Small cap

Less is More? Reducing Biases and Overfitting in Machine Learning Return Predictions

13.November 2023

Machine learning models have been successfully employed to cross-sectionally predict stock returns using lagged stock characteristics as inputs. The analyzed paper challenges the conventional wisdom that more training data leads to superior machine learning models for stock return predictions. Instead, the research demonstrates that training market capitalization group-specific machine learning models can yield superior results for stock-level return predictions and long-short portfolios. The paper showcases the impact of model regularization and highlights the importance of careful model design choices.

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Decreasing Returns of Machine Learning Strategies

10.November 2023

Traditional asset pricing literature has yielded numerous anomaly variables for predicting stock returns, but real-world outcomes often disappoint. Many of these predictors work best in small-cap stocks, and their profitability tends to decline over time, particularly in the United States. As market efficiency improves, exploiting these anomalies becomes harder. The fusion of machine learning with finance research offers promise. Machine learning can handle extensive data, identify reliable predictors, and model complex relationships. The question is whether these promises can deliver more accurate stock return predictions…

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Is It Good to Be Bad? – The Quest for Understanding Sin vs. ESG Investing

2.November 2023

What are our expectations from the ESG theme on the portfolio management level? The question is whether ESG investing also offers some kind of “alternative alpha”, or outperformance against the traditional benchmarks. There are managers and academics who are enthusiastic and hope for the outperformance of the good ESG stocks. However, the academic research community is really split. Some academic papers show positive alpha for “Saints” (good ESG stocks); others show significantly positive alpha for “Sinners” (bad ESG stocks). So, how it’s in reality? Is it “Good to be Bad”? Or the other way around?

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Performance of Factor Strategies in India

31.August 2023

India is a big emerging market, actually the second biggest after China. We primarily look at developed markets, mostly the U.S. and Europe, and from Emerging Markets, China at most, and we are aware that we neglect this prospective country. We would like to correct this notion and give attention to a country that is (along with China) being cited as a new potential rising superpower and already looking to take the lead of Emerging Markets (EM) countries. Today, we would like to review the paper that analyzes the performance of main equity factors (with an emphasis on the Quality factor) and is a good starting point to understand the specifics of factor investing strategies in India.

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Evaluating Factor Models in China

21.April 2023

Today, we will evaluate some specifics that are akin to the now second-largest market in the world – China. The abundance of “shell companies” creates a problem when researchers try to uncover sources of alpha in the Chinese market. We present recent research by Zhiyong Li and Xiao Rao (2022) that proposes a new alternative filter, which excludes the stocks with a high estimated shell probability when constructing equity factor models.

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Are There Intraday and Overnight Seasonality Effects in China?

26.August 2022

At the moment, there is a lot of attention surrounding overnight anomalies in various types of financial markets. While such effects have been well documented in research, especially in US equities and derivatives, there are other asset classes that are not as well addressed. A recent (2022) paper from Jiang, Luo, and Ye contributed appealing evidence in favor of validating these phenomena in the Chinese market. We highlight the finding that the market MKT factor beta premium is earned exclusively overnight and tend to reverse intraday (and in smaller potency also value HML and profitability RMW), which is the same finding as for the US equities. In contrast, the size SMB factor exhibit significantly opposite pattern: positive intraday premium and negative overnight premium (and the same for investment CMA factor).

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