Journal ArticleDOI
How Can 'Smart Beta' Go Horribly Wrong?
TLDR
In this article, the authors predict a smart beta crash as a consequence of the soaring popularity of factor-tilt strategies, and the reasonable probability of such a crash is shown.Abstract:
Factor returns, net of changes in valuation levels, are much lower than recent performance suggests. Value-add can be structural, and thus reliably repeatable, or situational—a product of rising valuations—likely neither sustainable nor repeatable. Many investors are performance chasers who in pushing prices higher create valuation levels that inflate past performance, reduce potential future performance, and amplify the risk of mean reversion to historical valuation norms. We foresee the reasonable probability of a smart beta crash as a consequence of the soaring popularity of factor-tilt strategies.read more
Citations
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Journal ArticleDOI
The Surprising Alpha from Malkiel’s Monkey and Upside-Down Strategies
Posted Content
Contrarian Factor Timing is Deceptively Difficult
TL;DR: In this article, the authors look at the general efficacy of value spreads in predicting future returns to styles, and find that despite their recent popularity, the most common factors or styles, namely the value, momentum and defensive styles, are not, in general, markedly over-valued as measured by their value spreads.
Journal ArticleDOI
Alice’s Adventures in Factorland: Three Blunders That Plague Factor Investing
TL;DR: Factor investing has failed to live up to its many promises as discussed by the authors and its success is compromised by three problems that are often underappreciated by investors: many investors develop exaggerated expectations about factor performance as a result of data mining, crowding, unrealistic trading cost expectations, and other concerns.
Journal ArticleDOI
Alice’s Adventures in Factorland: Three Blunders That Plague Factor Investing
Robert D. Arnott,Campbell R. Harvey,Campbell R. Harvey,Vitali Kalesnik,Juhani T. Linnainmaa,Juhani T. Linnainmaa +5 more
TL;DR: Factor investing has failed to live up to its many promises as mentioned in this paper and its success is compromised by three problems that are often underappreciated by investors: many investors develop exaggerated expectations about factor performance as a result of data mining, crowding, unrealistic trading cost expectations, and other concerns.
Journal ArticleDOI
Contrarian Factor Timing is Deceptively Difficult
TL;DR: In this article, the authors look at the general efficacy of value spreads in predicting future returns to styles and find that despite their recent popularity, the most common factors or styles are not, in general, markedly overvalued as measured by their value spreads.
References
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Journal ArticleDOI
Common risk factors in the returns on stocks and bonds
Eugene F. Fama,Kenneth R. French +1 more
TL;DR: In this article, the authors identify five common risk factors in the returns on stocks and bonds, including three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity.
Journal ArticleDOI
Illiquidity and Stock Returns: Cross-Section and Time-Series Effects
TL;DR: In this paper, the effects of stock illiquidity on stock return have been investigated and it was shown that expected market illiquidities positively affects ex ante stock excess return (usually called risk premium) over time.
Journal ArticleDOI
Investment performance of common stocks in relation to their price-earnings ratios: a test of the efficient market hypothesis
TL;DR: In this article, the authors determine empirically whether the investment performance of common stocks is related to their P/E ratios, and they find that returns on stocks with low PE ratios tend to be larger than warranted by the underlying risks, even after adjusting for any additional search and transactions costs, and differential taxes.
Book ChapterDOI
Market Liquidity: Illiquidity and Stock Returns Cross-Section and Time-Series Effects*
TL;DR: In this paper, the effects of stock illiquidity on stock return have been investigated and it was shown that expected market illiquidities positively affects ex ante stock excess return (usually called risk premium) over time.
Journal ArticleDOI
Presidential Address: Discount Rates
TL;DR: Discount-rate variation is the central organizing question of current asset-pricing research as discussed by the authors, and a survey of discount-rate theories and applications can be found in the survey.