Choosing the correct portfolio-construction techniques is very important. The new paper that is written by Amar Soebhag, Bart van Vliet, and Patrick Verwijmeren explores the various ways in which different design choices in portfolio construction can, either intentionally or unintentionally, influence and distort the statistical results of a market factor’s research. Their takeaway is that seemingly small differences in design can significantly impact the resultant portfolio’s performance.

The size effect assumes a negative relationship between average stock returns and firm size. In other words, it states that low capitalization stocks outperform stocks with large capitalization. Although generally accepted, the size effect keeps being challenged. Researchers have been asking how important the firm size characteristic actually is, and whether it is possible to replace the traditional size factor of Fama and French asset pricing model (1993) with more accurate factor. Recently, one potential challenger has emerged – so-called takeover factor, employed by Easterwood et al. (2022). In their study, they work on the assumption that small firms are often targets of takeovers, which gives us a different perspective on merger and acquisition news in regards to size effect. Their results show that M&A component of average returns explains the size premium entirely.

Hello all,

What have we accomplished in the last month?

– A new Screener for external strategy contributors, with 43 new factors and 2 new factor providers
– 8 new Quantpedia Premium strategies have been added to our database
– 20 new related research papers have been included in existing Premium strategies during the last month
– Additionally, we have produced 9 new backtests written in QuantConnect code
– And finally, 3+2 new blog posts that you may find interesting have been published on our Quantpedia blog in the previous month

Every year, Quantpedia’s team investigates thousands of academic research papers to bring you the most promising ideas from the academic world. We read papers, identify ideas and backtest them to build our unique database. As a result, we have already identified hundreds of factors and built tools to help you orient better in the broad universe of trading strategies and systematic investment factors.

And now, we are opening the possibility to all external researchers, quants, and portfolio managers to contribute to Quantpedia.

The summer is slowly approaching; therefore, our new article will be on a little lighter tone. We will examine a research paper on a periodic event with sentiment implications. The authors (Abudy, Mugerman, Shust) focused on a specific song competition – the Eurovision Song Contest, an international song competition organized annually. They examined a positive swing in investor mood in the winning country the day after the Eurovision Song Contest and documented an average abnormal return of 0.381%. On the contrary, they did not find any negative sentiment in other participating countries.