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 …

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

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

Nearly two months ago, in a time of the highest turmoil during the current pandemic crisis, we performed a quick assessment of the status of performance of equity factor strategies. The world has still not been able to ward-off health-care crisis completely, but a lot of countries have made significant progress (on the other hand, there are still a lot of countries in a worse state than a few months ago). Equity indexes have rebounded from the March lows and have removed some of the losses. Therefore, we have received multiple inquiries about the current situation of equity factor strategies.

So it may be a good time to revisit once again how they are performing.

Mirror, mirror on the wall, what’s the best factor model of them all? We at Quantpedia are probably not the only one asking this question. A lot of competing factor models are described in the academic literature and used in practice. That’s the reason why we consider a new research paper written by Matthias Hanauer really valuable. He compared several commonly employed factor models across non-U.S. developed and emerging market countries and answered the question from the beginning of this paragraph. Which model seems the winner? The six-factor model proposed in Barillas et al. (2019) that substitutes the classic value factor in the Fama and French (2018) six-factor model for a monthly updated value factor …

Authors: Hanauer

Title: A Comparison of Global Factor Models

Do retail day traders have a chance in current financial markets? They often lack proper trading research and infrastructure; they are facing high fees and stiff competition from professionals. But it’s always useful to view actual hard numbers and performance statistics and not just rely on feelings. Luckily, some academic research papers are exploring the question of the performance of retail traders. Chague, De-Losso, and Giovannetti have written the newest one, and as expected, their findings are not very favorable for retail day traders.

Authors: Chague, De-Losso, Giovannetti

Title: Day Trading for a Living?