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Latest Market Research Articles

Volatility Risk Premium an Exploitable Stock Market Predictor?

Does the U.S. stock market volatility risk premium (VRP), measured as the difference between the volatility implied by stock index option prices recent actual index volatility, usefully predict stock market returns? To investigate, we consider a simple VRP specification: S&P 500 Implied Volatility Index (VIX) minus standard deviation of daily S&P 500 Index returns over the past 21 trading days. Since VIX is an annualized percentage, we annualize actual daily volatility by multiplying by the square root of 252. We then relate this simple VRP to future S&P 500 Index returns and apply a VRP-related signal to time SPDR S&P 500 (SPY). Using daily data for the S&P 500 Index since December 1989, VIX since January 1990, and SPY and 13-week U.S. Treasury bills (T-bill) since the end of January 1993, all through April 2016, we find that: Keep Reading

Weekly Summary of Research Findings: 5/23/16 – 5/27/16

Below is a weekly summary of our research findings for 5/23/16 through 5/27/16. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs.

Subscribers: To receive these weekly digests via email, click here to sign up for our mailing list. Keep Reading

SACEMS-SACEVS Mutual Diversification

Are the “Simple Asset Class ETF Value Strategy” (SACEVS) and the “Simple Asset Class ETF Momentum Strategy” (SACEMS) mutually diversifying. To check, we relate monthly returns for the SACEVS and the SACEMS exchange-traded fund (ETF) selections and look at the performance of an equally weighted portfolio of the two strategies, rebalanced monthly (50-50). Specifically, we consider: SACEVS Best Value paired with SACEMS Top 1; and, SACEVS Weighted paired with SACEMS Equally Weighted (EW) Top 3. Using monthly gross returns for SACEVS Best Value and SACEMS Top 1 since January 2003 and for SACEVS Weighted and SACEMS EW Top 3 since July 2006, all through April 2016, we find that: Keep Reading


What happens if we extend the “Simple Asset Class ETF Value Strategy” (SACEVS) with a real estate risk premium, derived from the yield on equity Real Estate Investment Trusts (REIT), represented by the FTSE NAREIT Equity REITs Index? To investigate, we apply the SACEVS methodology to the following four asset class exchange-traded funds (ETF), plus cash:

3-month Treasury bills (Cash)
iShares 7-10 Year Treasury Bond (IEF)
iShares iBoxx $ Investment Grade Corporate Bond (LQD)
SPDR S&P 500 (SPY)

This set of ETFs relates to four factor risk premiums: (1) the difference in yields between Treasury bills and Treasury notes/bonds indicates the term risk premium; (2) the difference in yields between corporate bonds and Treasury notes/bonds indicates the credit (default) risk premium; (3) the difference in yields between equity REITs and Treasury notes/bonds indicates the real estate risk premium; and, (4) the difference in yields between equities and Treasury notes/bonds indicates the equity risk premium. We consider two alternative strategies for exploiting premium undervaluation: Best Value, which picks the most undervalued premium; and, Weighted, which weights all undervalued premiums according to degree of undervaluation. Based on the assets considered, the principal benchmark is a monthly rebalanced portfolio of 60% stocks and 40% U.S. Treasury notes (60-40 SPY-IEF). Using lagged quarterly S&P 500 earnings, end-of-month S&P 500 Index levels and end-of-month yields for the 3-month Constant Maturity U.S. Treasury bill (T-bill), the 10-year Constant Maturity U.S. Treasury note (T-note), Moody’s Seasoned Baa Corporate Bonds and FTSE NAREIT Equity REITs Index during March 1989 through April 2016 (limited by availability of earnings data), and daily dividend-adjusted closing prices for the above four asset class ETFs during July 2002 through April 2016 (166 months, limited by availability of IEF and LQD), we find that: Keep Reading

Expert Estimates of 2016 Country Equity Risk Premiums

What are current estimates of annual premiums over risk-free rates demanded in each country by equity investors (equity risk premium, or ERP)? In their May 2016 paper entitled “Market Risk Premium Used in 71 Countries in 2016: A Survey with 6,932 Answers”, Pablo Fernandez, Alberto Ortiz and Isabel Acin summarize results of an April 2016 email survey of international finance/economic professors, analysts and company managers “about the Market Risk Premium (MRP) or Equity Premium used to calculate the required return to equity in different countries.” Based on 6,734 specific and credible responses spanning 71 countries (with at least eight such responses), they find that: Keep Reading

Stock Returns Around Memorial Day

Does the Memorial Day holiday signal any unusual U.S. stock market return effects? By its definition, this holiday brings with it any effects from three-day weekends and sometimes the turn of the month. Prior to 1971, the U.S. celebrated Memorial Day on May 30. Effective in 1971, Memorial Day became the last Monday in May. To investigate the possibility of short-term effects on stock market returns around Memorial Day, we analyze the historical behavior of the stock market during the three trading days before and the three trading days after the holiday. Using daily closing levels of the S&P 500 Index for 1950 through 2015 (66 observations), we find that: Keep Reading

Asset Class Momentum Interaction with Market Volatility

Subscribers have proposed that asset class momentum effects should accelerate (shorter optimal ranking interval) when markets are in turmoil (bear market/high volatility). “Asset Class Momentum Faster During Bear Markets?” addresses this hypothesis in a multi-class, relative momentum environment. Another approach is to evaluate the relationship between time series (intrinsic or absolute) momentum and volatility. Applied to the S&P 500 Index and the S&P 500 Implied Volatility Index (VIX), this alternative offers a longer sample period less dominated by the 2008-2009 equity market crash. Specifically, we examine monthly correlations between S&P 500 Index return over the past 1 to 12 months with next-month return to measure strength of time series momentum (positive correlations) or reversal (negative correlations). We compare correlations by ranked fifth (quintile) of VIX at the end of the past return measurement interval to determine (in-sample) optimal time series momentum measurement intervals for different ranges of VIX. We also test whether: (1) monthly change in VIX affects time series momentum for the S&P 500 Index; and, (2) VIX level affects time series momentum for another asset class (spot gold). Using monthly S&P 500 Index levels and spot gold prices since January 1989 and monthly VIX levels since inception in January 1990, all through April 2016, we find that: Keep Reading

Weekly Summary of Research Findings: 5/16/16 – 5/20/16

Below is a weekly summary of our research findings for 5/16/16 through 5/20/16. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs.

Subscribers: To receive these weekly digests via email, click here to sign up for our mailing list. Keep Reading

Continue to archive for older articles

Editor Archive Picks

Comparison of Variable Retirement Spending Strategies

…ifficult to compare. Spending that fluctuates with portfolio returns between a floor and a ceiling supports an initial spending rate of 3.29%. This strategy is generally a little more efficient than the baseline in consuming wealth, but terminal wealth can still more than double with good market returns. Spending that increases faster than inflation when portfolio value rises but decreases when the portfolio value falls supports an initial…

Long-term Investors: Focus on Terminal Wealth?

…erminal wealth to standard deviation of annual returns is lower for stocks than government bonds in the U.S., the World market and nearly all of the other countries for all three holding intervals. The ratio of mean terminal wealth to standard deviation of terminal wealths for a specified holding interval is higher for stocks than government bonds in the U.S., the World market and many other countries for 20‐year and 30‐year holding intervals,…

Investors as Social (Relative Wealth) Climbers

Are investors/traders motivated primarily by absolute wealth or relative wealth? Is outperforming peers a strong motivation? In the February 2007 draft of his paper entitled “Why Risk is Not Related to Return”, Eric Falkenstein examines evidence for and implications of relative wealth as the principal motivator of investors. Using a wide range of examples, he argues that: Directly measured risk seldom relates positively to average…

Achilles’ Heel of Pre-determined Lifecycle Funds?

…strategy outperforms the pre-determined strategy in 75 -80% of cases, with higher mean and median wealth outcomes. The only cases for which the pre-determined strategy beats the dynamic strategy are those in the bottom 5% of wealth outcomes. The mean wealth outcome for 100% stocks is higher than that for both the pre-determined and dynamic lifecycle strategies. The median wealth outcome for 100% stocks is is higher than that for the…

Small and Value Stocks Less Risky for Long-term Investors?

…f terminal wealths by style. Median (midpoint) of terminal wealths by style. Average of the standard deviations of annual returns (SDD) by style. Standard deviation of the terminal wealths (SDE) by style. Lower‐tail Terminal Wealth (LTWx), the average terminal wealth in the lower x% of the distribution of terminal wealths (with x% being 1%, 5% or 10%) by style. Upper‐tail Terminal Wealth (UTWx), the average terminal wealth in the upper x% of the…

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Current Momentum Winners

ETF Momentum Signal
for May 2016 (Final)

Winner ETF

Second Place ETF

Third Place ETF

Gross Compound Annual Growth Rates
(Since August 2006)
Top 1 ETF Top 2 ETFs
11.3% 11.5%
Top 3 ETFs SPY
12.4% 7.2%
Strategy Overview
Current Value Allocations

ETF Value Signal
for May 2016 (Final)





The asset with the highest allocation is the holding of the Best Value strategy.
Gross Compound Annual Growth Rates
(Since September 2002)
Best Value Weighted 60-40
12.7% 9.8% 7.8%
Strategy Overview
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