Vol. 21, No. 3, 2023 William Kinlaw, Mark Kritzman, Michael Metcalfe and David Turkington The authors apply a Hidden Markov Model to identify regimes of shifting inflation and then employ an attribution technique based on the Mahalanobis distance to identify the economic variables that dynamically determine the trajectory of inflation. Their analysis enables policymakers to… Read more
Articles
Asset Allocation with Non-Pecuniary ESG Preferences: Efficiently Blending Value with Values
Vol. 21, No. 3, 2023 Douglas M. Grim, Giulio Renzi-Ricci and Anna Madamba The explosion of interest in ESG investing has yielded several quantitative frameworks that seek to incorporate non-pecuniary ESG preferences into conventional multi-asset portfolio optimization models. In this article, the authors specify an accessible approach that allows investors to simultaneously optimize for both… Read more
Efficient Goal Probabilities: A New Frontier
Vol. 21, No. 3, 2023 Sanjiv Das, Daniel Ostrov, Anand Radhakrishnan and Deep Srivastav In goals-based wealth management (GBWM), an investor looks to maximize the probabilities of attaining each of n goals over time. Because the goals are in competition for potentially limited financial resources, their relative importance must be specified, which we do by… Read more
Are 60/40 Portfolio Returns Predictable?
Vol. 21, No. 3, 2023 Jamil Baz, Steve Sapra and German Ramirez Long-horizon asset class returns are reasonably predictable using simple models of expected return. However, equity returns over the last decade far exceeded model-based predictions. We posit a framework for the drivers of potential mean-reversion in equity returns. We believe increases in real bond… Read more
Trading with the Informed and Against the Uninformed: Flows and Positioning in the Global Currency Market
Vol. 21, No 2, 2023 by Aldo Barrios, Rob Franolic, Davide Giovanardi and Michael Melvin FX trade settlement data from CLS provides the most comprehensive view of the opaque market of OTC currency trades. We use the flows of investment funds and non-financial corporates and develop trading signals where the former reflects speculative strategies, while… Read more
Is Index Concentration an Inevitable Consequence of Market-Capitalization Weighting?
Vol. 21, No 2, 2023 by Lisa R. Goldberg, Ananth Madhavan, Harrison Selwitz and Alexander Shkolnik Market-cap-weighted equity indexes are ubiquitous. However, there are growing concerns that such indexes are increasingly concentrated in a few stocks. We ask: Does market-cap weighting inevitably lead to increased concentration overtime? The question of inevitability arises from research that… Read more
The Math Gender Gap and Women’s Career Outcome
Vol 21, No, 2, 2023 by Renée B. Adams, Brad M. Barber and Terrance Odean We show that the gender gap in mathematics is related to women’s career outcomes. The math gender gap predicts the proportion of women in the investment profession across countries and across states in the US. Our results suggest that societal… Read more
Financing Fusion Energy
Vol.21, No.1, 2023 by Abdullah Alhamdan, Zachery M. Halem, Irene Hernandez, Andrew W. Lo, Manish Singh and Dennis Whyte The case for investing in fusion energy has never been greater, given increasing global energy demand, high annual carbon dioxide output, and technological limitations for wind and solar power. Nevertheless, financing for fusion companies through traditional… Read more
The Role of Options in Goals-Based Wealth Management
Vol.21, No.1, 2023 by Sanjiv R. Das and Greg Ross We develop a methodology using dynamic programming for goals-based wealth management over long horizons where portfolio rebalancing uses the standard securities and also derivative securities. A kernel density estimation approach is developed to accommodate derivative assets, solving a high-dimensional problem with fast computation. The approach… Read more
How Inefficient is the 1/N Strategy for a Factor Investor?
Vol.21, No.1, 2023 by Kevin Khang, Antonio Picca, Shaojun Zhang and Minzhi Zhu The last decade’s dramatic democratization of factor investing has broadened its investor base to individual investors and their advisors. This paper studies the performance of classic allocation strategies—1/N, mean–variance, and minimum-variance—from these investors’ perspective. Specifically, we curate commonly available long-only factor funds… Read more