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An Analysis of Volatility Clustering of Equity Factor Strategies

8.April 2021

Volatility clustering is a well-known effect in equity markets. In simple meaning, volatility clustering refers to a tendency of large changes in asset prices to follow large changes and small changes in asset prices to follow small changes. This interesting effect can be sometimes uncovered as one of the reasons for the functionality of some selected trading strategies. For example, low-volatility months in stock indexes (like the S&P 500 Index) are usually also months with higher performance. As volatility tends to cluster, a low volatility month in the present can signal a low volatility month with a better performance also in the future.

Based on this, we will be testing two hypotheses: (1) firstly, if there is a volatility clustering anomaly present in equity factor strategies; (2) secondly, if there is any performance pattern related to volatility.

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An Investigation of R&D Risk Premium Strategies

19.March 2021

The R&D investments represent a company’s unique expenditure, which is responsible for creating an information asymmetry about the firm’s growth potential and future prospects. In a case when market value reflects only the firm’s financial statements without taking the long-term benefits of R&D investments into consideration, the company’s stocks may be underpriced. On the other hand, the firm’s stock prices may also face overpricing. This might happen in a case when the investors judge the possible future outcomes of current R&D investment based on the past firm’s R&D success, which is not a guarantee by any means.

So, is there a premium among firms with intensive expenditures on R&D or not? If so, does R&D expenditures represent a robust risk factor, or are there any other hidden economic forces that could explain the R&D premium? This article has tried to answer these questions by revisiting and expanding the three previously conducted research papers on R&D premium.

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Retail Investment Boom, Robinhood, Passive Investing and Market Inelasticity

This week’s blog is unique compared to our previous posts. We have identified two papers that are connected, each with interesting findings and implications. One of today’s leading topics is the Robinhood platform, but not from the point of view of recent short squeezes and speculations. The Robinhood can be an interesting insight into retail investing and implications for the market. Research suggests that despite the very low share of retail investors, their power is significantly high. This seems to be caused by the inelastic market, which passive investing contributes to. Therefore, inelasticity is another crucial point.

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The Active vs Passive: Smart Factors, Market Portfolio or Both?

11.December 2020

While there may be debates about passive and active investing, and even blogs about the numbers of active funds that were outperformed by the market, the history taught us that the outperformance of active or passive investing is cyclical. As a proxy for the active investing, the new Quantpedia’s research paper examines factor strategies and their smart allocation using fast or slow time-series momentum signals, the relative weights based on the strength of the signals and even blending the signals. While the performance can be significantly improved, using those smart approaches, the factors still got beaten by the market in both US and EAFE sample. However, the passive approach did not show to be superior. The factor strategies and market are significantly negatively correlated and impressively complement each other. The combined Smart Factors and market portfolio vastly outperforms both factors and market throughout the sample in both markets. With the combined approach, the ever-present market falls can be at least mitigated or profitable thanks to the factors.

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Can Analysts Predict Performance of the US and International Stocks?

12.November 2020

Analysts recommendations are quite puzzling topic among both practitioners and academics as well. The most important question related to the analysts is straightforward: what is the value of their recommendations? The research paper of Azvedo and Müller (2020) brings light on this topic, but also explores the relation of analysts recommendations and market anomalies. In line with other literature, it seems that the recommendations are significantly more valuable in international markets compared to the US market. While the prediction ability of analysts is not present in the US market, less developed markets and markets with higher limits-to-arbitrage are connected with valuable recommendations. Secondly, using around 200 cross-sectional anomalies, authors show that analysts are more lined up with anomaly-based composite mispricing measures in international markets. Therefore, there is not a bias from analysts to recommend overvalued stocks in global markets compared to the well-developed US market. We highlight several results and tables, but the paper is full of impressive results, ideas and tables. Therefore, we invite you to read this blog post as well as the source research paper.

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Resurrecting the Value Premium

8.October 2020

Nowadays, the value factor is a hot topic among practitioners and researchers as well. It is commonly known that equity factors have a cyclical performance, but many argue that value underperforms for too long. Therefore, many say that the classical HML value factor of Fama and French is dead. On the other hand, there is an emerging amount of research papers that study the value investing with an aim to make some alterations that would result in a profitable factor as the classic B/M ratio looks like it’s not a sensible value factor anymore. This branch of literature was recently enriched by novel research of Blitz and Hanauer (2020). By including more value metrics, altering the investment universe and applying basic risk management techniques, value strategy can become profitable in the long term. Although the modification is sensible, it stills suffer in a recent period. Only time will tell whether the novel resurrected value factors would emerge again as many times in the past…

Authors: David Blitz and Matthias X. Hanauer

Title: Resurrecting the Value Premium

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