Vol. 19, No. 3, 2021 William Kinlaw, Mark Kritzman and David Turkington The authors introduce a new index of the business cycle that uses the Mahalanobis distance to measure the statistical similarity of current economic conditions with past episodes of recession and robust growth. Their approach has a key advantage compared to approaches that simply… Read more
Articles
The Magic Formula: Value, Profitability, and the Cross-Section of Global Stock Returns
Vol. 19, No. 2, 2021 Douglas W. Blackburn and Nusret Cakici Buying profitable, undervalued stocks and shorting unprofitable, overvalued stocks yields significant return differentials in North American, Europe, Japan, and Asia. Using data from 1991 to 2016, double sorting stocks into portfolios by gross profits, a measure of profitability, and earnings yield, a measure of… Read more
What Happens with More Funds than Stocks? Analysis of Crowding in Style Factors and Individual Equities
Vol. 19, No. 2, 2021 Ananth Madhavan, Aleksander Sobczyk and Andrew Ang The proliferation of funds juxtaposed against the decline in individual stock listing since the mid-1990s raises questions about crowding in individual stocks or style factors. We examine these issues by characterizing the common components of funds from 2007 through 2018. A key difference… Read more
Active Investing as a Negative Sum Game: A Critical Review
Vol. 19, No. 2, 2021 Geoffrey J. Warren The literature on whether active management adds value is examined through the prism of the proposition by Sharpe (1991) that active investing is a negative sum game after costs. Focal points include how active fund research does not directly test Sharpe’s proposition and seems inconsistent with it… Read more
Asset Pricing, Asset Allocation And Risk-Adjusted Performance With Multiple Goals And Agency: The Goals And Risk-Based Asset Pricing Model
Vol. 19, No. 2, 2021 Arun Muralidhar Investment managers require a consistent asset pricing model, asset allocation recommendations, and risk-adjusted performance measures (or the “three facets of investing”) to be effective in managing portfolios. Incorporating three critical realities of investing into these models (i.e., that investors have many stochastic goals, seek to delegate to skillful… Read more
Comovement, Liquidity and Asymmetries
Vol. 19, No. 1, 2021 James X. Xiong Substantially increased institutional investing and index trading in the US stock market have a meaningful impact on the mechanical relationship between return comovement and liquidity, which can be quantified by a power-law function and explained by a liquidity supply model. Three well-documented asymmetries (asymmetric volume, asymmetry in… Read more
Idiosyncratic Risk and When to Tilt Toward Value
Vol. 19, No. 1, 2021 Jason D. Fink and Kristin E. Fink While the outperformance of value relative to growth portfolios has been well established, there is still debate over whether this outperformance is the result of a systematic risk factor or a behavioral tendency. The distinction is crucial to determining the expected returns of… Read more
Lending to Lose: Who Buys Negatively Yielding Bonds and What it Means for Investors
Vol. 19, No. 1, 2021 Vineer Bhansali I discuss the demand and supply of negatively yielding bonds, which is a recent and relatively unprecedented phenomenon in financial markets. To understand why one would lend to lose, I classify buyers into three categories, i.e. “forced buyers”, “speculators” and “non-financial government entities”. I conclude that the demand… Read more
Investment Style Volatility and Mutual Fund Performance
Vol. 19, No. 1, 2021 Keith C. Brown, W. V. Harlow and Hanjiang Zhang We develop a holdings-based statistic to measure the volatility of a fund’s investment style characteristic profile over time. On average, funds with lower levels of style volatility significantly outperform more style-volatile funds on a risk-adjusted basis. We show that style volatility… Read more
Active Investing and the Efficiency of Security Markets
Vol. 19, No. 1, 2021 Russ Wermers This study investigates the impact of active investment management on the efficiency of public security markets. The scholarly literature indicates that active management contributes to market efficiency, thereby providing positive externalities for all investors, including investors in passively-managed funds. Contrary to popular interpretations of Sharpe’s (1991) “active arithmetic,”… Read more