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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Resurrecting the Value Premium

8.October 2020

Nowadays, the value factor is a hot topic among practitioners and researchers as well. It is commonly known that equity factors have a cyclical performance, but many argue that value underperforms for too long. Therefore, many say that the classical HML value factor of Fama and French is dead. On the other hand, there is an emerging amount of research papers that study the value investing with an aim to make some alterations that would result in a profitable factor as the classic B/M ratio looks like it’s not a sensible value factor anymore. This branch of literature was recently enriched by novel research of Blitz and Hanauer (2020). By including more value metrics, altering the investment universe and applying basic risk management techniques, value strategy can become profitable in the long term. Although the modification is sensible, it stills suffer in a recent period. Only time will tell whether the novel resurrected value factors would emerge again as many times in the past…

Authors: David Blitz and Matthias X. Hanauer

Title: Resurrecting the Value Premium

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Implied Equity Duration as a Measure of Pandemic Shutdown Risk

14.August 2020

Some companies have relatively more of their value in near-term cash flow (for ex. General Motors Corporation). Others (for ex. Tesla), are growth stocks, with a greater proportion of their market value based on long-term expected future cash flow. It seems that coronavirus pandemic has hit mainly the first group, the “low equity duration” companies. A new academic research paper written by Dechow, Erhard, Sloan, and Soliman explains how the equity duration factor can be used to assess how are companies exposed to short-term unexpected macroeconomic events (like COVID-19 pandemic), and how equity duration sensitivity can also explain relative underperformance of value vs growth stocks during the last bear market.

Authors: Dechow, Patricia and Erhard, Ryan and Sloan, Richard G. and Soliman, Mark T.

Title: Implied Equity Duration: A Measure of Pandemic Shutdown Risk

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The Effectivity of Selected Crisis Hedge Strategies

30.July 2020

During past months we made a set of articles analyzing the performance of equity factors and selected systematic strategies during coronavirus crisis. These articles were short-ranged with data only from the start of the year 2020, which is enough for the purpose of the quick blog posts, but very short-sighted to see the nature of these strategies. Therefore, we expanded the time range by 20 years. For a better understanding of hedge possibilities of these strategies, we have added a comparison to essential safe-haven assets, not only to equities.

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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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Transaction Costs Optimization for Currency Factor Strategies

18.June 2020

A lot of backtests of systematic trading strategies omit transaction costs (in the form of spreads and fees). Simulation is then simpler, but resultant model portfolio and its performance can be misleading. In the case of currency factor investing, backtest without the tcosts simulation can pick currencies with wider spreads and higher volatilities. And in real trading, with real-world transaction costs, a strategy can, therefore, perform significantly worse than expected. A research paper written by Melvin, Pan, and Wikstrom offers an elegant optimization methodology to incorporate transaction costs into the backtesting process which allows strategies to retain their alpha …

Authors: Michael Melvin, Wenqiang Pan, Petra Wikstrom

Title: Retaining Alpha: The Effect of Trade Size and Rebalancing Frequency on FX Strategy Returns

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