Factor allocation

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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A Robust Approach to Multi-Factor Regression Analysis

24.February 2021

Practitioners widely use asset pricing models such as CAPM or Fama French models to identify relationships between their portfolios and common factors. Moreover, each asset class has some widely-recognized asset pricing model, from equities through commodities to even cryptocurrencies. 

However, which model can we use if our portfolio is complex and consists of many asset classes? Which factors should we include and which should we omit? (Especially if we have a database that consists of several hundreds of potential factors). Additionally, we know that equities influence bonds, commodities influence equities and vice versa. Hence the question, what about the cross-asset relationships? 

These are the problems and questions we faced when looking for a methodology for our Multi-Factor Analysis report in the Quantpedia Pro platform. This blog post aims to introduce the model, its logic and the method we have decided to use. 

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Basic Properties of Various Real Asset Portfolios

5.February 2021

Do not put all your eggs in one basket is a common phrase that resonates among investors worldwide. The errand of such a famous saying is simple, diversify! However, how to diversify, if in the crisis, everything seems to be highly correlated? Last week, we wrote a blog about the Macro Factor Risk Parity, but it certainly is not the only option. Real assets such as REITs, various commodities, and the ever-popular gold are commonly added into portfolios as diversifiers. However, Parikh and Zhan (2019) research examine a much bigger set of real assets than the aforementioned evergreens. Real assets like Timberland, Farmland, Infrastructure, Natural Resources and many others are presented in the paper. All those assets have different sensitivities to inflation, GDP growth, equities or bonds. Therefore, real assets could have a value in the portfolios to protect an investor from inflation, stagnation, or simply distributing the eggs mentioned above in many baskets. All these strategies are presented in the paper and compared to equities, bonds and traditional 60/40. 

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