Investing Research Articles

Why do portfolios formed from the principal components of many long-short stock return factors from two recent studies, one covering 207 factors and the other 153 factors (with overlap 97), have such different out-of-sample gross Sharpe ratios? In their November 2022 paper entitled “Factor Returns and Out-of-Sample Alphas: Factor Construction Matters”, Hendrik Bessembinder, Aaron Burt… Keep Reading

Are gains from tax-loss harvesting, the systematic taking of capital losses to offset capital gains, additive to or subtractive from premiums from portfolio tilts toward common factors such as value, size, momentum and volatility (smart beta)? In their October 2014 paper entitled “Factor Tilts after Tax”, Lisa Goldberg and Ran Leshem look at the effects on portfolio performance… Keep Reading

How special is the Fama-French three-factor model (market, size, book-to-market ratio) compared to other possible three-factor models? In their November 2012 paper entitled “Firm Characteristics and Empirical Factor Models: a Data-Mining Experiment”, Leonid Kogan and Mary Tian systematically compare explanatory breadth for all 351 three-factor and 2,925 four-factor (linear) models for predicting stock returns that… Keep Reading

How sensitive are findings about the magnitude and reliability of equity factor premiums to differences in the rules researchers use in sorting stocks to calculate them? In their July 2022 paper entitled “Non-Standard Errors in Portfolio Sorts”, Dominik Walter, Rüdiger Weber and Patrick Weiss examine variations in factor premiums (non-standard errors) due to differences in… Keep Reading

Can diversification across economic states improve portfolio performance? In their November 2020 paper entitled “Investing Through a Macro Factor Lens”, Harald Lohre, Robert Hixon, Jay Raol, Alexander Swade, Hua Tao and Scott Wolle study interactions between three economic “factors” (growth, defensive/U.S. Treasuries and inflation) and portfolio building blocks (asset classes and conventional factor portfolios). Their… Keep Reading

Does duration (relative arrival sequence) of firm cash flows explain many widely accepted equity factor returns? In their April 2019 paper entitled “Duration-Driven Returns”, Niels Gormsen and Eben Lazarus investigate whether firm cash flow duration explains value, profitability, investment, low risk, idiosyncratic volatility and payout factor returns. They measure cash flow duration monthly via multiple… Keep Reading

What is the best way to construct equity multifactor portfolios? In the November 2018 revision of their paper entitled “Equity Multi-Factor Approaches: Sum of Factors vs. Multi-Factor Ranking”, Farouk Jivraj, David Haefliger, Zein Khan and Benedict Redmond compare two approaches for forming long-only equity multifactor portfolios. They first specify ranking rules for four equity factors: value, momentum, low volatility… Keep Reading

How should investors reposition portfolios across inflationary regimes (deflation, low inflation, mild inflation, high inflation)? In their July 2022, paper entitled “Investing in Deflation, Inflation, and Stagflation Regimes”, Guido Baltussen, Laurens Swinkels and Pim van Vliet examine asset class and factor returns across inflationary regimes. They first construct long monthly return histories for asset classes… Keep Reading

Several recent papers find that most studies identifying factors that predict stock returns are not replicable or derive from snooping of many factors. Is there a good counter-argument? In their January 2021 paper entitled “Is There a Replication Crisis in Finance?”, Theis Ingerslev Jensen, Bryan Kelly and Lasse Pedersen apply a Bayesian model of factor… Keep Reading

Do stocks entering (exiting) factor indexes experience a price jump (drop) due to increased (decreased) demand? In their October 2016 paper entitled “Price Response to Factor Index Decompositions”, Joop Huij and Georgi Kyosev examine price impacts for stocks entering and exiting MSCI Minimum Volatility factor indexes covering U.S., European, global and emerging markets. To isolate the factor index effect,… Keep Reading