Investing Research Articles

Do factors widely used to model cross-sectional returns of U.S. stocks exhibit reward-for-risk behaviors? In other words, are expected factor returns higher (lower) when factor return volatility is high (low)? In their January 2017 paper entitled “The Risk-Return Tradeoff Among Equity Factors”, Pedro Barroso and Paulo Maio examine reward-for-risk behaviors of the size (small minus big market… Keep Reading

Are the returns of factors widely used to predict the cross-section of stock returns themselves predictable? In the January 2016 draft of his paper entitled “Equity Factor Predictability”, Ulrich Carl analyzes predictability of market, size (market capitalization), value (book-to-market ratio), momentum (returns from 12 months ago to one month ago), low beta (betting against beta) and quality… Keep Reading

How does the fact that many investments can go up more than they can go down interact with their optimal allocations? In their February 2017 paper entitled “What Our Market Return Forecasts Really Mean: Convexity in Equity Returns and its Implications for Investment Sizing”, Victor Haghani and James White examine how return convexity, return forecast and investment… Keep Reading

How attractive are purified factor portfolios, constructed to focus on one factor by avoiding exposures to other factors? In their January 2017 paper entitled “Pure Factor Portfolios and Multivariate Regression Analysis”, Roger Clarke, Harindra de Silva and Steven Thorley explore a multivariate regression approach to generating pure factor portfolios. They consider five widely studied factors: value (earnings yield);… Keep Reading

Do legal, policy and practical constraints on short selling substantially detract from factor investing performance? In their February 2017 paper entitled “Factor Investing: The Rocky Road from Long Only to Long Short”, Marie Briere and Ariane Szafarz examine how severely constraints on short selling affect the attractiveness of factor investing. They consider 11 assets consisting of the… Keep Reading

Which stock market factors and stock characteristics contribute significantly to portfolio performance when considered jointly (accounting for interactions) on a net basis (accounting for offsetting trades)? In their February 2017 paper entitled “A Portfolio Perspective on the Multitude of Firm Characteristics”, Victor DeMiguel, Alberto Martin-Utrera, Francisco Nogales and Raman Uppal investigate which of 51 stock factors/characteristics matter on a… Keep Reading

In their February 2017 paper entitled “Bayesian Model Averaging, Ordinary Least Squares and the Price of Gold”, Dirk Baur and Brian Lucey analyze a large set of factors that potentially influence the price of gold via two methods: Ordinary Least Squares (OLS, scatter plot) and Bayesian Model Averaging (BMA, accounting for model uncertainty). They include as potential influencers three other precious… Keep Reading

“Option-implied Correlation as Stock Market Return Predictor” finds that implied correlation for a broad stock market index relative to its components may be useful for predicting equity market returns. To corroborate, we look at the readily available CBOE S&P 500 Implied Correlation Indexes. The indexes are a series of three based on sequential pairings of… Keep Reading

Does option-implied correlation, a measure of the expected average correlation between a stock index and its components over a specified horizon, predict stock market behavior? In their January 2017 paper entitled “Option-Implied Correlations, Factor Models, and Market Risk”, Adrian Buss, Lorenzo Schoenleber and Grigory Vilkov examine option-implied correlation as a stock market return predictor. They consider expected average… Keep Reading

What drives the low-risk stock return anomaly, wherein low-risk stocks outperform high-risk stocks (contrary to a reward-for-risk view)? In their February 2017 paper entitled “Betting Against Correlation: Testing Theories of the Low-Risk Effect”, Clifford Asness, Andrea Frazzini, Niels Gormsen and Lasse Pedersen investigate several ways to select low-risk stocks and infer from findings what drives low-risk outperformance as represented by… Keep Reading