Last week, we examined the data (from my new book, “Your Complete Guide to Factor-Based Investing,” which I co-authored with Andrew Berkin) on the odds that the premiums associated with some common investment factors would produce a negative return over various horizons. We then examined how constructing a diversified factor portfolio might impact those odds…
The results of the U.S. presidential election not only surprised almost all the gurus who were saying that a Hillary Clinton victory was a sure thing, but also those forecasting that, if by some miracle Donald Trump won, a stock market crash was bound to occur. Prior to the election, I had received many inquiries…
As I have been discussing in a series of articles (which you can find here, here and here), we now have a substantial body of evidence demonstrating that individual investors possess a preference for low-priced equities. This is anomalous behavior, because the level of a company’s stock price is arbitrary—firms can manipulate it by adjusting…
Eugene Fama and Kenneth French’s seminal 1992 paper, “The Cross-Section of Expected Stock Returns,” resulted in the development of the Fama-French three-factor model. This model added the size and value factors to the market beta factor. One of the benefits of adding the value factor (the tendency for relatively cheap assets to outperform relatively expensive…
Momentum is the tendency for assets that have performed well (poorly) in the recent past to continue to perform well (poorly) in the future, at least for a short period of time. This is a big problem for the efficient markets hypothesis, as there’s no coherent risk-based explanation for momentum’s performance. Not only has there…
The table below, taken from the newly released book I co-authored with Andrew Berkin, “Your Complete Guide to Factor-Based Investing,” shows the annual premium and Sharpe ratio for the equity factors of market beta, size, value, momentum, profitability and quality. It also shows the odds that each premium will produce a negative return over various…
In the last few weeks, I’ve unpacked studies addressing both the nominal price illusion and the nominal price premium. So today I’ll answer a related question: Do nominal stock prices really matter? Because the level of a company’s stock price is arbitrary—it can be manipulated, for example, by firms via adjustments in the number of…
As I wrote about last week, the absolute level of a firm’s stock price is arbitrary, as it can be easily manipulated by the firm through altering the number of shares outstanding (for example, by splitting the stock). Despite this obvious fact, the research into investor behavior has found a strong preference among individuals for…
CAPM was the first formal asset pricing model. Market beta was its sole factor. With the 1992 publication of their paper, “The Cross-Section of Expected Stock Returns,” Eugene Fama and Kenneth French introduced a new-and-improved three-factor model, adding size and value to market beta as factors that not only provided premiums, but helped further explain…
Asset pricing models imply that equity portfolios’ time-varying exposure to the market risk and uncertainty factors carries with it positive risk premiums. Turan Bali and Hao Zhou contribute to the body of literature on this topic through the study “Risk, Uncertainty, and Expected Returns,” which appeared in the June 2016 issue of the Journal of…
The vast majority of financial trades take place in open and highly regulated markets. However, asset managers from mutual fund families sometimes offset their trades with affiliated funds in an internal market. Such cross-trading can allow fund families to shift performance from poorly performing funds to better performing funds, artificially inflating their returns. Research shows…
The absolute level of a firm’s stock price is arbitrary, as it can be easily manipulated by altering the number of shares outstanding (for example, by splitting the stock). Despite this obvious fact, research into investor behavior has found a strong preference for low-priced stocks on the part of individual investors. For instance, research has…
Japan’s Government Pension Investment Fund (GPIF) is the world’s biggest state investor, trumping all other managed government retirement and sovereign wealth funds. Prime Minister Shinzo Abe’s drive to spur the Japanese economy out of its two-decade-and-growing economic slump, known as Abenomics, has pushed the GPIF to plow more money into risky investments, aiming both to…
Financial research has uncovered many relationships between investment factors and stock returns. For investors, an important question is whether the publication of this research can impact the future size of factor premiums. Asking this question is crucial on two fronts. First, if anomalies are the result of behavioral errors, or even investor preferences, and the…
As an investment style, trend-following, also referred to as time-series momentum, has existed for quite some time. Time-series momentum examines the trend of an asset with respect to its own past performance. This is different from cross-sectional momentum, which compares the performance of an asset with respect to the performance of another asset. Academic research…