Investing Research Articles

How much difference does it make to calculate mutual fund alphas with exchange-traded funds (ETF) rather than ideal (frictionless) indexes/factors? In their November 2012 paper entitled “Mutual Fund’s Net Economic Alpha: Definition and Evidence” Sharon Garyn-Tal and Beni Lauterbach investigate how benchmarking mutual funds with ETFs differs from traditional benchmarking with ideal performance models based… Keep Reading

Does adding profitability (see “Gross Profitability as a Stock Return Predictor”) to the Fama-French three-factor model of future stock returns result in a better model? In the June 2013 draft of their paper entitled “A Four-Factor Model for the Size, Value, and Profitability Patterns in Stock Returns”, Eugene Fama and Kenneth French examine whether profitability usefully augments their three-factor model. They… Keep Reading

What are the trading behaviors of the best-performing hedge funds? In his June 2013 paper entitled “How do Hedge Fund ‘Stars’ Create Value? Evidence from Their Daily Trades”, Russell Jame uses transaction-level data to investigate the magnitude and source of hedge fund equity trading profits. His sample includes name, equity trade dates (but not non-equity trades,… Keep Reading

What initial retirement portfolio withdrawal rate is sustainable over long horizons when, as currently, bond yields are well below and stock market valuations well above historical averages? In their June 2013 paper entitled “Asset Valuations and Safe Portfolio Withdrawal Rates”, David Blanchett, Michael Finke and Wade Pfau apply predictions of bond yields and stock market… Keep Reading

Do country economic fundamentals provide exploitable information about future changes in associated currency exchange rates? In the June 2013 version of their paper entitled “Currency Risk Premia and Macro Fundamentals”, Lukas Menkhoff, Lucio Sarno, Maik Schmeling and Andreas Schrimpf investigate the usefulness of economic fundamentals in currency trading by measuring the performance of multi-currency hedge… Keep Reading

How can investors capture returns from widely accepted risk factors associated with asset classes and subclasses? In the June 2013 version of his book chapter entitled “Factor Investing”, Andrew Ang provides advice on capturing risk premiums associated with factors such as value, momentum, illiquidity, credit risk and volatility risk. Based on the body of research,… Keep Reading

What do records of actual positions suggest about commodity futures trading success? In the June 2013 version of their paper entitled “Determinants of Trader Profits in Commodity Futures Markets”, Michaël Dewally, Louis Ederington and Chitru Fernando examine actual daily closing positions of energy futures traders to determine how profitability relates to differences in risk taking,… Keep Reading

A subscriber inquired whether the level of momentum (past return) for each asset in the “Momentum Strategy” indicates the level of future return for that asset, and whether extreme negative momentum supports shorting an asset. In other words, do each of these asset class proxies exhibit reliably exploitable intrinsic momentum? To investigate, we regress next-month return versus… Keep Reading

How does central bank quantitative easing (QE) affect various financial markets? In the May 2013 preliminary and incomplete version of his paper entitled “The Time Horizon of Price Responses to Quantitative Easing”, Harry Mamaysky investigates how U.S. Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) QE announcements affect the prices of… Keep Reading

Reversion-to-trend appears to hold in many financial markets. Is this concept exploitable for country stock markets? In their June 2013 paper entitled “Do ‘Dogs of the World’ Bark or Bite? Evaluating a Mean-Reversion-Based Investment Strategy”, David Smith and Vladimir Pantilei test a simple “Dogs of the World” strategy designed to exploit long-term reversion across the 45… Keep Reading