Vol.21, No.1, 2023 by Andrew Chin and Yuyu Fan We apply text-mining techniquesin earnings call transcriptsto extract meaningful features that capture management and investment community signals. Using a corpus of transcripts of earnings calls for global companies from 2010 to 2021, we create fundamentally driven features spanning document attributes, readability, and sentiment on different sections… Read more
Articles
Insight: Bias and Noise in Humans & AI: When to Trust Humans & Machines in Decision-Making
Vol. 20, No. 4, 2022 by Vasant Dhar When should we trust machine-based and human decisions in finance? In this article I answer this question by drawing on two sets of insights about decision error. I first draw on research of leading theorists on human decision-making and prediction, summarized through a set of articles and… Read more
ESG Screening in the Fixed-Income Universe
Vol. 20, No. 4, 2022 by Fabio Alessandrini, David Baptista Balula and Eric Jondeau This paper evaluates the impact of a screening process based on Environmental, Social, and Governance (ESG) scores for an otherwise passive portfolio of investment-grade corporate bonds. The main result is that a global exclusion strategy leads to a substantial improvement of… Read more
Climate-Aware Risk Budgeting
Vol. 20, No. 4, 2022 by Brian Jacobsen, Eddie Cheng and Wai Lee Climate change is a risk investors are thinking about, but how can it be practically incorporated into an asset allocation framework? This paper presents two different approaches. One is a traditional approach where the covariance matrix and excess return vector is adjusted… Read more
Factor Investing in Paris: Managing Climate Change Risk in Portfolio Construction
Vol. 20, No. 4, 2022 by Janina Kolle, Harald Lohre, Erhard Radatz and Carsten Rother The 2015 Paris Agreement is a landmark in limiting emissions and targeting global warming well below 2◦C, preferably 1.5◦C compared to pre-industrial levels. In this light, we investigate how to efficiently construct equity portfolios that help mitigating climate change risk… Read more
ESG Investment Performance Evaluation: An Integrated Approach
Vol. 20, No. 4, 2022 by Stephen Horan, Elroy Dimson, Clive Emery and Kenneth Blay ESG investment strategies have experienced a massive inflow of capital over the past decade despite investors having few methods to evaluate their performance and communicate their ESG values, objectives, and preferences to investment managers. This paper develops a three-dimensional performance… Read more
Carbon Emissions and Asset Management
Vol. 20, No. 4, 2022 by Ashwin Alankar and Myron Scholes Two common methods that portfolio managers use to reduce the carbon footprint of their portfolios are either to exclude carbon emitters from their portfolios or to engage/cajole underlying companies to reduce their carbon footprint by taking actions to reduce emissions. We estimate the costs… Read more
What’s in the Moneyness? Moneyness Spread and Future Stock Returns
Vol. 20, No. 3, 2022 by Zhan Li There exists a significant and positive cross-sectional relation between moneyness spread and future stock returns. Stocks with high moneyness spread outperform stocks with low moneyness spread, measured by raw and risk-adjusted returns. This predictability can last for at least 15 days, and the predictability of open interest-weighted… Read more
Just Say No to Leveraged ETFs
Vol. 20, No. 3, 2022 by Ziemowit Bednarek and Pratish Patel The daily return on a positive Leveraged Exchange-Traded Fund (LETF) is a multiple of its benchmark. We compare the risk–reward trade-off of investing in an LETF relative to the benchmark. The main contribution is straightforward: Sharpe Ratio (SR) adequately and sufficiently captures the trade-off… Read more
Portfolio Performance Attribution via Shapley Value
Vol. 20, No. 3, 2022 by Nicholas Moehle, Stephen Boyd and Andrew Ang We consider an investment process that includes a number of features, each of which can be active or inactive. Our goal is to attribute or decompose an achieved performance to each of these features, plus a baseline value. There are many waysto… Read more