroeconomic conditions, it succeeds in predicting short term returns.

Source:

Arnott, R. D., Chaves, D. B., & Chow, T. (2017). King of the mountain: The Shiller P/E and macroeconomic conditions. The Journal of Portfolio Management, 44 (1), 55-68.
 
The research paper can be obtained here.
 

Innovative originality as valuable ressource

Important findings:

  • Innovation (and its originality) are an important entrepreneurial resource and create a so called competitive moat.
  • Original innovations are innovations that use knowledge from a wide variety of fields of study. The breadth (of different fields of study) of citations within patents can be used to evaluate the degree of innovation.
  • Due to limited investor attention and skepticism towards complexity innovation could be undervalued.
  • Original innovation predicts higher, more stable profitability and higher equity returns. This is particularly true for companies with high valuation uncertainty and limited investor attention.

Source:

Hirshleifer, D., Hsu, P.-H., & Li, D. (2017). Innovative originality, profitability, and stock returns. The Review of Financial Studies, 31 (7), 2553-2605.
 
The research paper can be obtained here.
 

Instable results in academic research papers

Important findings:

  • In scientific journals, there is a prevailing pressure to produce significant results. The so called p-value is primarily used for this purpose.
  • Particularly the large amount of different tests and other data mining approaches severely limits the usefulness of p-values.
  • Therefore, the author presents guidelines for a robust, transparent research culture in financial economics.

Source:

Harvey, C. R. (2017). The scientific outlook in financial economics. The Journal of Finance, 72 (4), 1399-1440.
 
The research paper can be obtained here.
 

Interest rate risk as an explanation for the low volatility anomaly

Important findings:

  • Low volatility portfolios are interest rate sensitive and suffer from rising rates.
  • At the same time, interest rate risk seems to be significantly better compensated in equities than in bonds.
  • These effects can explain a large part of the low volatility anomaly.

Source:

Driessen, J., Kuiper, I., & Beilo, R. (2017). Does interest rate exposure explain the low-volatility anomaly? Unpublished Results.
 
The research paper can be obtained here.
 

Investment, momentum and reversal

Important findings:

  • Equity markets exhibit momentum in the medium term (3-12 months) and reversal in the long term (3-5 years).
  • A potential explanation for this pattern is the inherent delay in firm investment.
  • Winners only continue to win, when there is subsequent investment. In contrast, losers only continue to lose, when there is subsequent disinvestment.

Source:

Mortal, S. C., & Schill, M. J. (2018). The role of firm investment in momentum and reversal. Journal of Empirical Finance, 48, 255-278.
 
The research paper can be obtained here.
 

Labor supply and demographics

Important findings:

  • Between 1980 and 2000 there was a massive labor supply shock due to the integration of China and the countries of the former Soviet Union.
  • This shock led to a shift of manufacturing to Asia, stagnation in real wages, weakening of unions, rising inequality within but not between countries, deflationary pressure and falling interest rates.
  • Now the trend reverses and with the aging population concur rising interest rates, rising inflation, increasing real wages and diminishing inequality.
  • The massive debt overhang built up over the last decades will be the most pressing issue.

Source:

Goodhart, C., & Pradhan, M. (2017). Demographics will reverse three multi-decade global trends. Working Paper.
 
The research paper can be obtained here.
 

Latent factors in the equity market

Important findings:

  • This paper presents a new approach to estimate latent asset pricing factors that explain equity prices in the time series as well as the cross-section.
  • According to this approach, there are five important factors to explain equity returns: the broad equity market (market beta), a value factor, a momentum factor, a profitability factor as well as a Sharpe ratio factor which loads heavily on reversal.
  • Many further equity characteristics do not help explaining equity returns.

Source:

Lettau, M., & Pelger, M. (2018). Factors that fit the time series and cross-section of stock returns. Working Paper.
 
The research paper can be obtained here.
 

Longterm reversal as a global factor

Important findings:

  • So far, there have not been large scale studies analyzing long-term reversal in international equity markets.
  • This paper closes this gap and finds long-term reversal in 23 developed markets.
  • Long-term reversal is robust when controlling for further factors such as size, value and momentum.

Source:

Blackburn, D. W., & Cakici, N. (2017). Overreaction and the cross-section of returns: International evidence. Journal of Empirical Finance, 42 , 1-14.
 
The research paper can be obtained here.
 

Longterm reversal in industry performances

Important findings:

  • Companies in loser industries yield a substantial outperformance compared to companies in winner industries over the next five years.
  • This effect is a decisive driver behind long-term reversal in equities.
  • Industry reversal exists in all phases of the business cycle and is more pronounced in industries with high valuation uncertainty.

Source:

Wu, Y., & Mazouz, K. (2016). Long-term industry reversals. Journal of Banking & Finance, 68, 236-250.
 
The research paper can be obtained here.
 

Low correlation as an explanation for smart beta returns

Important findings:

  • Strategies that have a low correlation to the market capitalization weighted index deliver a higher risk adjusted return. This effect can be used to construct a factor that enhances the explanatory power of a Fama-French model.
  • This finding helps to explain part of the excess return of smart beta strategies.

Source:

Kudoh, H., Miazzi, A., & Yamada, T. (2015). The low-correlation enhancement: How to make alternative beta smarter. The Journal of Investing, 24 (4), 81-91.
 
The research paper can be obtained here.
 

Macroeconomic determinants of stock market betas

Important findings:

  • This paper decomposes the market beta into several cyclical components with different frequency.
  • Especially the surplus-consumption-ratio as well as the default premium have a significant influence on the equity market beta.

Source:

Gonzalez, M., Nave, J., & Rubio, G. (2018). Macroeconomic determinants of stock market betas. Journal of Empirical Finance, 45 , 26-44.
 
The research paper can be obtained here.
 

Market efficiency and industry clusters

Important findings:

  • Companies within industry clusters have more efficient market prices than companies outside clusters.
  • Geographic proximity creates information spillovers and reduces the marginal costs of information producers.
  • Analysts are more likely to cover companies within clusters.
  • Institutional investors that hold large positions of a specific company in a cluster are more likely to hold stocks of other cluster members.

Source:

Engelberg, J., Ozoguz, A., & Wang, S. (2018). Know thy neighbor: Industry clusters, information spillovers, and market efficiency. Journal of Financial and Quantitative Analysis, 53 (5), 1937-1961.
 
The research paper can be obtained here.
 

Market impact of large transactions

Important findings:

  • Most studies that estimate the market impact of large transactions consider each transaction separately.
  • Neglecting the interactions in the order flow can lead to substantial under-estimation of transaction costs. Potential contagion effects can also not be captured.
  • This paper proposes a model to alleviate this concern.

Source:

Benzaquen, M., Mastromatteo, I., Eisler, Z., & Bouchaud, J.-P. (2016). Dissecting cross-impact on stock markets: An empirical analysis. Unpublished Results.
 
The research paper can be obtained here.
 

Mispricing and the lottery effect

Important findings:

  • The investor preference for right skewed payoffs (= increased probability of large gains / lottery effect) is a common driver of mispricing across a multitude of market anomalies.
  • Investors overweigh overvalued stocks in particular.
  • Moreover, stocks with right skewed payoffs show substantially more mispricing.
  • A factor that captures skewness-related mispricing helps in explaining the return of many anomalies.

Source:

Kumar, A., Motahari, M., & Taffler, R. J. (2018). Skewness preference and market anomalies. Working Paper.
 
The research paper can be obtained here.
 

Misvaluation as explanation of the profitability factor

Important findings:

  • Macroeconomic risks can only partially capture the profitability premium. A misevaluation factor based on sentiment, however, contributes substantially in explaining the profitability premium.
  • The profitability premium is primarily present in companies whose profitability is underestimated in times of high sentiment. Companies with high profitability and low valuation are more likely to be underestimated by analysts and they show price jumps after earnings announcements.

Source:

Lam, F. E. C., Wang, S., & Wei, K. J. (2016). The profitability premium: Macroeconomic risks or expectation errors? Unpublished Results.
 
The research paper can be obtained here.
 

Modelling skewed distributions

Important findings:

  • Skewness and kurtosis of a distribution are decisive for risk management.
  • A classical normal distribution does not take these moments into account, while more complicated distributions are difficult to use in practice.
  • This paper proposed a new distribution that takes skewness and kurtosis into account while at the same time being as easy to use as a normal distribution.

Source:

de Roon, F., & Karehnke, P. (2016). A simple skewed distribution with asset pricing applications. Review of Finance, 21 (6), 2169-2197.
 
The research paper can be obtained here.
 

Momentum in company fundamentals

Important findings:

  • Momentum not only exists in returns, but also for company fundamentals.
  • Twin momentum – the combination of price momentum and fundamental momentum – considerably improves on each of the two momentum variants alone.

Source:

Huan, D., Zhang, H., & Zhou, G. (2017). Twin momentum: Fundamental trends matter. Unpublished Results.
 
The research paper can be obtained here.
 

Momentum in the predictive ability of return forecasts

Important findings:

  • Goyal & Welch (2008) showed that forecasting equity returns is difficult in the long run. However, in between, there are phases, when certain variables have the ability to forecast equity returns.
  • This paper shows that the predictive ability can be improved if the most recent forecast quality is taken into account and the estimator is used only if the recent forecast quality was good. Alternatively, a historical mean estimate is used to predict equity returns.

Source:

Wang, Y., Liu, L., Ma, F., & Diao, X. (2018). Momentum of return predictability. Journal of Empirical Finance, 45, 141-156.
 
The research paper can be obtained here.
 

Momentum spillover from equities to corporate bonds

Important findings:

  • This paper finds momentum spillovers from equities to corporate bonds, i.e. companies that had high recent equity returns will show high corporate bond returns.
  • This momentum strategy shows distinct structural as well as time-varying default risks.
  • Taking the company specific momentum (residual momentum), these risks can be substantially reduced and the Sharpe ratio can be doubled.

Source:

Haesen, D., Houweling, P., & van Zundert, J. (2017). Momentum spillover from stocks to corporate bonds. Journal of Banking & Finance, 79 , 28-41.
 
The research paper can be obtained here.
 

Negative bubbles

Important findings:

  • After massive losses (50-60%), we can regularly observe distinct reversal phases.
  • For more moderate losses (20-30%), there is no evidence for reversals.
  • Over exaggeration and panics during market crashes can likely be explained best by behavioral approaches.

Source:

Goetzmann, W. N., & Kim, D. (2017). Negative bubbles: What happens after a crash. European Financial Management, 24(2), 171-191.
 
The research paper can be obtained here.
 

New approaches for hedging equity risk

Important findings:

  • Traditional hedging approaches for equity portfolios such as put options, US treasuries, gold and credit protection are expensive and / or unreliable.
  • The authors propose two strategies to protect against large drawdowns: (1) a time-series momentum strategy (similar to many CTAs) and (2) a long-short strategy on the equity quality factor.

Source:

Cook, M., Hoyle, E., Sargaison, M., Taylor, D., & Hemert, O. V. (2017). The best strategies for the worst crises. Unpublished Results.
 
The research paper can be obtained here.
 

Non-linear covariance shrinkage

Important findings:

  • Estimating a covariance matrix is important for many approaches to portfolio construction and often suffers from instable estimates.
  • Linear shrinkage approaches are commonly used to achieve a balanced mix of estimation and model errors and allow for a fairly good estimate.
  • This paper is the first to propose a non-linear shrinkage approach that dominates existing approaches for covariance estimation.

Source:

Ledoit, O., & Wolf, M. (2017). Nonlinear shrinkage of the covariance matrix for portfolio selection: Markowitz meets goldilocks. The Review of Financial Studies, 30 (12), 4349-4388.
 
The research paper can be obtained here.
 

Optimized rebalancing of multi asset portfolios

Important findings:

  • Weights of a multi asset portfolio shift over time due to market movements.
  • Rebalancing brings the weights back to the strategic asset allocation.
  • In between rebalancings, investors deviate from the strategic asset allocation and incur timing bets regarding when to rebalance.
  • Using a short option overlay, the basis risk can be reduced and investor can concurrently harvest a volatility risk premium.

Source:

Israelov, R., & Tummala, H. (2017). An alternative option to portfolio rebalancing. Working Paper.
 
The research paper can be obtained here
 

Over-diversification across asset managers

Important findings:

  • Many institutional investor allocate their assets across too many asset managers. In this regard, they are overdiversified.
  • This overdiversification leads to a significant decrease in relative risks, which considerably limits the outperformance potential. At the same time, they face high fees from active management.

Source:

McKay, S., Shapiro, R., & Thomas, R. (2017). What free lunch? The costs of overdiversification. Financial Analysts Journal, 74(1), 1-15.
 
The research paper can be obtained here.
 

Payment cycles and market liquidity

Important findings:

  • The monthly payment cycle creates systematic pattern in liquid asset markets.
  • The cost of debt and equity capital temporarily increases around the month ends, when there are many investors in need of cash to cover payouts.
  • Investors suffer from liquidity related asset sales during those time periods.

Source:

Etula, E., Rinne, K., Suominen, M., & Vaittinen, L. (2017). Dash for cash: Monthly market impact of institutional liquidity needs. Unpublished Results.
 
The research paper can be obtained here.
 

Political risk and equity tail risk

Important findings:

  • This study analyses the tail risk of equities around national elections globally from 1982 to 2012.
  • Equities have a lower crash probability in election years than in the period following the election.
  • Bad news is suppressed during political uncertainty.
  • The effect is particularly pronounced in countries with poor investor protection, limited checks and balances, if the results are highly uncertain or if there are pro-business incumbents. Politically sensitive industries or companies with larger information asymmetries are also more heavily impacted.

Source:

Li, Q., Li, S., & Xu, L. (2018). National elections and tail risk: International evidence. Journal of Banking & Finance, 88, 113-128.
 
The research paper can be obtained here.
 

Popularity as return driver

Important findings:

  • In efficient markets, systematic risks are undesirable and therefore require a return premium.
  • In the behavioral finance world, behavioral biases affect asset prices.
  • Popularity unifies both of these perspectives by pricing assets according to their rational (risk based) or irrational (emotional) desirability.
  • Characteristics that are permanently undesirable require a price discount respectively a return premium.

Source:

Idzorek, T. M., & Ibbotson, R. G. (2017). Popularity and asset pricing. The Journal of Investing, 26 (1), 46-56.
 
The research paper can be obtained here.
 

Post publication decline of anomalies

Important findings:

  • The paper of McLean & Pontiff (2016) showed that 97 anomalies significantly weakened post-publication in the United States.
  • This paper now finds that for 241 anomalies and 39 international markets, there is no significant post publication decline in other countries outside of the United States.

Source:

Jacobs, H., & Müller, S. (2018). Anomalies across the globe: Once public, no longer existent? Unpublished Results.
 
The research paper can be obtained here.
 

Profitability shocks and the size effect

Important findings:

  • Many studies find that the size effect disappeared after the early 1980s.
  • The paper shows that this disappearance is due to negative profitability shocks of small companies while there were positive shocks for large companies.
  • When adjusting for these profitability shocks, a robust size effect remains.

Source:

Hou, K., & van Dijk, M. A. (2018). Resurrecting the size effect: Firm size, profitability shocks, and expected stock returns. Review of Financial Studies.
 
The research paper can be obtained here.
 

Properties of factor premia across multiple asset classes

Important findings:

  • Most studies analyze factor premia for a specific asset class only. This paper in contrast, takes a look at factor premia across multiple asset classes.
  • The authors find that the returns of factor premia are significantly driven by their own factor volatility, their sensitivity to funding liquidity and the market volatility. Moreover, the industrial production and the inflation are relevant drivers.
  • Factor premia that show a disadvantageous return distribution in difficult market regimes, have higher expected returns.

Source:

Ebner, M. (2016). Risk and risk premia: A cross asset class analysis. Unpublished Results.
 
The research paper can be obtained here.
 

Quality controls resurrect the size effect

Important findings:

  • Recently the size factor has been widely attacked. It is supposedly too weak, too instable, weakening since its discovery, concentrated among microcaps and in January as well as internationally instable.
  • Controlling for quality, however, these criticisms can be alleviated.
  • After controlling for quality, the size factor performs on par with other anomalies such as value or momentum.

Source:

Asness, C. S., Frazzini, A., Israel, R., Moskowitz, T., & Pedersen, L. H. (2018). Size matters, if you control your junk. Journal of Financial Economics, 129, 479-509.
 
The research paper can be obtained here.
 

Replication of anomalies

Important findings:

  • Many anomalies found in academic research are not robust.
  • The authors try to replicate 447 anomalies while excluding micro-cap stocks.
  • 68% of the anomalies cannot be reproduced using classical statistical standards. Applying higher standards, this number even rises to 85%.
  • Of the remaining significant anomalies, the majority can be explained using a q-factor model.
  • Capital markets are more efficient than recognized in the research on anomalies.

Source:

Hou, K., Xue, C., & Zhang, L. (2017). Replicating anomalies. Unpublished Results.
 
The research paper can be obtained here.
 

Residual Momentum in Japan

Important findings:

  • Residual momentum is momentum that has been adjusted for the Fama & French factor exposures.
  • In contrast to classical momentum, it also works in Japan.
  • While momentum returns show reversals in the long term, which necessitates regular portfolio adjustments, residual momentum does not show reversals.
  • Investor underreaction is the most likely explanation for residual momentum.

Source:

Chang, R. P., Ko, K.-C., Nakano, S., & Rhee, S. G. (2018). Residual momentum in Japan. Journal of Empirical Finance, 45 , 283-299.
 
The research paper can be obtained here.
 

Return of equity strategies throughout the trading day

Important findings:

  • Returns of anomaly strategies are not generated evenly across the trading day, which supports explanations based on institutional effects and information asymmetry.
  • Small stocks yield an outperformance near market close.
  • Low Beta stocks accumulate returns gradually over the trading day, but show distinct losses overnight.

Source:

Bogousslavsky, V. (2017). The cross-section of intraday and overnight returns. Unpublished Results.
 
The research paper can be obtained here.
 

Reversals of Alphas

Important findings:

  • Assets with low realized CAPM-alphas yield positive excess returns compared to assets with high realized CAPM-alphas.
  • Even though the CAPM-alpha is mis-specified in a multi-factor-world, it is widely used for performance analysis in practice. This gives fund managers the incentive to shift portfolios towards higher realized alphas. This shift leads to an undervaluation of stocks with low realized alphas.
  • This behavior is consistent with three possible explanations: (1) investors are leverage constrained, (2) managers are benchmarked towards the CAPM, (3) the market overreacts to extreme values of realized alphas.
  • Academic research seemingly does not only diminish anomalies, but can also create new anomalies.

Source:

Horenstein, A. R. (2018). Can Academic Research Generate New Anomalies? Unpublished Results.
 
The research paper can be obtained here.
 

Risk neutral return distributions and crash risks of currency options

Important findings:

  • Higher moments (skewness, kurtosis) of the risk-neutral return distributions of currency options help forecasting and explaining crashes and crash risk premia.
  • Moreover, these moments commove with macroeconomic variables.

Source:

Chen, R.-R., lin Hsieh, P., & Huang, J. (2018). Crash risk and risk neutral densities. Journal of Empirical Finance, 47, 162-189.
 
The research paper can be obtained here.
 

Risk-adjustment of time series momentum

Important findings:

  • This paper proposes to adjust time-series momentum strategies by their volatilty to balance their risk exposure.
  • This strategy leads to an exposure to market beta, value and momentum, while at the same time considerably reducing the turnover.

Source:

Dudler, M., Gmur, B., & Malamud, S. (2014). Risk-adjusted time series momentum. Unpublished Results.
 
The research paper can be obtained here.
 

Sentiment, uncertainty and expected returns

Important findings:

  • Aggregated sentiment indicators based on news and social media searches have a considerable impact on the excess returns.
  • A factor based on these indicators helps improving existing asset pricing models.
  • Positive sentiment (optimism) as well as negative sentiment (fear) concurs with high returns.
  • The authors interpret this finding as a premium for increased uncertainty.

Source:

Füss, R., & Koeppel, C. (2018). Sentiment-conditional risk premium in financial markets. Working Paper.
 
The research paper can be obtained here.
 

Short-term underreaction of equity markets

Important findings:

  • Following jumps in U.S. stock prices, there is short-term underreaction.
  • A strategy that goes long in stocks with positive upward jumps while shorting stocks with negative jumps yields a significant outperformance over the 1-3 month horizon.
  • Limited investor attention offers one potential explanation.

Source:

Jiang, G. J., & Zhu, K. X. (2017). Information shocks and short-term market underreaction. Journal of Financial Economics, 124 (1), 43-64.
 
The research paper can be obtained here.
 

Smart beta ETFs and fund flows

Important findings:

  • Actively traded smart beta ETFs result in smarter mutual fund flows.
  • More precisely, mutual fund flows become more sensitive to alphas of multi factor models, while the link to the CAPM weakens.

Source:

Cao, J., Hsu, J. C., Xiao, Z., & Zhan, X. (2017). Smart beta, smarter flows. Unpublished Results.
 
The research paper can be obtained here.
 

Social media and equity prices

Important findings:

  • Social media influences financial markets. Often the relationship remains relatively unclear and only few hedge funds make use of this kind of data.
  • The sentiment of tweets can predict daily returns above the information contained in the Fama-French five factor model.
  • The authors claim to have discovered a social media factor as sixth factor that complements the existing Fama-French five factor model.

Source:

Liew, J., & Budavari, T. (2017). The "sixth" factor - a social media factor derived directly from tweet sentiments. The Journal of Portfolio Management, 43 (3), 102-111.
 
The research paper can be obtained here.
 

Speculative overpricing of high beta assets

Important findings:

  • The risk-return-trade-off does not behave according to financial theory in practice.
  • High beta stocks are vulnerable to speculative overpricing: they are more sensitive towards disagreement and overvalued due to short-sale constraints.
  • If disagreement is low, the risk-return-trade-off is positive, while large disagreement can lead to decreasing expected returns when systematic risks increase.

Source:

Hong, H., & Sraer, D. A. (2016). Speculative betas. The Journal of Finance, 71 (5), 2095-2144.
 
The research paper can be obtained here.
 

Survivorship bias in peer group comparisons

Important findings:

  • Survivorship bias, the focus on surviving securities, leads to considerable biases in backtests of investment strategies or peer group comparisons.
  • Backtesting strategies will look too good if only surviving securities are used. Peer group comparisons, in contrast, look too bad, as the fund is only compared to surviving and thus successful funds.
  • The authors propose a new method to correct for this effect when calculating performance based measures for peer group comparisons.

Source:

Allen, G. C., Cliff, I. S., & Meerschaert, W. J. (2018). Picking through the alpha graveyard correcting for survivorship bias in investment product universes. Journal of Investment Management, 16 (3), 46-57.
 
The research paper can be obtained here.
 

Sustainability and mispricing

Important findings:

  • Undervalued equities with poor social performance show the highest risk-adjusted returns, whereas overvalued equities with good social performance have the lowest risk-adjusted returns.
  • This effect is primarily driven by sustainable institutional investors and is not fully offset by arbitrage of unconstrained investors.

Source:

Zhan, X. E. (2017). Investor preference, corporate social performance, and stock prices. Unpublished Results.
 

Systemic risk from short volatility strategies

Important findings:

  • Short volatility strategies are widely popular at the moment.
  • These strategies bet on the volatility staying low in the future and thus are equivalent to some type of financial insurance against market turbulence.
  • Therefore, these strategies contain a high systematic risk and can lead to market crashes, if many investors want to exit those strategies at the same time.
  • Besides directly writing options, many other strategies have an implicit exposure to short volatility risk such as carry trade strategies, risk parity strategies and volatility targeting strategies.

Source:

Bhansali, V., & Harris, L. (2018). Everybody's doing it: Short volatility strategies and shadow financial insurers. Financial Analysts Journal, 74 (2), 12-23.
 
The research paper can be obtained here.
 

Tail risk hedging strategies

Important findings:

  • This paper compares a direct option-based hedging approach to an indirect approach that dynamically allocates between stocks and bonds.
  • While the option based approach performs better in the short-term in crises, the gains are quickly eroded by high insurance premia in the following months.
  • Over the whole crisis, both approaches perform similarly, while the indirect, dynamic approach is clearly superior in calm market states.

Source:

Asvanunt, A., Nielsen, L. N., & Villalon, D. (2015). Working your tail off: Active strategies versus direct hedging. The Journal of Investing, 24 (2), 134-145.
 
The research paper can be obtained here.
 

Tail risk sensitivity of individual stocks

Important findings:

  • This study measures the sensitivity of equities towards large market downturns, the so called tail beta.
  • Stocks with high tail betas lose 2-3x as much in crises compared to stocks with low tail betas.
  • Even though equities with high tail betas are considerably more risky, there appears to be no return premia for holding them.

Source:

van Oordt, M. R. C., & Zhou, C. (2016). Systematic tail risk. Journal of Financial and Quantitative Analysis, 51 (02), 685-705.
 
The research paper can be obtained here.
 

The carry premium in a multi asset context

Important findings:

  • The carry factor is primarily discussed in the foreign exchange markets.
  • This paper shows how the carry factor can be extended to further asset classes.
  • The authors show the attractiveness of multi-asset carry portfolios that profit from the diversification of carry premia across multiple asset classes and that do not exhibit the strong downside risks present in currency carry strategies.

Source:

Baltas, N. (2017). Optimising cross-asset carry. Unpublished Results.
 
The research paper can be obtained here.
 

The cyclically adjusted price-earnings-ratio

Important findings:

  • The cyclically adjusted price-earning-ratio (CAPE) receives much attention as well as criticism for predicting equity returns.
  • The authors propose diverse technical improvements for a more robust estimation of the CAPE. In particular, enhancing the CAPE with other stable accounting measures like cash-flows and revenues seems warranted.
  • Comparing the current CAPE level with the historical mean does not make much conceptional sense as there is no steady-state level.
  • Moreover, using CAPE as market timing tool requires caution and is better suited for analyzing the relative returns of equities compared to other asset classes.

Source:

Philips, T., & Ural, C. (2016). Uncloaking Campbell and Shiller's CAPE: A comprehensive guide to its construction and use. The Journal of Portfolio Management, 43 (1), 109-125.
 
The research paper can be obtained here.
 

The dynamics of the value factor

Important findings:

  • The relative return of a value strategy is cyclical.
  • Those episodes stand out when the valuation spread between cheap and expensive securities is particularly pronounced.
  • During these periods, value strategies show the following characteristics: (1) high returns, (2) a low equity market beta, but high commonalities with the world value factor, (3) deteriorating fundamentals, (4) negative news sentiment, (5) selling pressure, (6) increased limits to arbitrage, but nevertheless (7) increased arbitrage activity.
  • These time periods are clustered and a dynamic strategy yields an outperformance that cannot be explained using traditional factors.

Source:

Asness, C., Liew, J., Pedersen, L. H., & Thapar, A. (2017). Deep value. Working Paper.
 
The research paper can be obtained here.
 

The effect of accruals on equity returns

Important findings:

  • Accruals are non-cash components of earnings and can be easily manipulated by shifting claims between periods. To gain more reliable estimates of profitability, cash-flows are often used.
  • Expected returns rise in profitability, but decrease in accruals. Measuring profitability while excluding accruals leads to higher expected returns.
  • Defining profitability correctly (without accruals), there is no need to have a separate accruals factor.

Source:

Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. (2016). Accruals, cash flows, and operating profitability in the cross section of stock returns. Journal of Financial Economics, 121 (1), 28-45.
 
The research paper can be obtained here.
 

The effect of creative destruction on asset prices

Important findings:

  • Equities differ in their sensitivity towards innovation risk (Schumpeterian creative destruction).
  • Small cap value stocks are more vulnerable, while large cap growth stock offer protection to innovation risk.
  • Therefore, the sensitivity towards creative destruction offers a new explanation of the return premium of small cap stocks and value stocks.

Source:

Grammig, J., & Jank, S. (2016). Creative destruction and asset prices. Journal of Financial and Quantitative Analysis, 51 (6), 1739-1768.
 
The research paper can be obtained here.
 

The excess return of equities and bonds is not guaranteed

Important findings:

  • The authors test excess returns for equities and bonds over bills in 20 different countries over a period of more than a century.
  • The excess returns are only significant in less than half of the cases.
  • Globally, the reward for higher risk is not set in stone.

Source:

Garat, J. I. (2016). The risk of premiums. The Journal of Portfolio Management, 42 (4), 108-115.
 
The research paper can be obtained here.
 

The Fama & French 5-factor-model

Important findings:

  • The Fama & French (2015) 5-factor-model with the factors market, size, value, profitability and investments is becoming more and more of a standard.
  • However, there are several weaknesses.
  • It sticks to the market beta as a factor, even though the empirical relationship is not linearly rising in a stable manner.
  • Moreover, the momentum effect is ignored.
  • There are still questions regarding stability and economic motivation for the two new factors profitability and investments.
  • Therefore, this model will not be able to solve the ongoing controversy in asset pricing.

Source:

Blitz, D., Hanauer, M. X., Vidojevic, M., & van Vliet, P. (2017). Five concerns with the five-factor model. Working Paper.
 
The research paper can be obtained here.
 

The financial intermediation premium

Important findings:

  • Companies that borrow money from highly leveraged financial intermediaries have higher expected returns than companies with low-leverage lenders.
  • This return difference cannot be explained by other company characteristics. However, it is driven by the company exposure towards the financial sector.
  • The dispersion of the leverage of financial intermediaries forecasts macroeconomic aggregates.

Source:

Marchuk, T. (2017). The financial intermediation premium in the cross section of stock returns. Unpublished Results.
 
The research paper can be obtained here.
 

The impact of characteristics on equity returns

Important findings:

  • Over the last 40 years, research identified many characteristics that explain stock returns based on linear regressions.
  • A new, non-parametric approach shows that many identified return drivers do not add value in predicting equity returns.
  • Moreover, non-linear relationships between characteristics and equity returns play an important role.

Source:

Freyberger, J., Neuhierl, A., & Weber, M. (2017). Dissecting characteristics nonparametrically. Unpublished Results.
 
The research paper can be obtained here.
 

The impact of ETFs on capital markets

Important findings:

  • Over the last 25 years, the ETF market has grown manifold and now has a considerable impact on the capital markets as a whole.
  • While ETFs facilitate price discovery, they cause volatility that is not driven by economic funds as well as influence the correlation structure of returns.
  • Finally, ETFs heavily impact market liquidity.

Source:

Ben-David, I., Franzoni, F. A., & Moussawi, R. (2017). Exchange traded funds (ETFs). Annual Review of Financial Economics, 9.

The research paper can be obtained here.
 

The influence of bubble risks on asset prices

Important findings:

  • This paper describes the systematic risk due to bubbles in asset prices and its effect on asset prices.
  • This approach leads to better estimates of the market risk premium as well as of market volatility than existing asset pricing models.

Source:

Lee, J. H., & Phillips, P. C. (2016). Asset pricing with financial bubble risk. Journal of Empirical Finance, 38 , 590-622.
 
The research paper can be obtained here.
 

The influence of hormones on financial risk-taking

Important findings:

  • This paper discusses biological reasons for risk taking behavior. The focus is on the role of steroid hormones (the endocrine system).
  • Hormones have a significant influence on trader performance. High cortisol levels increase the perception of risk, while high testosterone levels lead to increased focus on opportunities and increased risk-taking behavior.
  • Bull and bear markets and the concomitant excessive optimism or pessimism could be influenced by hormone-induced shifts in confidence and risk preferences.
  • A higher endocrine diversity of financial market participants could increase the stability of the financial system.

Source:

Coates, J. M., Gurnell, M., & Sarnyai, Z. (2009). From molecule to market: steroid hormones and financial risk-taking. Philosophical Transactions of the Royal Society B: Biological Sciences, 365 (1538), 331-343.
 
The research paper can be obtained here.
 

The integration of ESG in the portfolio construction

Important findings:

  • This article evaluates how investors can integrate ESG criteria into portfolio construction.
  • It presents three potential approaches: (1) ESG filtering, (2) ESG as additional factor in the multi factor portfolio, (3) ESG as sub-score that contributes to each individual factor.
  • While a simple ESG filter (1) is easily implementable and features a good performance, the final ESG exposure is somewhat instable particularly for only moderate filtering.
  • If ESG is included as separate factor (2) or sub-score (3), we can create a strong ESG profile, but there is a performance dilution if ESG itself does not boost performance.

Source:

Bender, J., Sun, X., & Wang, T. (2017). Thematic indexing, meet smart beta! Merging ESG into factor portfolios. The Journal of Index Investing, 8 (3), 89-101.
 
The research paper can be obtained here.
 

The interaction of short term reversal and momentum

Important findings:

  • Short-term trends heavily depend on intermediate momentum.
  • Short-term reversal strategies work best for intermediate momentum losers.
  • Momentum strategies work best for short-term trend winners.

Source:

Zhu, Z., & Yung, K. (2016). The interaction of short-term reversal and momentum strategies. The Journal of Portfolio Management, 42 (4), 96-107.
 
The research paper can be obtained here.
 

The links between momentum and reversal

Important findings:

  • Momentum stocks that did not contribute to momentum profits, in contrast, show subsequent reversal.
  • If these two types of stocks are mixed, momentum and reversal appear to be linked.
  • Separating these stocks can be achieved by sorting by size and value criteria.

Source:

Conrad, J., & Yavuz, M. D. (2016). Momentum and reversal: Does what goes up always come down? Review of Finance, 21 (2), 555-581.
 
The research paper can be obtained here.
 

The lottery effect as an explanation of the beta anomaly

Important findings:

  • The beta-anomaly refers to the unexpectedly high return of low beta stocks, while high beta stocks suffer from lower than expected returns.
  • This paper shows that this anomaly can be explained well by the so called lottery effect, i.e. that people are willing to give up returns for a minor chance for a high payoff.
  • This effect is concentrated among high beta stocks with low institutional ownership.

Source:

Bali, T. G., Brown, S. J., Murray, S., & Tang, Y. (2017). A lottery-demand-based explanation of the beta anomaly. Journal of Financial and Quantitative Analysis, 52 (06), 2369-2397.
 
The research paper can be obtained here.
 

The non-linear influence of characteristics on equity returns

Important findings:

  • This paper analyzes the relationship between company characteristics and equity returns. Instead of using linear regressions, this study relies on a tree-based approach which is capable of capturing non-linear interactions.
  • Especially momentum and less prominently volatility and liquidity are important return drivers.

Source:

Coqueret, G., & Guida, T. (2018). Stock returns and the cross-section of characteristics: A tree-based approach. Unpublished Results.
 
The research paper can be obtained here.
 

The popularity of minimum volatility strategies

Important findings:

  • Minimum volatility strategies gained in popularity over the recent years.
  • Compared to the overall market, they remain minuscule and many active mutual funds overweight high volatility stocks.
  • A neutral positioning of these active mutual funds would lead to a much stronger shift towards minimum volatility than all current investments.
  • Moreover, minimum volatility strategies are not overvalued compared to historical standards and the performance is consistent with the expectations for the respective market regime.

Source:

Ang, A., Madhavan, A., & Sobczyk, A. (2017). Crowding, capacity, and valuation of minimum volatility strategies. The Journal of Index Investing, 7 (4), 41-50.
 
The research paper can be obtained here
 

The role of design decisions in factor investing

Important findings:

  • Successful investing requires transferring solid investment concepts into actual trading strategies.
  • Factor investing in particular involves many design decisions that have a sizable impact on performance.
  • The skill to harvest factor premia efficiently and precisely can constitute an alpha source of its own.

Source:

Israel, R., Jiang, S., & Ross, A. (2017). Craftsmanship alpha: An application to style investing. Working Paper.
 
The research paper can be obtained here.
 

The roll yield

Important findings:

  • The so called roll yield which occurs while rolling futures positions particularly in commodity markets is an often misunderstood concept.
  • It is not an actual cash flow during the roll. Gains and losses accrue only through price changes during the holding period of futures and not during the roll.
  • The roll yield, however, describes the difference between futures prices and spot prices.

Source:

Bessembinder, H. (2017). Do stocks outperform treasury bills? Journal of Financial Economics, 129(3), 440-457.
 
The research paper can be obtained here.
 

The value of customer evaluations

Important findings:

  • This study analyses 14.5 mio customer opinions on Amazon and evaluates in how far they contain information about future stock prices.
  • They find that companies whose products have abnormally high ratings yield an excess return of 55 to 73 bp per month compared to companies whose products have abnormally poor ratings.
  • This excess return cannot be explained by other known company characteristics and does not show reversals in the long term.
  • Moreover, consumer opinions can predict revenues and earnings surprises.

Source:

Huang, J. (2018). The customer knows best: The investment value of consumer opinions. Journal of Financial Economics, 128 (1), 164-182.
 
The research paper can be obtained here.
 

The value of volatility management

Important findings:

  • Recent studies show that volatility managed portfolios yield a higher Sharpe ratio.
  • This paper shows that this observation only holds for equities and credit, but is negligible for fixed income, currencies and commodities.
  • However, tail risks can be significantly reduced across all asset classes.
  • Thus, volatility management significantly increases the attractiveness of portfolio risk and return characteristics.

Source:

Harvey, C. R., Hoyle, E., Korgaonkar, R., Rattray, S., Sargaison, M., & Hemert, O. V. (2018). The impact of volatility targeting. Working Paper.
 
The research paper can be obtained here.
 

Time variation of credit risk premia

Important findings:

  • This study analyses credit risk premia and adjusts them for expected losses.
  • These adjusted credit risk premia vary widely across time (up to a factor of 10) with particularly high risk premia in crisis periods.
  • This variation is more pronounced for investment grade bonds than for high yield bonds.

Source:

Berndt, A., Douglas, R., Due, D., & Ferguson, M. (2017). Corporate credit risk premia. Unpublished Results.
 
The research paper can be obtained here.
 

Trends over different time horizons

Important findings:

  • In the equity markets, depending on the time horizon, there are three distinct types of trends. In the short-term, there is reversal; in the medium term we can observe momentum, while in the long-term, there is reversal once more.
  • A trend factor that captures these three trends simultaneously, yields a considerable improvement compared to the three trends taken separately.

Source:

Han, Y., Zhou, G., & Zhu, Y. (2016). A trend factor: Any economic gains from using information over investment horizons? Journal of Financial Economics, 122 (2), 352-375.
 
The research paper can be obtained here.
 

Twitter based mood as return driver

Important findings:

  • This study analyses the influence of a Twitter based public mood measure on the cross-section of US equity returns.
  • Stocks that are more sensitive to the public mood earn a higher expected return.
  • At the same time, those stocks tend to be small, young, unprofitable, pay less dividends, not engage in R&D, use more external financing and have a high idiosyncratic risk.

Source:

Marsh, I. W., & Liu, J. (2018). The impact of public mood on the cross-section of stock returns. Working Paper.
 
The research paper can be obtained here.
 

Uncertainty of beta estimates

Important findings:

  • Depending on the time period, the market proxy or the factor model, beta estimates can vary widely.
  • It shows that equities whose beta estimates vary more and thus encompass a higher uncertainty have higher returns than equities with narrower beta estimates.
  • This phenomenon is independent of the absolute level of the systematic risk / the market beta.

Source:

Lahtinen, K. D., Lawrey, C. M., & Hunsader, K. J. (2017). Beta dispersion and portfolio returns. Journal of Asset Management, 19 (3), 156-161.
 
The research paper can be obtained here.
 

Using a network approach for portfolio optimization

Important findings:

  • This paper models financial markets as a network where securities are nodes.
  • The optimal portfolio weights are lower the more central – and therefore riskier – the securities are within the network.
  • Central stocks are rather old, large, cheap and risky.
  • A network based strategy can achieve excess returns versus common benchmarks that cannot be explained by classical factor models.

Source:

Peralta, G., & Zareei, A. (2016). A network approach to portfolio selection. Journal of Empirical Finance, 38 , 157-180.
 
The research paper can be obtained here.
 

Valuation as an approach to factor timing

Important findings:

  • The authors analyze value as a measure to predict future returns.
  • Currently, equity factors are not overvalued from a valuation standpoint.
  • Value timing is highly correlated with a static value strategy, but tends to be less stable.
  • Therefore, value timing disappoints in a multi-factor context that already includes the value factor in the portfolio due to reduced diversification.

Source:

Asness, C., Chandra, S., Ilmanen, A., & Israel, R. (2017). Contrarian factor timing is deceptively difficult. The Journal of Portfolio Management, 43 (5), 72-87.
 
The research paper can be obtained here.
 

Value and momentum on an asset class level

Important findings:

  • A dynamic allocation based on value and momentum criteria works on the asset class level.
  • Between 1975 and 2013 such a strategy would have yielded an excess return of roughly 2.66% p.a.

Source:

Haghani, V., & Dewey, R. (2016). A case study for using value and momentum at the asset class level. The Journal of Portfolio Management, 42 (3), 101-113.
 
The research paper can be obtained here.
 

Value Timing

Important findings:

  • The value spread helps predicting the return of value strategies on equities, commodities, currencies, bonds and equity indices.
  • Asset class specific as well as common components of the value spread contribute equally to the forecasting performance.
  • The common component is highly correlated with classical risk factors such as dividend yield, leverage or illiquidity.

Source:

Yara, F. B., Boons, M., & Tamoni, A. (2018). Value timing: Risk and return across asset classes. Unpublished Results.
 
The research paper can be obtained here.
 

Worthless companies

Important findings:

  • This paper presents the worthless company hypothesis: companies with worthless assets can have substantial equity values and debt trading near par as long as there is a probability of an irrational buyer showing up.
  • This hypothesis could explain the valuation of certain start-ups, the valuation during the dotcom bubble as well as the poor performance of certain short sellers.

Source:

Heaton, J. B. (2018). Worthless companies. European Financial Management.
 
The research paper can be obtained here.
 

Yield chasing in corporate bonds

Important findings:

  • This paper focuses on the phenomenon of “reaching for yield”, which is a tilt of portfolios towards bonds with higher yield to maturity than in the benchmark.
  • This phenomenon leads to higher returns and higher fund inflows, especially in a low interest rate environment.
  • From a risk-adjusted perspective, however, the performance decreases.
  • Funds pursue rank-chasing behavior by reaching for yield.
  • Moreover, funds that reach for yield hold less cash and invest in less liquid bonds, amplifying redemption risks.

Source:

Choi, J., & Kronlund, M. (2017). Reaching for yield in corporate bond mutual funds. The Review of Financial Studies, 31 (5), 1930{1965.
 
The research paper can be obtained here.