Quantitative Methods - Articles & White Papers

A recurring criticism of smart beta strategies is the presumption of a risk of “crowding”. It is frequently pointed to as a potential risk but is rarely formalised or even defined. While there is no convincing evidence to prove the crowding theorists correct, thinking about the economic rationale behind a specific premium…

The outbreak of covid19 has significantly disrupted the economy. This note attempts to quantify the macroeconomic impact of costly and deadly disasters in recent US history, and to translate these estimates into an analysis of the likely impact of covid19. A costly disaster series is constructed over the sample 1980:1-2019:…

QMA relates valuation multiples to fundamentals through a new framework. Starting with a standard Gordon dividend discount model and applying a Dupont decomposition, they investigate how changes in fundamentals affect pricing in the cross section of global equities. QMA find that changes in fundamentals affect value and…

Is Value broken? Does a decade of disappointing performance mean that a factor has ultimately failed? The ‘lost decade’ for classic Fama-French factors like Size and Value raises some tough questions for quant researchers and portfolio managers. David Blitz and Pim van Vliet discuss a number of hot quant topics in our latest…

The author explains in a nontechnical fashion why dollar-neutral quant trading strategies, such as equities Statistical Arbitrage, suffered substantial losses (drawdowns) during the COVID-19 market selloff. We discuss: (i) why these strategies work during "normal" times; (ii) the market regimes when they work best; and (iii…

In a new paper co-authored with researchers from GIC in Singapore, State Street show why mapping sequences of economic outcomes leads to a richer understanding of scenarios, probabilities and portfolio returns.

A recent research publication develops a new business cycle forecasting technique using a metric called “Mahalanobis distance.” This measure is intuitive, is based on a straightforward set of computations, is able to identify post-war US recessions with few false positives, and, as claimed by the authors, has a reasonable…

In this study, the third paper of our Foreign Exchange (FX) Implied Volatility Forecasting research series, we proposed an approach to predicting the directional movement of IV based on surface dimension reduction.

During the Global Financial Crisis (GFC), the role of hedge funds and their potential to provide significant downside protection was hotly debated. The same debate has resurfaced earlier this year again when markets for risky assets experience double-digit declines within just a few days. The authors in this study examine…

Forecasting implied FX volatility surface has important applications in investment and trading, but it is a challenging task because the FX vol surface is composed of correlated high-dimensional time series and the shape of the surface can be significantly impacted by extreme market shocks that are almost impossible to…

The equity risk premium is the price of risk in equity markets, and it is a key input in estimating costs of equity and capital in both corporate finance and valuation. Given its importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. Professor Aswath Damodaran begins this paper…

State Street Associates explores how regression models consider historical relevance when generating predictions and why censoring the least relevant periods can improve their predictive power.

Value is one of the most studied risk premia strategies across asset classes. Multi-asset value portfolios have demonstrated attractive payoffs over the long term. Recent value factor underperformance has called into question whether the value factor payoff is cyclically low, or if there are more structural challenges. We…

Jack Vogel, PhD describes 'Active Share' as a way to measure to what extent a fund's holdings differ from the weightings in a corresponding index. He shows viewers how to calculate this in excel and how the technique can be used to compare multiple funds.

An unusual shift in equity betas accompanied the market drawdown in March 2020, leaving equity investors few places to hide. In this paper, we share our observations of this dislocation and highlight the likely affect it had on defensive equity strategies.

In this article, we explore generative models in order to build a market generator. The underlying idea is to simulate artificial multi-dimensional financial time series, whose statistical properties are the same as those observed in the financial markets. In particular, these synthetic data must preserve the first four…

Robeco's data sets give investors the opportunity to conduct their own analysis; this set covers idiosyncratic or residual momentum.

This paper presents an equilibrium bond-pricing model that jointly explains the upward-sloping nominal and real yield curves and the violation of the expectations hypothesis. Instead of relying on the inflation risk premium, the ambiguity-averse agent faces different amounts of Knightian uncertainty in the long run versus…

This paper is a review the literature on equity market momentum, a seminal and intriguing finding in finance. This phenomenon is the ability of returns over the past one to four quarters to predict future returns over the same period in the cross-section of equities. The author documents about ten different theories for…

The volatility surface of an option changes over time, and values exist as discrete points on a grid, but the property of smoothness across points on the surface is evident. Common approaches to predicting points on an implied volatility surface include generalized autoregressive conditional heteroskedasticity (GARCH) and…