Small cap

Nuclear Threats and Factor Performance – Takeaway for Russia-Ukraine Conflict

31.March 2022

The Russian invasion of Ukraine and its repercussions continue to occupy front pages all around the world. While using nuclear forces in war is probably a red line for all of the mature world, there is still possible to use nuclear weapons for blackmailing. What will be the impact of such an event on financial markets? It’s not easy to determine, but we tried to identify multiple events in the past which were also slightly unexpected and carried an indication of nuclear threat and then analyzed their impact on financial markets.

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Factor Performance in Cold War Crises – A Lesson for Russia-Ukraine Conflict

8.March 2022

The Russia-Ukraine war is a conflict that has not been in Europe since WW2. And it has great implications not only on human lives but also on security prices. It bears numerous characteristics of the cold war crises, where two nuclear powers (Soviet Union and USA/NATO) were often very close to hot war or were waging a proxy war in 3rd countries. We thought it might be wise to look at similar periods from the past to understand what happens in such situations. We selected five events and analyzed the performance of main equity factors (market, HML, SMB, momentum & 2x reversal) and energy and fixed income proxy portfolios.

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Asset Pricing Models in China

27.September 2021

The CAPM model was a breakthrough for asset pricing, but the times where the market factor was most widely used are long gone. Nowadays, if we exaggerate a bit, we have as many factors as we want. Therefore, it might not be straightforward which factor model should be used. 

Hanauer et al. (2021) provide several insights into factor models. The authors postulate that the factor models should be examined in the international samples since this can be understood as a test for asset pricing models. The domestic Chinese A-shares stock market seems to be an excellent “playground” for the factors models, given the size of the Chinese stock market, but mainly because of its uniqueness. The paper compares the models (and factors) based on various methods (performance, data-driven asset pricing framework, test assets, turnovers and even transaction costs). Apart from valuable insights into the several less-known factors, the key takeaway message could be that the “US classic” Fama-French factor models perform poorly in China. The modified Fama-French six-factor model or q-factor is better, but overall, it seems that factor models designed for China, such as the model of Liu, Stambaugh and Yuan (2019), are the best.

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Large Cap Analysis

23.December 2020

Every week, through these posts, we point to interesting academic research papers. This week´s blog is slightly different, yet no less engaging. This blog includes numerous interesting charts from more than hundred charts in the CUSTOM REPORT: U.S. LARGE INDEX by the PHILOSOPHICAL ECONOMICS using OSAM Research Database. The report consists of the visually presented analysis of the U.S. Large index. The analysis includes the composition, returns, individual stocks, sector and factor allocations, and six fundamentals. The report contains comprehensive information about the large caps in the U.S. market from 1963 to 2020 and is worthy of a look.

We wish you all Merry Christmas …

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The Risk in Equity Risk Factors

9.July 2020

The bear markets were and surely would be present in the equities in the future. While many fear them, experienced investors accept that the growth of the equity market cannot be constant and that inherent equity risk often manifests as a painful market drawdown. When someone designs a strategy, it is a general practice to check its performance during such downturns. Therefore, we can recommend an interesting novel research paper by Paul Geertsema and Helen Lu. The selected paper analyzes the risk of the most common equity factors and plots their over- or under-performance during multiple crisis periods since the Vietnam war until the COVID-19.

Authors: Paul Geertsema, Helen Lu

Title: The Risk in Risk Factors

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Long-Short vs Long-Only Implementation of Equity Factors

26.May 2020

How should be equity factor strategies implemented? In a long-only smart beta) way? As a long-short strategy, as most of the hedge funds usually do? Or in a partially-hedged fashion by going long equity factor and shorting market to offset some of the market risks? There is no one universal answer as it depends on the investment mandate and constraints of each fund manager contemplating to implement factor investing strategies. But recent academic paper written by Benaych-Georges, Bouchaud and Ciliberti suggests that it’s a good idea to go in the direction of long-short implementation (if it’s possible). Managing short book can be challenging; however, the added benefit of lower correlation among strategies gives resultant factor portfolio a significant boost in the return-to-risk ratio (even after accounting for realistic implementation and shorting costs).

Authors: Benaych-Georges, Bouchaud, Ciliberti

Title: Equity Factors: To Short Or Not To Short, That is the Question

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