Stock picking

Popularity Asset Pricing Model

19.November 2019

Professor Roger Ibbotson is one of the most respected and influential researchers of the current era. His book “Stocks, Bonds, Bills, and Inflation” is a classic and often serves as a reference for information about capital market returns. Therefore we always pay attention to his publications. His actual work, “Popularity – A Bridge between Classical and Behavioral Finance”, which is written with Thomas M. Idzorek, Paul D. Kaplan, and James X. Xiong, is now available on SSRN.

In their work, authors explain the term “Popularity” from an asset pricing point and show how “Popularity” can be a broad umbrella under which nearly all market premiums and anomalies (including the traditional value and small-cap) can fall. They develop a formal asset pricing model that incorporates the central idea of “Popularity”, which they call the “popularity asset pricing model” (PAPM). Based on this model, they predict characteristics as a company’s brand, reputation, and perceived competitive advantage to be new equity factors.

It’s a long read, but we at Quantpedia really recommended it for all equity portfolio managers …

Authors: Ibbotson, Idzorek, Kaplan, Xiong

Title: Popularity: A Bridge between Classical and Behavioral Finance

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Three Methods to Fix Momentum Crashes

12.November 2019

Everyone who lived during the 2007 and 2009 crisis knows what the biggest weakness of the equity momentum strategy was. It was right during the spring of 2009 when the financial markets were on its inflection point when the momentum strategy crashed. Right after that inflection point, stocks which were the biggest losers during the previous year performed exceptionally well and caused strong under-performance of classical long-short momentum strategy. How can we prevent this situation from happening again? That’s the topic of our favorite new recent study written by Matthias Hanauer and Steffen Windmueller. They analyze three momentum risk management techniques – idiosyncratic momentum, constant volatility-scaling, and dynamic scaling, to find the remedy for momentum crashes. It’s our recommended read for this week for equity long-short managers …

Authors: Matthias Hanauer and Steffen Windmueller

Title: Enhanced Momentum Strategies

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Commodity Futures Risk Premium – Historical Analysis

17.October 2019

We at Quantpedia absolutely love long-term studies, and academic research paper written by Bhardwaj, Janardanan, and Rouwenhorst is really exceptional. There are a lot of studies covering a long history of equity and bond markets. But futures markets are not covered so well, and that’s the reason why is this paper so valuable. An additional plus is that study covers also delisted contracts, which makes the study’s data quality even better. Quantpedia’s recommended read to anyone interested in asset allocation into commodities …

Authors: Bhardwaj, Janardanan and Rouwenhorst

Title: The Commodity Futures Risk Premium: 1871–2018

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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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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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What Affects the Correlation Between Stocks and Bonds

26.August 2019

The correlation between bonds and stocks is essential information for asset allocation decisions; therefore understanding its macro-economic drivers is very valuable for all investors. Stocks-bonds correlation isn’t stable, as we have experienced in the last 30 years, as the correlation, which was positive until the end of the 1990s, changed sign at the turn of the century. Research paper written by Marcello Pericoli sheds more light on this issue and shows that the correlation is primarily influenced by the uncertainty about inflation and real interest rates as well as by co-movement between inflation, real interest rates and dividend growth.

Author: Pericoli

Title: Macroeconomics Determinants of the Correlation Between Stocks and Bonds

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