Professor Robert Shiller’s work and his famous CAPE (cyclically-adjusted price-to-earnings) ratio is well known among the investment community. His methodology for assessing a valuation of the U.S. equity market is not the first one but is surely the most cited and the most discussed. There are numerous papers that tweak or adjust Shiller’s methodology to assess better if U.S. equities are under- or over-valued. We recommend the work of Wang, Ahluwalia, Aliaga-Diaz, and Davis (all from The Vanguard Group ) in which they use a combination of machine learning and a regression-based approach to obtain forecasted CAPE ratio, and subsequently, U.S. stock market returns, more accurately.

Authors: Wang, Ahluwalia, Aliaga-Diaz, Davis

Title: The Best of Both Worlds: Forecasting US Equity Market Returns using a Hybrid Machine Learning – Time Series Approach

As we have promised in our previous blog, it’s time to take a look at our Premium offering. What’s new and what we have accomplished so far?

The end of the year is a good time for a short recapitulation. Apart from other things we do (which we will summarize in our next blog in a few days), we have published around 50 short blog posts / recherches of academic papers on this blog during the last year. We want to use this opportunity to summarize 10 of them, which were the most popular (based on Google Analytics tool). Maybe you will be able to find something you have not read yet …

Trend-following funds and strategies were extremely popular after the 2008/2009 crisis. They offered attractive performance, and diversification properties made them a nice addition to investor’s portfolios. Ten years later, “trend-following strategy” is not such a popular word. Strategies didn’t blow-up, but their performance was far from spectacular. What are the main reasons for that? Is it an increased correlation among markets? Are trend rules inefficient? An important recent academic study written by Babu, Hoffman, Levine, Ooi, Schroeder, and Stamelos (all from AQR Capital Management) analyzes trend-following performance for each decade in the last 140 years and uses three distinct factors: the magnitude of market moves, the efficacy of trend-following strategies at capturing profitability from market moves, and the degree of diversification across trends in a trend-following portfolio. They show that it’s the first factor (a lack of large risk-adjusted market moves, positive or negative) that had the biggest impact in the last decade. This suggests that trend-following strategies should be able to deliver better performance in the future if the size of the market moves reverts to levels more consistent with the long-term historical distribution of returns…

Authors: Babu, Hoffman, Levine, Ooi, Schroeder, and Stamelos

Title: You Can’t Always Trend When You Want

ESG Investing (sometimes called Socially Responsible Investing) is becoming a current trend, and its proponents characterize it as a modern, sustainable, and responsible way of investing. Some people love it, others see it as just another fad that will soon be forgotten. We at Quantpedia have decided to immerse in academic research related to this trend to understand it better. How are ESG scores measured? What are the common problems in ESG data? Are there any systematic ESG factor strategies that offer outperformance? These are some of the areas we wanted to explore, and we invite you on this journey with us …