Investing Research Articles

Does global diversification improve smart beta (equity factor) investing strategies? In their September 2017 paper entitled “Diversification Strikes Again: Evidence from Global Equity Factors”, Jay Binstock, Engin Kose and Michele Mazzoleni examine effects of global diversification on equity factor hedge portfolios. They consider five factors: High-Minus-low Value (HML) – book equity divided by market capitalization. Small-Minus-Big Size (SMB) – market… Keep Reading

Can investors confidently pick hedge funds that will do well? In their September 2017 paper entitled “Hedge Fund Performance Prediction”, Nicolas Bollen, Juha Joenväärä and Mikko Kauppila examine the forecasting power of 26 hedge fund performance predictors identified in past research. These predictors span five categories: seven broad manager skills; four market timing skills; six systematic risks; four tail risks;… Keep Reading

Why don’t machines rule the financial world? In his September 2017 presentation entitled “The 7 Reasons Most Machine Learning Funds Fail”, Marcos Lopez de Prado explores causes of the high failure rate of quantitative finance firms, particularly those employing machine learning. He then outlines fixes for those failure modes. Based on more than two decades of… Keep Reading

Does uncertainty about future firm earnings underlie stock factor returns? In their August 2017 paper entitled “Uncertainty, Momentum, and Profitability”, Claire Liang, Zhenyang Tang and Xiaowei Xu examine relationships between analyst uncertainty about current-year firm earnings and four U.S. stock return anomalies. They each month estimate uncertainty for each stock as square root of the average squared differences between… Keep Reading

A subscriber, noting an article on slowing down intrinsic (absolute or time series) momentum for SPDR S&P 500 (SPY) when its return volatility is relatively high, suggested doing the same for the Simple Asset Class ETF Momentum Strategy (SACEMS). The hypothesis is that this dynamic lookback interval approach avoids undesirable whipsaws when asset returns are… Keep Reading

Does margin debt serve as an intermediate-term stock market sentiment indicator based on either momentum (with an increase/decrease in margin debt signaling a continuing stock market advance/decline) or reversion (with change in margin debt signaling a pending reversal)? To investigate, we relate the behavior of NYSE end-of-month margin debt, published with a delay of about a month, with… Keep Reading

Does low volume in currency exchange markets expose exploitable inefficiencies? In their August 2017 paper entitled “The Value of Volume in Foreign Exchange”, Antonio Gargano, Steven Riddiough and Lucio Sarno investigate whether currency trading volumes (including spot, swap and forward) exploitably predict currency returns. They first measure interactions of trading volumes and returns statistically. They then assess gross economic import… Keep Reading

Is market breadth a reliable indicator of future stock market returns? To investigate, we perform simple tests on four daily U.S. stock market breadth metrics: RSP-SPY – Total return for Guggenheim S&P 500 Equal Weight (RSP) minus total return for SPDR S&P 500 (SPY). NYSE A/D – Number of NYSE advancing stocks divided by number of… Keep Reading

Does the broad U.S. stock market, as represented by SPDR S&P 500 (SPY), exhibit reliable day-of-the-week and/or overnight return anomalies? To check, we consider three returns: Close-Open: measured from prior close to open. (For example, the Monday Close-Open return is from the close on the prior trading day, usually Friday, to the open on Monday.)… Keep Reading

How many, and which, factors should investors include when constructing multi-factor smart beta portfolios? In their August 2017 paper entitled “How Many Factors? Does Adding Momentum and Volatility Improve Performance”, Mohammed Elgammal, Fatma Ahmed, David McMillan and Ali Al-Amari examine whether adding momentum and low-volatility factors enhances the Fama-French 5-factor (market, size, book-to-market, profitability, investment) model of stock returns. They… Keep Reading