Factor investing

Momentum Explains a Bunch Of Equity Factors

10.October 2019

Financial academics have described so many equity factors that the whole universe of them is sometimes called “factor zoo”. Therefore, it is no surprise that there is a quest within an academic community to bring some order into this chaos. An interesting research paper written by Favilukis and Zhang suggests explaining a lot of equity factors with momentum anomaly. They show that very often, up to 50% of the equity factor returns can be linked to returns of momentum strategy. This link is especially prevalent in short legs of equity factors.

Authors: Favilukis, Zhang

Title: One Anomaly to Explain Them All

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Continuous Futures Contracts Methodology for Backtesting

3.October 2019

No doubt, the correct datasets are the key when one does some analysis in the financial markets. Nowadays, futures contracts are widely spread and popular among practitioners. However, each delivery month is connected with a different price where the price of the underlying asset should stand at a given date in the future (the expiration date). The industry standard for backtesting futures strategies is to construct one data sequence from a stream of contracts. Our short article shows the importance of choosing the correct methodology for building continuous futures contracts data series…

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Commodity Futures Predict Stock Market Returns

11.September 2019

Commodities are an essential exporting asset for a lot of countries around the world. Therefore, it is not surprising that the stock market returns of some emerging market countries are dependent on the returns of those commodities. What is more striking is that commodities do not forecast equity returns for only those few small exporting countries. Academic research paper written by Alves & Szymanowska shows that commodity futures returns predict stock market returns in 65 out of 70 countries and macroeconomic fundamentals in 62 countries. That is looking like an idea worth dig into …

Authors: Alves, Szymanowska

Title: The Information Content of Commodity Futures Markets

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Media Attention and the Low Volatility Effect

18.August 2019

The low volatility factor is a well-known example of a stock trading strategy that contradicts the classical CAPM model. A lot of researchers are trying to come up with an explanation for driving forces behind the volatility effect. One such popular explanation is the ‘attention-grabbing’ hypothesis – which suggests that low-volatility stocks are ‘boring’ and therefore require a premium relative to ‘glittering’ stocks that receive a lot of investor attention. Research paper written by Blitz, Huisman, Swinkels and van Vliet tests this theory and concludes that ‘attention-grabbing’ hypothesis can't be used to explain outperformance of low volatility stocks.

Related to: #7 – Low Volatility Factor Effect in Stocks

Authors: Blitz, Huisman, Swinkels, van Vliet

Title: Media Attention and the Volatility Effect

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Metcalfe’s Law in Bitcoin

12.August 2019

Cryptocurrencies are a new asset class, and researchers have just started to understand better fundamental forces which are behind their price action. A new research paper shows that Bitcoin’s price can be modeled by Metcalfe’s Law. Bitcoin (and other cryptocurrencies) are in this characteristic very similar to Facebook as their value depends on the number of active users – network size

Authors: Peterson

Title: Bitcoin Spreads Like a Virus

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Three New Insights from Academic Research Related to Equity Momentum Strategy

4.August 2019

What are the main insights?

– The momentum spread (the difference of the formation-period recent 6-month returns between winners and losers) negatively predicts future momentum profit in the long-term (but not in the following month), the negative predictability is mainly driven by the old momentum spread (old momentum stocks are based on whether a stock has been identified as a momentum stock for more than three months)

– The momentum profits based on total stock returns can be decomposed into three components: a long-term average alpha component that reverses, a stock beta component that accounts for the dynamic market exposure (and momentum crash risk), and a residual return component that drives the momentum effect (and subsumes total-return momentum)

– The profitability and the optimal combination of ranking and holding periods of momentum strategies for a sample of Core and Peripheral European equity markets the profitability vary across markets

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