Quantitative Methods - Articles & White Papers

This white paper is the fourth in a five-paper series. It introduces a radical new perspective on equities, thinking of them as one would of any high-end consumer good. This change in perspective enables us to demonstrate that income inequality is a hidden driver of equity prices, and also allows us to…

In this paper, we investigate the relationship between biodiversity and companies, through the lens of corporate bonds. We focus on acute biodiversity events and address biodiversity as a risk, considering its looming losses. We illustrate the material and tangible operational risk that may arise from biodiversity losses and…

Behavioral finance shines a spotlight on how psychology influences investor behavior which in turn has an impact on financial markets. This plays an important role in explaining factor premiums and assessing the extent to which they will be sustainable in the long run.

The emergence of net zero emissions policies is currently one of the most important topics among asset owners and managers. In this research paper, we investigate the integrated approach, which is implemented by equity and fixed-income mutual funds and ETFs.

We characterise the stochastic interaction of learning algorithms as a deterministic system of differential equations to understand their long-term behaviour in a repeated game. In a symmetric bimatrix repeated game, we prove that the dynamics of many learning algorithms converge to the outcomes of pure strategy Nash…

Stocks with high net gamma exposure robustly underperform stocks with low high net gamma exposure by 10% per year. This effect is distinct from multiple previously documented return predictors, and survives many robustness checks. We show that stocks with low net gamma exposure negatively predicts future realized volatility…

Following the success of diversifying Growth insights in the US, we broadened our research exploration of the Information Momentum factor, extending it to global universes.

Which assets perform best when rates are rising and inflation is high? And what happens if rates are still rising but inflation is already falling? And what’s the impact of the business cycle? These are the questions that everyone is currently trying to answer.

This article analyzes how all the factors we use in our Multi-Factor Regression Model performed during various Market Cycles (in sample), including the Bull/ Bear market, the High/Low inflation, and the Rising/Falling interest rates. Further, we also examine the performance of a Balanced Portfolio ETF–AOR, over the past 100…

Despite structural differences between the options and stock markets, few studies have discussed the behavior and impact of high-frequency traders (HFTs) in the options market. Options exchanges identify high-frequency/algorithmic traders as Professional Customers (PCs). In this study, we use granular data that identifies…

Multi-factor strategies currently present an appealing opportunity for equity investors, even against a challenging macroeconomic backdrop. In summarizing key insights from the last two years, we outline how the value, momentum, quality and low-risk factors have historically delivered robust long-term returns, and how they…

We look into the economic risks of employing factor-style strategies such as those in the STOXX Factor Indices, by screening them through Axioma’s Macroeconomic Projection model. The findings show that some styles have more economic exposure than others, and that macro variables can be correlated with industry, country and…

The Magdeburg Unicorn is a reminder of the problems that can occur with an incomplete picture. At Franklin Templeton, we invest heavily in gathering data, crunching numbers, building models, and trying to make sense of the deluge of information that bombards us daily. In the modern world, data capture and systematic data…

Many authors in the past year have written about the unfortunate failure of the 60/40 asset allocation in 2022. These so-called balanced portfolios with broad exposure to stocks and bonds experienced losses not seen since the Great Depression, discouraging investors anticipating the benefits of modest diversification.…

To have confidence that a factor premium, or strategy, isn’t just the result of data mining – a lucky/random outcome – we recommend that you require evidence that the premium has not only been persistent over long periods of time and across economic regimes, but also pervasive across sectors, countries, geographic regions…

Beta-neutral value, momentum, and low volatility factors are currently highly correlated to the S&P 500. The correlation is temporary rather than structural. Likely explained by the downturn in tech stocks that benefits these factors.

This article discusses the same market states out-of-sample. We will describe our methodology and the thinking behind it all in this article. Both in-sample and out-of-sample market cycle analysis may be useful for making investment decisions.

The win rate of a trend-following strategy is related to the probability of uncle point or ruin. A high win rate helps to avoid an uncle point or even ruin. However, during adverse market conditions, the win rate can fall below levels that guarantee positive expectation.

This article develops a new approach to explain why risk factors constructed from index option returns are priced in the stock market. We decompose an option-based factor into three main components and identify the one responsible for the beta–return relationship.

We study the effect of an asset’s volatility on the expected returns of European options on the asset. Deriving predictions from a stochastic discount factor model, we show that the effect depends on whether variations in the asset’s volatility are driven by systematic or idiosyncratic volatility.