Volume 18, No. 2, 2020 Vasant Dhar and Haoyuan Yu How do you know how much you should trust a model that is learned from data? We propose that a central criterion in measuring trust is the decision-making variance of a model. We call this “model variance.” Conceptually, it refers to the inherent instability machine… Read more
Articles
Time-Series Variation in Factor Premia: The Influence of the Business Cycle
Volume 18, No. 1, 2020 Christopher Polk, Mo Haghbin and Alessio de Longis Factor cyclicality can be understood in the context of factor sensitivity to aggregate cash-flow news. Factors exhibit different sensitivities to macroeconomic risk, and this heterogeneity can be exploited to motivate dynamic rotation strategies among established factors: size, value, quality, low volatility and momentum… Read more
Trends Everywhere
Volume 18, No. 1, 2020 Abhilash Babu, Ari Levine, Yao Hua Ooi, Lasse Heje Pedersen and Erik Stamelos We provide new out-of-sample evidence on trend-following investing by studying its performance for 82 securities not previously examined and 16 long–short equity factors. Specifically, we study the performance of time series momentum for emerging market equity index futures… Read more
Timing is not Everything—Assessing Manager Skill in Factor Timing
Volume 18, No. 1, 2020 Andrew Chin and Piyush Gupta We introduce an innovative framework to assess the contribution and persistence of factor timing within US large-cap equity funds. After decomposing active returns into three components—strategic factor contribution, tactical factor contribution and security selection—we find that they are all significant but security selection is the dominant contributor… Read more
Do High-Frequency Traders Improve Your Implementation Shortfall?
Volume 18, No. 1, 2020 Robert A. Korajczyk and Dermot Murphy We take advantage of a regulatory change that effectively imposed a “tax” on HFT order activity on Canadian equity venues to study the resulting effect on the execution costs of large institutional trades.We find that bid–ask spreads increase and price impact decreases for these trades… Read more
Funding Long Shots
Vol. 17, No. 4, 2019 John Hull, Andrew W. Lo and Roger M. Stein We define long shots as investment projects with four features: (1) low probabilities of success; (2) long gestation lags before any cash flows are realized; (3) large required up- front investments; and (4) very large payoffs (relative to initial investment) in… Read more
Don’t Get Carried Away: Uncovering Macro Characteristics in Carry Portfolios
Vol. 17, No. 4, 2019 Marco Aiolfi and Yesim Tokat-Acikel Investors are increasingly showing interest in risk premia strategies across asset classes. Carry is one of the most studied premia. To successfully execute a risk premia strategy, it is important to have a detailed understanding of how individual premia returns are affected by macroeconomic conditions… Read more
Ratings versus Spreads as Indicators of Price Risk
Vol. 17, No. 4, 2019 Martin Fridson, CFA, Begum Ipek Yavuz, Kai Zhao and Yan Yu Past comparisons of “market ratings,” or yield spreads over Treasury rates, and letter grades published by credit rating agencies have focused on the two indicators’ respective records in predicting defaults or promptness in reflecting company-specific changes in credit quality… Read more
Tilt Nickels To Diamonds: An Orthogonalization Approach
Vol. 17, No. 4, 2019 Wenfeng Wu, George Xiang and Tong Yu Alternative index products often achieve improved performance at the cost of increased exposure to risk. In this study, we propose a portfolio tilting strategy that alleviates the risks inherent to alternative indices by projecting fundamental factors on risk factors to purge the influence… Read more
Bill Gross’Alpha: The King Versus the Oracle
Vol. 17, No. 3, 2019 Aaron Brown and Richard Dewey We set out to investigate whether “Bond King” Bill Gross demonstrated alpha (excess average return after adjusting for market exposures) over his career, in the spirit of earlier papers asking the same question of “Oracle of Omaha,” Warren Buffett. The journey turned out to be… Read more