Smart beta

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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Does Social Media Sentiment Matter in the Pricing of U.S. Stocks?

15.March 2021

Although the models cannot entirely capture the reality, they are essential in the analysis and problem solving, and the same could be said about asset pricing models. These models had a long journey from the CAPM model to the most recent Fama French five-factor model. However, the asset pricing models still rely on fundamentals, and as we see in the practice every day, the financial markets or investors are not always rational, and prices tend to deviate from their fundamental values. Past research has already suggested that the assets are driven by both the fundamentals and sentiment. The novel research of Koeppel (2021) continues in the exploration of the hypothesis mentioned above and connects the sentiment with the factors in Fama´s and French´s methodology. The most interesting result of the research is the construction of the sentiment risk factor based on the direct search-based sentiment indicators. The data are sourced by the MarketPsych that analyze information flowing on social media. For comparison, public news is not a source of such exploitable sentiment indicator.

The sentiment score extracted from social media can be exploited to augment the Fama French five factors model. Based on the results, this addition seems to be justified. Adding the sentiment to the pure fundamental model explains more variation and reduce the alphas (intercepts). Moreover, the factor is unrelated to the well-known and established risk factors utilized in the previous asset pricing models, including the momentum. Finally, the sentiment factor seems to be outperforming several other factors, even those established as the smart beta factors.

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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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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 Active vs Passive: Smart Factors, Market Portfolio or Both?

11.December 2020

While there may be debates about passive and active investing, and even blogs about the numbers of active funds that were outperformed by the market, the history taught us that the outperformance of active or passive investing is cyclical. As a proxy for the active investing, the new Quantpedia’s research paper examines factor strategies and their smart allocation using fast or slow time-series momentum signals, the relative weights based on the strength of the signals and even blending the signals. While the performance can be significantly improved, using those smart approaches, the factors still got beaten by the market in both US and EAFE sample. However, the passive approach did not show to be superior. The factor strategies and market are significantly negatively correlated and impressively complement each other. The combined Smart Factors and market portfolio vastly outperforms both factors and market throughout the sample in both markets. With the combined approach, the ever-present market falls can be at least mitigated or profitable thanks to the factors.

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