Latest update from research

Important findings:

• Most fixed income instruments are illiquid. Fund managers, however, still need to publish the daily net asset value (NAV) for their portfolio.
• The published NAVs of fixed income funds are partly based on stale price information. Particularly during market crashes, therefore, published NAVs and market values differ in a predictable manner for a time period of up to two weeks.
• Fund managers also have an incentive to smoothen their NAVs by using artificially stale prices to improve their Sharpe Ratio. This study finds clues that fund managers may indeed be doing so.
• Differences between NAV and market value of the portfolio allow for opportunistic trades that hurt long-term buy-and-hold investors.

Source:

Choi, J., M. Kronlund, and J. Oh, 2022, Sitting bucks: Stale pricing in fixed income funds, Journal of Financial Economics 145(2A), 296-317.

The research paper can be obtained here.

Important findings:

• The prices of corporate bonds are slow to react to changes in interest rates and credit risk. It can take up to twelve weeks for a change in credit risk to be fully reflected in a bond's price.
• Bonds with higher credit quality react particularly slowly to changes in credit risk, whereas bonds with worse credit quality are slower to react to changes in interest rates.
• This underreaction does not seem to be driven primarily by a lack of liquidity but rather by limited attention from investors.

Source: Li, J., 2022, Endogenous inattention and risk-specific price underreaction in corporate bonds, Journal of Financial Economics 145(2B), 595-615.

The research paper can be obtained here.

Important findings:

• This study uses a novel statistical approach to identify structural breaks in factor premia. Structural breaks are points in time after which one or several factors earn consistently higher or lower returns until the next break.
• In a six-factor model (market, value, size, momentum, investment, and profitability), four such structural breaks can be identified: The oil price shock of the 1970s, the change in the FED’s monetary policy regime, the bursting of the Dotcom-bubble, and the Great Financial Crisis.
• The factors value and size have decreased with every structural break and are now statistically insignificant. The factors market, momentum, investment, and profitability are also subject to structural breaks but have remained statistically significantly positive.

Source: Smith, S. and A. Timmermann, 2022, Have risk premia vanished?, Journal of Financial Economics 145(2B), 553-576.

The research paper can be obtained here.

Important findings:

• The authors construct a new dataset for the market value of publicly listed firms in 17 countries covering the years from 1870 to 2016.
• They show that the value of listed firms in comparison to gross domestic product has, in most developed countries, reached unprecedented heights over the last thirty years.
• This growth in firm values is shown to mostly be due to a redistribution among different types of capital income. Listed firms pay less in interest and taxes than they used to. Higher valuation ratios and lower discount rates on the other hand only play a subordinated role.

Source: Kuvshinov, D. and K. Zimmermann, 2022, The big bang: Stock market capitalization in the long run, Journal of Financial Economics 145(2B), 527-552.

The research paper can be obtained here.

Important findings:

• The sources of private equity returns, and the social and economic consequences of PE-financed buyouts, are a controversial topic.
• This study uses granular, store-level data to study the impact of private equity acquisitions on retail sales.
• It finds that targets of private equity transactions increase their sales by 50% more than comparable firms in subsequent periods, mostly through increased volumes of products sold, rather than increased prices. This increase in sales comes from geographic expansion and the launch of new products.
• The mechanism by which PE firms help their targets achieve said growth is by relaxing financial constraints and providing managerial expertise.

Source:

Fracassi, C., A. Previtero, and A. Sheen, 2022, Barbarians at the store? Private Equity, Products, and Consumers, Journal of Finance 77(3), 1439-1488.

The research paper can be obtained here.

Important findings:

• This paper shows, based on an economic model, that Bitcoin cannot widely be adopted as a payment system.
• The reason are negative network effects stemming from the need to establish consensus about transactions within a decentralized ledger. As the number of miners (network participants that confirm transactions) increases, establishing consensus becomes more difficult, leading to a longer transaction delay.
• Users of payment networks do not like waiting for transactions to be processed. In Bitcoin, they can therefore pay an additional fee for speedy processing. But as fee levels increase, more miners enter the network, thereby further increasing transaction delay.
• Flexible transaction rates that increase with transaction demand would not solve the problem. Miners would still need to agree on the order of transactions, leading to transaction delay.

Source:

Hinzen, F. J., K. John, and F. Saleh, 2022, Bitcoin's limited adoption problem, Journal of Financial Economics 144(2), 347-369.

The research paper can be obtained here.

Important findings:

• The variance of oil prices (measured by the implied variance of options on oil) is a robust, leading indicator for economic output, the oil sector and financial markets
• An increase in the oil price variance is correlated with a contraction in economic output, and a fall in aggregate consumption, investment and employment in the following four quarters
• The return of the aggregate equity market is negatively correlated with the oil price variance. On sector level, the negative correlation ("oil beta") is lowest, or even positive, for firms in the oil sector.
• A possible explanation for the relationship between oil price risk and economic output are precautionary inventories. In times of high oil price uncertainty, companies increase inventories and decrease their oil consumption, thereby decreasing their output.

Source:

Gao, L., S. Hitzemann, I. Shaliastovich, and L. Xu, 2022, Oil Volatility Risk, Journal of Financial Economics 144(2), 456-491.

The research paper can be obtained here.

Important findings:

• The efficacy of negative reference rates as an instrument for monetary policy is controversial; opponents argue that monetary policy below the "zero lower bound" of a reference rate of zero is ineffective or even counterproductive.
• This study uses data from the European Central Bank to test whether there is a zero lower bound for the bank deposits of corporate customers in the eurozone.
• It concludes that there is none. Well-capitalized banks were able to pass on negative interest rates in the Eurozone to corporate customers without suffering a related outflow of deposits.

Source:

Altavilla, C., L. Burlon, M. Giannetti, and S. Holton, 2022, Is there a zero lower bound? The effects of negative policy rates on banks and firms, Journal of Financial Economics 144(3), 885-907.

The research paper can be obtained here.

Important findings:

• In addition to general, long term buy and sell recommendations, stock market analysts also publish short-term trade ideas with a horizon of about one to eight weeks. Sometimes these even stand contrary to the analyst's long-term recommendation.
• These ideas are valuable on average: Buy recommendations are followed by positive (+0.91%), sell recommendations by negative abnormal returns (-1.96%).
• Ideas by analysts with better management access are better on average, as well as ideas that are based on a specific catalyst event with importance to the company (ideas based on temporary mispricing, while still valuable, are less profitable on average).

Source:

Birru, J., S. Gokkaya, X. Liu, and R. Stulz, 2022, Are analyst short-term trade ideas valuable?, Journal of Finance 77(3), 1829-1875.

The research paper can be obtained here.

Important findings:

• This paper examines the performance of investments made by customers of the popular retail brokerage platform Robinhood.
• Perhaps contrary to popular belief, Robinhood customers on aggregate had both good timing and positive alpha
• While Robinhood investors on aggregate seem to like volatility and overweigh certain "experience stocks", their collective holdings are mostly tilted towards stocks with high past trading volume.

Source:

Welch, I., 2022, The Wisdom of the Robinhood Crowd, Journal of Finance 77(3), 1489-1527.

The research paper can be obtained here.

Important findings:

• A large fraction of publicly listed firms is in possession of institutional investors who follow passive investment strategies and hold broadly diversified portfolios. It is questionable whether these institutions at all have an incentive to monitor their portfolio firms.
• This study quantifies the incentives of institutional investors to engage with their portfolio companies, both directly in terms of an increase in management fee from portfolio value, as well as indirectly through additional fund flows following positive returns.
• The analysis concludes that a 1% increase in the value of a portfolio firm increases the annual management fees of the average institutional investor by $129,000. This result indicates that most institutions have clear incentives to maximize the value of their portfolio firms through shareholder engagement.

Source:

Lewellen, J. and K. Lewellen (2022). Institutional investors and corporate governance: The incentive to be engaged, Journal of Finance 77(1), 213-264.

The research paper can be obtained here.

Important findings:

• Firms whose operations produce toxic substances face a tradeoff: In case these substances pollute the environment, they might incur a legal liability. On the other hand, preventing pollution requires investment.
• Capital expenses are generally costlier for financially constrained firms having to rely on external sources of financing. Therefore, in expectation, those firms should invest less in abatement measures.
• The quoted study traces this tradeoff empirically. It provides evidence that when an external shock relaxes firms' financial constraints, affected firms subsequently end up investing more into environmental protection measures.

Source:

Xu, Q. and T. Kim (2022). Financial Constraints and Corporate Environmental Policies, Review of Financial Studies 35(2), 576-635.

The research paper can be obtained here.

Important findings:

• The number of US IPOs in in which the issuing firms use dual class share structures has risen rapidly in recent years.
• This rise is due to founders gaining outsize influence in the determination of governance terms for their firms
• The reason for founders' increase in influence seems to be both an increase in the availability of capital (including from private sources such as PE) as well as a decrease in capital requirements for issuing firms, because of technological advances.

Source:

Aggarwal, D., O. Eldar, Y. V. Hochberg, and L. P. Litov (2022). The rise of dual-class stock IPOs, Journal of Financial Economics 144, 122-153.

The research paper can be obtained here.

Important findings:

• The paper introduces a new method to estimate market betas.
• The estimates are more reliable out-of-sample than the regular OLS beta and common alternatives such as the Vasicek beta.
• Compared to the alternatives, the method presented in the paper is more easily implementable and does not require additional data or large amounts of computing power.

Source:

Welch, I. (2021). Simply Better Market Betas. Critical Finance Review, Forthcoming.

The research paper can be obtained here.

Important findings:

• Private Investments in Public Equity (PIPEs) are an important source of financing for small, publicly listed firms in certain markets. In the US, for example, PIPEs have a larger volume than secondary equity offerings in the segment of firms with less than $1b in market cap. A PIPE requires that the pre-emption right of existing shareholders can be suspended, which means PIPEs are more popular in some jurisdiction than others.
• In a PIPE, an investor buys shares directly from a publicly listed firm. On average the investor receives a discount of 11.2% over the prevailing market price. In addition, the investor receives warrants in 40% of PIPEs.
• The shares purchased can usually not be sold right away, because they first need to be registered with the SEC (which happens after 100 days on average) and are usually also illiquid.
• Investors on average achieve an abnormal return of 12.1% in the first year following a PIPE. The distribution of returns is positively skewed (median 1.7%). The reasons for this skewness are the warrants on one hand, and that firms financing themselves through PIPEs are generally in financial distress on the other hand.
• The abnormal returns could be compensation for investing in firms that have few alternatives and that are sometimes highly risky (in those cases, most investors are PE funds and hedge funds, which generally have a high risk tolerance).

Source:

Lim, J., Schwert, M., Weisbach, M. S. (2021). The Economics of PIPEs. Journal of Financial Intermediation 45.

The research paper can be obtained here.

Important findings:

• Initial coin offerings (ICOs) are a blockchain based way to finance an enterprise that rapidly gained in popularity in 2018, and then disappeared again almost as quickly. This paper documents several facts that provide clues as to why the wave of ICOs might have been so short lived.
• The average company funding itself through an ICO is less than two years old, has 11 employees and no revenues. Investments into such early stage companies are generally the domain of specialized angel investors and venture capitalists that perform due diligence and demand numerous protections and control rights. In ICOs, such clauses are generally lacking.
• The average ICO on the other hand has 4700 investors that contribute around $1,200 each. Hence, most participants seem to be retail investors. The average investors sell their allocation only 90 days after the ICO closes, suggesting a very short term, speculative motive.
• Large investors can usually participate at discounted prices during a presale. Many of these presale participants sell their allocation shortly after the end of the ICO in the secondary market, to the detriment of the remaining investors.

Source:

Fahlenbrach, R., Frattaroli, M. (2021). ICO investors. Financial Markets and Portfolio Management.

The research paper can be obtained here.

Important findings:

• This study investigates the investment decision of retail investors using account data from a discount brokerage
• When the fed funds rate declines, retail investors buy more dividend stocks and funds. This effect is stronger for investors that seem to live of portfolio income, and suggests that they see dividends as an alternative income source to certificates of deposit or bonds.
• For investment funds, the effect is mostly observable on share classes for retail investors, whereas share classes for institutions are less affected.
• The increase in demand after an interest rate decline leads to positive risk adjusted returns for dividend titles, which suggests that investors react with a delay and that the market does not fully anticipate their behavior.
• Because the supply of dividend-paying securities can only adjust slowly, their prices rise when interest rates sink. This implies that the costs of capital of mature firms (with stable incomes and few investment opportunities, who generally pay higher dividends) decrease relative to those of growth firms.

Source:

Daniel, K., Garlappi, L., Kairong, X. (2021). Monetary Policy and Reaching for Income. Journal of Finance 76(3), 1145-1193.

The research paper can be obtained here.

Important findings:

• There is uncertainty around future regulation of firms’ carbon emissions. This uncertainty makes it difficult for investors to quantify the impact this regulation should have on firm values.
• The uncertainty around the future regulatory cost of carbon emissions is priced in the option market. Insurance against the downside tail risk of carbon intensive firms is more expensive.

Sources:

Ilhan, E., Sautner, Z., Vilkov, G. (2021). Carbon Tail Risk. The Review of Financial Studies 34(3), 1540–1571.

The research paper can be obtaine here.

• Various studies have recently criticized the number of published investment "factors" that allegedly predict stock returns. These studies allege that a large part of the published factors is a statistical artefact caused by so-called data mining (the repeated performance of many statistical tests followed by the selection of the most significant results).
• This study presents an opposing view by calculating how many statistical tests would have been necessary to discover the published results through sheer chance and repetition.
• It finds that it would take 10,000 researchers, working 8 hours a day, 365 days a year, a full 451 years of statistical testing.
• The study concludes that data mining alone is unlikely to explain the large number of investment factors discovered.

Source:

Chen, A. (2021). The limits of p-hacking: Some thought experiments, The Journal of Finance 74(5), 2447-2480.

The research paper can be obtained here.

• MiFID II forces asset managers to pay separately for research, instead of bundling payments with trading commissions.
• Since MiFID II was introduced, the number of analysts following EU-based firms has decreased by 7.67% relative to US-based firms. This decrease was mostly concentrated in large firms.
• Since the unbundling of research payments from commissions, the quality of research has improved. The average analyst forecasting error has decreased by 18.02%.
• The reason for this decrease in quantity accompanied by an increase in quality is, that MiFID II has made the market for sell-side research more competitive.

Source:

Guo, Y. and L. Mota (2021). Should Information be sold separately? Evidence from MiFID II, Journal of Financial Economics 142(1), 97-126.

The research paper can be obtained here.

• The returns on cryptocurrencies are mostly driven by network effects (e.g., the number of transactions in a currency) and the degree of attention the currency gets from investors
• The production side (cost of electricity and computers) and fundamental values (e.g., the number of users) on the other hand do not have a significant impact
• The returns also exhibit strong time series momentum, i.e. positive returns are generally followed by more positive returns, and negative returns by more negative returns.

Source:

Yukun, L. and A. Tsyvinski (2021). Risks and Returns of Cryptocurrencies, Review of Financial Studies 34(6), 2689-2727.

The research paper can be obtained here.

• Direktinvestitionen in Immobilien sind auf lange Sicht weniger rentabel als bisher gedacht. Über den Zeitraum 1901-1983 findet eine neue Studie reale Nettogesamtrenditen von 2.3% für Wohn- und 4.5% für Gewerbeimmobilien.
• Bei der grossflächigen Messung historischer Immobilienrenditen gab es in der Vergangenheit oft Schwierigkeiten, insbesondere dass die Charakteristika der einzelnen Objekte schwierig messbar sind und Informationen über den realisierten Cash-Flow und angefallene Kosten von Investitionen fehlen.
• Die zitierte Studie basiert auf einem Datensatz von Immobilieninvestitionen vier englischer Universitäten, welcher einen hohen Detaillierungsgrad aufweist und es den Autoren ermöglicht, die genannten Schwierigkeiten zu adressieren.

Quelle:

Chambers, C., C. Spaenjers, and E. Steiner (2021). The Rate of Return on Real Estate: Long-Run Micro-Evidence, Review of Financial Studies 34(8), 3572-3607.

Das Forschungspapier kann hier (eventuell kostenpflichtig) bezogen werden.

• The link between online information availability and stock price crash risk is not obvious. If investors generally face a biased information environment, more information should improve investors' decision making. If internet search leads investors to seek out information confirming their own biases, on the other hand, this information could lead them to overvalue certain stocks.
• The study examines what happened to stock returns on the Chinese market after Google unexpectedly withdrew from China in 2011, thereby reducing investors' access to information.
• After Google's withdrawal, the stock price crash risk for firms investors searched for more previous to the withdrawal increased by 19% compared to less searched-for firms.
• The results imply that internet search helps investors process information, rather than reinforcing a potential confirmation bias.

Source:

Xu, Y., Y. Xuan, and G. Zheng (2021). Internet searching and stock price crash risk: Evidence from a quasi-natural experiment, Journal of Financial Economics 141, 255-275.

The research paper can be obtained here.

• This study investigates what fraction of private and public information is reflected in asset market prices
• The authors interpret evidence from existing experimental studies using a new methodology.
• They find that whereas almost all public information is reflected in asset prices, less than half of private information is. This result speaks in favor of the semi-strong form of the efficient market hypothesis.

Source:

Page, L. and C. Siemroth (2021). How much information is incorporated into financial asset prices? Experimental Evidence, Review of Financial Studies 34(9), 4412-4449.

The research paper can be obtained here.

• The paper develops a Markowitz-type portfolio choice model with investors incorporating ESG scores into their decision making. The results show that investors face a tradeoff between their portfolio's Sharpe Ratio their desired target ESG score.
• The model shows that there is an "ESG efficient frontier": for every attainable ESG score, there is a constrained mean-variance efficient portfolio that delivers the maximum Sharpe ratio. The relationship between the Sharpe ratio and ESG score of mean-variance efficient portfolios follows an inverted U-shape: portfolios with an ESG rating above or below that of the unconstrained mean-variance efficient portfolio have a lower expected Sharpe ratio.
• The model nevertheless suggests that ESG-unaware investors chose portfolios with lower Sharpe Ratios, as ESG scores contain information about assets' risk and return characteristics.
• An investor able take short positions is better off not screening out assets with low ESG scores, as he may short firms with poor ESG scores to finance long positions in firms with high ESG scores.

Source:

Pedersen, L. H., S. Fitzgibbons, and L. Pomorski (2021). Responsible investing: The ESG-efficient frontier, Journal of Financial Economics 142, 572-597.

The research paper can be obtained here.

Important findings:

• This study investigates how retail investors modify their investments in firms after those firms issue press releases regarding ESG topics. For this purpose, the study uses data from Robinhood, a large retail brokerage in the United States.
• The paper finds that retail investors do not react to ESG disclosures. This is in stark contrast to other disclosures, particularly earnings announcements, to which the same investors react strongly.
• The results of this study are at odds with the findings of surveys in laboratory settings, in which individuals state that they view ESG disclosures favorably. In addition, the study shows that retail investors have different preferences than institutional investors when it comes to ESG.

Source:

Moss, A., Naughton, J.P., Wang, C. (2020). The Irrelevance of ESG Disclosures to Retail Investors: Evidence from Robinhood. Working Paper, University of Iowa.

The research paper can be obtained here.

Important findings:

• Investors that are dissatisfied with the environmental practices of their portfolio companies can either choose to divest, or to remain and engage with firm management. This paper finds that the second approach to environmental activism in investment management – engagement – can lead to measurable results.
• This study measures changes in environmental outcomes of firms that become the target of an activist campaign and compares them to those of similar firms that do not.
• Targeted firms, relative to the control group, reduce their releases of toxic materials and greenhouse gases. These results are achieved by means of increased capital expenditures and new abatement initiatives and not by a decrease in production.

Source:

Naaraayanan, S. L., Sachdeva, K., Sharma, V. (2020). The Real Effects of Environmental Activist Investing. ECGI Finance Working Paper No. 743/2021.

The research paper can be obtained here.

Important findings:

• Since 2006, private equity (PE) funds have generated about the same performance as public equity (as measured by the Multiple of Money MoM). Funds run by the top PE firms did not perform substantially better.
• Nevertheless, PE firms have received over $230 billion in performance sensitive compensation (carry) over the same time.
• Overall, this makes PE a very expensive form of financial intermediation under its current compensation structure.

Source:

Phalippou, L. (2020). An Inconvenient Fact: Private Equity Returns and The Billionaire Factory. The Journal of Investing 31(1), 11-39.

The research paper can be obtained here.

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.

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.

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.

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.

Important findings:

• This study analyzes the performance of equity funds managed by the asset management divisions of universal banks.
• Non-bank funds outperform affiliated funds by 92 basis points per year.
• Conflicts of interest are a possible explanation, as the underperformance occurs mainly where equities of bank borrowers are overweighted.
• Affiliated managers thus support bank lending, securing their own careers at the expense of fund investors.

Source:

Ferreira, M. A., Matos, P., & Pires, P. (2018). Asset management within commercial banking groups: International evidence. The Journal of Finance, 73 (5), 2181-2227.

The research paper can be obtained here.

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.

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.

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. (2018). The "Roll Yield" Myth. Financial Analysts Journal 74(2), 41-53.

The research paper can be obtained here.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Quelle:

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Important findings:

• 96% aller Aktien welche seit 1926 in der CRSP Datenbank (umfassendes Universum US-amerikanischer Titel) auftauchen haben schlechter performt als einmonatige Staatsanleihen.
• Im Durchschnitt haben Aktien, wie von der Finanzmarkttheorie vorhergesagt, höhere historische Renditen als Staatsanleihen. Die Verteilung der historischen Renditen unter den einzelnen Aktien ist allerdings stark rechtsschief.
• Diese Rechtsschiefe erklärt weshalb schlecht diversifizierte, aktiv verwaltete Portfolios meist schlechter abschneiden als der Markt.

Source:

Bessembinder, H. (2018). Do stocks outperform treasury bills? Journal of Financial Economics 129, 440-457.

The research paper can be obtained here.

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.

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, 1-15.

The research paper can be obtained here.

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.

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.

Important findings:

• Actively traded smart beta ETFs provide for smarter fund flows.
• This means that fund flows react more sensitively to alphas of multi-factor models and the dominance of the CAPM is weakened.

Source:

Cao, J., Hsu, J. C., Xiao, Z., & Zhan, X. (2017). Smart beta, smarter flows. Unpublished Results.

The research paper can be obtained here.

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.

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.

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.

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.

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.

The research paper can be obtained here.

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.

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.

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.

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.

Souce:

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Quelle:

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.

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.

Quelle:

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Key Findings:

• This research paper describes the systematic risk created by the occurrence of price bubbles and analyzes the impact of this factor on securities prices.
• Using this new approach, the market risk premium as well as market volatility can be better estimated than with existing theoretical models for financial assets.

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 (possibly for a fee) here.

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.

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.

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.

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.

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.

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.

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.

Important findings:

• This research paper presents a new portfolio weighting approach called hierarchical risk parity.
• Compared to classical risk parity, it is much more stable and can handle impure data better.
• Besides, hierarchical risk parity succeeds in reducing portfolio risk compared to classical risk parity.

Source:

Lopez de Prado, M. (2016). Building diversified portfolios that outperform out of sample. The Journal of Portfolio Management, 42 (4), 59-69.

The research paper can be obtained here.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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 hier.

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 hier.

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.

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.

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.

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.

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.

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.

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.

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 obtaine here.

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.

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.

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.

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.

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.