Two of the most-well-known factors that help explain stock returns are the value effect (where equities with lower prices relative to metrics—such as book value, earnings, cash flow, sales and dividends—tend to outperform the equities with higher prices relative to those metrics), and the momentum effect (where assets that have outperformed in the recent past…
As I write this on Aug. 10, despite all the economic problems facing investors (such as Greece, the slowing Chinese economy, a bear market in Chinese stocks, the collapse in commodity prices and Puerto Rico’s default), the VIX index, a measure of the market’s expectation of 30-day volatility, had closed above 14 only once since…
It’s not as if investors didn’t already have enough to worry about with the Greek crisis, Puerto Rico’s default, the Iranian nuclear agreement, ISIS, the Fed ending its zero-interest-rate policy in the near future, and gurus such as GMO’s Jeremy Grantham proclaiming that the market is vastly overvalued based on the Shiller CAPE 10 ratio….
Slightly more than a decade ago, several studies were published raising the possibility that an allocation to commodities (in the shape of fully collateralized futures) could improve the efficiency of a portfolio due to the diversification benefit (the low to negative correlation of commodities to both stocks and nominal bonds) provided through including this asset…
In my role as director of research for The BAM Alliance, a community of more than 140 registered investment advisor firms, I’m frequently asked both by clients and other advisors to address the issues raised by market “gurus” who make forecasts in the financial media. These forecasts often create anxiety, so investors naturally ask whether…
The success of the carry trade strategy has led to its widespread proliferation, despite the fact that it contradicts economic theory. In short, this strategy involves borrowing (going short) a currency with a relatively low interest rate and using the proceeds to purchase (going long) a currency yielding a higher interest rate, capturing the interest…
Research into the determinants of fixed-income returns have found that a number of stock and bond market risk factors can be shown to demonstrate explanatory power beyond the standard term-structure variables. Ivelina Pavlova, Ann Marie Hibbert, Joel Barber and Krishnan Dandapani—authors of the paper “Credit Spreads and Regime Shifts,” which appears in the Summer 2015…
In their groundbreaking paper, “Digesting Anomalies: An Investment Approach,” Kewei Hou, Chen Xue and Lu Zhang proposed a new four-factor asset pricing model that goes a long way toward explaining many of the anomalies neither the Fama-French three-factor nor subsequent four-factor models could explain. The study, which was published in the March 2015 issue of…
Richard Thaler, a professor of behavioral science and economics at the University of Chicago Booth School of Business, is widely considered one of behavioral finance’s founding fathers (along with Daniel Kahneman and Amos Tversky). His excellent new book, “Misbehaving,” is partly a history of how the field of behavioral finance originated and developed, despite hurdles…
Regular readers of my books and articles are likely well aware that I’m a big fan of the field of behavioral finance. In fact, I try to read everything I can on the subject. The first half of my book, “Investment Mistakes Even Smart Investors Make and How to Avoid Them,” discusses many of the…
The first half of 2015 again brought hedge funds little in the way of relief from their historically poor performance. Hedge funds entered 2015 coming off their sixth-straight year of trailing U.S. stocks by significant margins. And for the 10-year period from 2005 through 2014—which includes the worst bear market in the post-Depression era—the HFRX…
Investors certainly have enough to worry about these days. In addition to concerns about the Greek crisis itself, a lot of investors are worried about the risk of it spreading. Greece did indeed default on its International Monetary Fund (IMF) loan, but has since repaid it with the new rescue package it received. Many of…
Even though financial theory has long held that dividend policy should be irrelevant to stock returns, there has been a rush in recent years to invest in dividend-paying stocks. This trend has been fueled both by media hype and the current regime of interest rates, which are well below historical averages. The low yields on…
Over the past decade, structured investment products, also known as equity- or index-linked notes, have become increasingly common in the portfolios of retail investors. In 2013 alone, more than $40 billion in structured notes were issued. And this is not just a U.S. phenomenon. A 2009 study by Marc Rieger and Thorsten Hens found that…
One of the more popular strategies pursued by hedge funds is the currency carry trade. The strategy involves borrowing (going short) a currency with a relatively low interest rate and then using the proceeds to purchase (going long) a currency yielding a higher interest rate, thus capturing the interest differential. The strategy can be “enhanced”…