Volume 16, No. 2, Second Quarter 2018

Complete and Incomplete FinTech Platforms

by: Vasant Dhar and Roger M. Stein

A major consequence of the Internet era is the emergence of complex “platforms” that combine technology and process in new ways that often disrupt existing industry structures and blur industry boundaries. These platforms allow easy participation that often strengthens and extends network effects, while at the same time the vast amounts of data captured through such participation can increase the value of the platform to its participants, creating a virtuous cycle. While initially slow to penetrate the financial services sector, such platforms are now beginning to emerge.We provide a taxonomy of platforms in finance and identify the feasible strategies that are available to incumbents in the industry, innovators, and the major Internet giants.

Common Factors in Corporate Bond Returns

by: Ronen Israel, Diogo Palhares and Scott Richardson

We find that four well-known characteristics (carry, defensive, momentum, and value) explain a significant portion of the cross-sectional variation in corporate bond excess returns. These characteristics have positive risk-adjusted expected returns and are not subsumed by traditional market premia or respective equity anomalies. The returns are economically significant, not explained by macroeconomic exposures, and there is some evidence that mispricing plays a role, especially for momentum.

Evaluation and Ranking of Market Forecasters

by: David H. Bailey, Jonathan M. Borwein, Amir Salehipour and Marcos López de Prado

Many investors rely on market experts and forecasters when making investment decisions, such as when to buy or sell securities. Ranking and grading market forecasters provides investors with metrics on which they may choose forecasters with the best record of accuracy for their particular market exposure. This study develops a novel ranking methodology to rank the market forecaster. In particular, we distinguish forecasts by their specificity, rather than considering all predictions and forecasts equally important, and we also analyze the impact of the number of forecasts made by a particular forecaster.We have applied our methodology on a dataset including 6627 forecasts made by 68 forecasters.

The Dirty Dozen of Valuation Ratios: Is One Better Than Another?

by: Eero Pätäri, Ville Karell, Pasi Luukka and Julian Scott Yeomans

This paper compares the efficacy of both traditional valuation ratios and an extensive set of related combination criteria in identifying the future best-performing stocks for a comprehensive U.S. sample over the period 1971–2013. Value portfolios formed on different criteria have remarkably different exposures to style factors. We find evidence of strong relative efficacy of three enterprise value multiples (EBIT/EV, EBITDA/EV, and S/EV). Particularly, the evidence for the unique characteristics of S/EV contributes to the existing literature. The defensive characteristic of high dividend yield is pervasive both as a stand-alone criterion and as a combination sub-criterion.

A Practitioner’s Guide to Asset Allocation

by: William Kinlaw, Mark P. Kritzman and David Turkington • reviewed by: Sharon Hill

“Book Reviews” identifies important, and often popular, new books from a wide range of investment topics. Beyond providing a summary and review of the content and style of the books, “Book Reviews” seeks to contribute to a conscious, critical, and informed approach to investment literature.

Practitioner’s Digest • Vol. 16, No. 2

The “Practitioners Digest” emphasizes the practical significance of manuscripts featured in the “Insights” and “Articles” sections of the journal. Readers who are interested in extracting the practical value of an article, or who are simply looking for a summary, may look to this section.

Crypto-Assets Unencrypted

by: Seoyoung Kim, Atulya Sarin and Daljeet Virdi

With the recent surge in crypto-activity, a natural question arises as to what exactly a “cryptocurrency” is and how to value and assess these digital assets. In this paper, we provide an overview of the history and technology underlying cryptocurrencies. We also present information on the volume, size, and volatility of this emerging asset class, which we compare to major fiat currencies and commodities. Finally, we provide a framework for valuing crypto-assets, discuss the still-evolving regulatory environment for this asset class, and discuss the mechanics of investing in cryptocurrencies.