Investing Research Articles

What is the best stock pairs trading method? In their June 2015 paper entitled “The Profitability of Pairs Trading Strategies: Distance, Cointegration, and Copula Methods”, Hossein Rad, Rand Kwong Yew Low and Robert Faff compare performances of three pairs trading methods as applied to U.S. stocks. Distance – Select the 20 stock pairs with the smallest sum of squared differences… Keep Reading

There are many leveraged exchange-traded funds (ETF) designed to track multiples of short-term (daily) changes in popular indexes. Over longer holding periods, these ETFs tend to veer off track. The cumulative tracking error can be large. How well do leveraged ETFs track benchmarks over a multi-year period? What return metric drives the degree to which they fail to achieve… Keep Reading

Is it misleading to view factor risk premiums (such as for market, size and value) as constant over time? In his June 2015 paper entitled “Dynamic Risk Premia and Asset Pricing Puzzles”, Andy Jia-Yuh Yeh generates time-varying (dynamic) risk premiums for the Fama-French five-factor asset pricing model and explores whether widely accepted asset pricing anomalies exist after accounting for premium dynamics. Specifically, he applies a filter… Keep Reading

Which works best, strategies comparing past returns among assets (relative or cross-sectional) or strategies requiring positive past raw/excess returns (intrinsic or absolute or time series)? In their May 2015 paper entitled “Cross-Sectional and Time-Series Tests of Return Predictability: What is the Difference?”, Amit Goyal and Narasimhan Jegadeesh investigate differences between relative and intrinsic past return strategies, focusing on individual U.S. common… Keep Reading

How far can a fund manager squeeze turnover while still maintaining an effective low-volatility portfolio? In his June 2015 paper entitled “Low Turnover: a Virtue of Low Volatility”, Pim van Vliet investigates the lower limit of turnover for a low-volatility stock portfolio in two ways. First, he reviews 21 published analyses to relate turnover to volatility reduction while controlling for… Keep Reading

What is the best scheme over the long run for identifying U.S. stock market trends? In the May 2015 version of his paper entitled “Market Timing With a Robust Moving Average”, Valeriy Zakamulin isolates the most robust moving average weighting scheme for a U.S. stock market index based on monthly data. He tests 300 weighting schemes. For all schemes, test portfolios are… Keep Reading

“Simple Asset Class ETF Value Strategy” (SACEVS) tests a simple relative value strategy that each quarter allocates funds to one or more of the following three asset class exchange-traded funds (ETF), plus cash, based on degree of undervaluation of measures of the term risk, credit risk and equity risk premiums: 3-month Treasury bills (Cash)iShares 7-10 Year Treasury Bond (IEF)iShares… Keep Reading

…commodity futures in aggregate offer a long-term return comparable to that of stocks, with less downside risk and a substantial diversification benefit for a stock/bond portfolio.

What are the most pressing systematic weaknesses in financial research, and how should the investment community address them? In the May 2015 version of his article entitled “The Future of Empirical Finance”, Marcos Lopez de Prado identifies three major problems in empirical finance and proposes ways to mitigate them. Based on his experience and common sense arguments and references… Keep Reading

Are there intractable weaknesses of historical inference as a tool to predict the behaviors of financial markets? In the May 2015 draft of his article entitled “Beyond Backtesting: The Historical Evidence Trap”, Ulrich Hammerich briefly describes four weaknesses of backtesting more difficult to address than overfitting/snooping, neglect of trading frictions and data quality. He calls these weaknesses the technological trap, the market efficiency… Keep Reading