Investing Research Articles

How effective is investor sentiment in predicting stock market returns? In his October 2017 paper entitled “Measuring Investor Sentiment”, Guofu Zhou reviews various measures of equity-oriented investor sentiment based on U.S. market, survey and media data. He highlights the Baker-Wurgler Index (the most widely used), which is based on the first principal component of six sentiment inputs: (1)… Keep Reading

Are there stock return forecasts good enough to make mean-variance optimization work as a stock portfolio allocation strategy? In their October 2017 paper entitled “Mean-Variance Optimization Using Forward-Looking Return Estimates”, Patrick Bielstein and Matthias Hanauer test whether firm implied cost of capital (ICC) based on analyst earnings forecasts is effective as a stock return forecast for… Keep Reading

What is the best way to tackle multi-class, multi-factor investing? In their August 2017 paper entitled “Investing in a Multi-Asset Multi-Factor World”, Alexandar Cherkezov, Harald Lohre, Sergey Protchenko and Jay Raol investigate the use of factor investing across multiple asset classes. They define several factors for each of four asset classes, as follows: Equities (individual stocks for developed and… Keep Reading

What makes momentum investing tick? In their September 2017 paper entitled “Understanding the Momentum Risk Premium: An In-Depth Journey Through Trend-Following Strategies”, Paul Jusselin, Edmond Lezmi, Hassan Malongo, Côme Masselin, Thierry Roncalli and Tung-Lam Dao present a theoretical analysis of the momentum risk premium. They assume that asset prices generally exhibit geometric Brownian motion (randomness) with constant volatility, but with a time-varying trend. They… Keep Reading

Should retirement portfolios include an allocation to managed futures? In his October 2017 paper entitled “Using Trend-Following Managed Futures to Increase Expected Withdrawal Rates”, Andrew Miller compares seven 30-year retirement scenarios via backtests and modified backtests. Specifically, he compares maximum annual real withdrawal rates as a percentage of initial assets that do not exhaust any 30-year retirement… Keep Reading

Does relative demand for call and put options on individual stocks, as measured by average difference in implied volatilities of at-the-money calls and puts (aggregate implied volatility spread), predict stock market returns? In their September 2017 paper entitled “Aggregate Implied Volatility Spread and Stock Market Returns”, Bing Han and Gang Li test aggregate implied volatility spread as… Keep Reading

Is it better to build equity multifactor portfolios by holding distinct single-factor sub-portfolios, or by picking only stocks that satisfy multiple factor criteria? In their September 2017 paper entitled “Smart Beta Multi-Factor Construction Methodology: Mixing vs. Integrating”, Tzee-man Chow, Feifei Li and Yoseop Shim compare long-only multifactor portfolios constructed in two ways: Integrated – each quarter, pick the 20%… Keep Reading

How efficiently do mutual funds capture factor premiums? In their April 2017 paper entitled “The Incredible Shrinking Factor Return”, Robert Arnott, Vitali Kalesnik and Lillian Wu investigate whether factor tilts employed by mutual fund managers deliver the alpha found in empirical research. They focus on four factors most widely used by mutual fund managers: market, size, value and momentum…. Keep Reading

Which equity factors have high and low expected returns? In their February 2017 paper entitled “Forecasting Factor and Smart Beta Returns (Hint: History Is Worse than Useless)”, Robert Arnott, Noah Beck and Vitali Kalesnik evaluate attractiveness of eight widely used stock factors. They measure alpha for each factor conventionally via a portfolio that is long (short)… Keep Reading

How should factor-based (style) investors proceed after picking a factor to exploit? In their September 2017 paper entitled “Craftsmanship Alpha: An Application to Style Investing”, Ronen Israel, Sarah Jiang and Adrienne Ross survey style portfolio implementation options. They start with a brief discussion of style portfolios types and then focus on portfolio design and implementation. They note trade-offs associated… Keep Reading