White papers and reports exploring quantitative investment and investment tools. Research for quant managers and analysts in this section covers academic papers on portfolio optimisation, articles on trading strategies for model-driven alpha creation, managing index funds, papers on derivatives pricing, and articles on performance attribution analysis. The "tools" component of this section refers to investment tools which help portfolio managers to do their job. For instance, ETFs may be considered a "tool" to make... a short term allocation to specific asset class or strategy. Investment technology is a "tool" used throughout the investment process. This heading includes research on alpha creation, including: quantitative approaches to asset allocation and investment technology, Big Data, and the role of technology within asset management. For lists of white papers on specific quant topics - such as index investing, derivatives pricing, attribution analysis or trading models for alpha generation - please use the search menu at the top or click on the appropriate selection in the topic menu.
Published in the Financial Analysts Journal the flagship publication of CFA Institute
The average monthly premium of the Market return over the one-month T-bill return is substantial, as are average premiums of value and small stocks over Market. As the return horizon increases, premium distributions become more…
In this paper for the Journal of Portfolio Management, Robert D. Arnott, Denis B. Chaves, and Tzee-man Chow examine the interplay that exists between the Shiller P/E ratio and the macroeconomy.
Long-term investors often passively track a strategic asset allocation benchmark whose weights across the various asset classes remains constant over a multi-year horizon (usually 10, 15 years, or longer). Specialist teams, internal or external, may be setup to add an active overlay portfolio in the form of a tactical asset…
In this paper, Professor Aswath Damodaran examines ways of estimating equity risk premiums (ERP). He begins by considering the economic determinants of ERP, including information uncertainty, perceptions of macroeconomic risk and risk aversion by investors. This is the 11th edition of this paper. It has been produced…
This influential paper is Mebane Faber's update to his 2006 version. It incorporates new data from the period 2008-2012. The paper investigates how well the original work has held up since publication. Faber finds that overall, the models achieve equity-like returns with bond-like volatility and drawdowns, which was his…
While many investors have long taken factors into account for risk management, they’re increasingly recognizing that factors can also be return drivers. Ron Ratcliff, BlackRock’s Head of Multi-Asset Investment Risk for Americas West and Russ Koesterich, Portfolio Manager for BlackRock’s Global Allocation discuss how raised “…
Now in its fifth year, the 2018 FTSE Russell global smart beta survey provides unique insight into major trends in awareness, popularity and use of smart beta strategies among global asset owners. In 2014, 25% of investors reported no current allocation in smart beta and had no plans to evaluate it in the future, today, it…
52% of institutions have replaced a derivative product with an ETF (see 1 below). Efficiency, precise exposures, improved flexibility and low cost are all features that have contributed to ETFs assuming a more prominent role alongside traditional derivatives.
Institutional investors can’t ignore the role of factors within portfolio construction. When harnessed correctly, factors can enhance portfolio diversification and performance relative to traditional market-cap indexes. Our new research paper helps institutional investors ask the right questions and develop a deeper…
Collected interviews with high-profile factor investing experts, who bring an original contribution to the discussion. The concept of factor investing dates back to the 1970s, but it has only been gaining traction over the past few years. Factor-based allocation has its roots in the vast amount of empirical findings,…
Many researchers have studied the relationship between companies with strong environmental, social and governance (ESG) characteristics and corporate financial performance. A major challenge has been to show that positive correlations — when produced — provide explanations for the behavior. As the classic phrase used by…
Investors may need to vary between using local and regional models, if using factors for alpha generation. They should pay attention to pure risk factors; and 'alpha factor users' should not panic when returns to factors go negative, nor should they expect the good times to last forever.
Should investors try to time their exposure to different factors? Factor-based strategies have become increasingly popular in recent years. But how to implement them in practice still remains a puzzle for many newcomers. Deciding whether to tactically monitor and adjust exposures to different factors and, if so, how to go…
This 31-page paper appears in CFA Institute's Financial Analysts Journal. It examines the topic of ETF pricing inefficiencies. Despite the arbitrage mechanism that allows authorized participants to create and redeem shares for the underlying portfolios, ETF prices can deviate significantly from the net asset values.…
In a world where alpha can seem scarce, active small-cap managers continue to outperform their benchmarks in an impressive way. But why? Investors have a general sense small caps are riskier and less efficient, but how these characteristics contribute to more alpha opportunities remains unclear. At QMA, we think it’s…
This survey reveals compensation levels across a variety of investment roles, covering marketing and distribution, investment analysis, finance, risk & compliance, and investment operations. The analysis is split by role and experience.
This paper appeared in CFA Institute's Financial Analysts Journal. Combining long-only-constrained factor subportfolios is generally not a mean–variance-efficient way to capture expected factor returns. For example, a combination of four fully invested factor subportfolios—low beta, small size, value, and momentum—captures…
This report by S&P Dow Jones takes an in-depth look at how indices are changing the face of investing. Specifically, it examines whether passive investing can grow too large and what the possible implications of this are for active management.
Illiquidity risk is a potentially appealing means of generating additional yields in a low-return world. The authors of this 10-page document discuss three different dimensions of illiquidity risk premium that investors should demand for a given asset.
The authors of this very interesting paper discuss why considering diversification and risk independently may help investors build more efficient portfolios. They argue that asset allocators should rethink the impact of low volatility diversifiers in higher risk portfolios. Some low vol asset classes (e.g. hedge funds) may…
