This article focuses on the interaction between media and asset prices and explores the potential mechanisms that drive stock market reaction to news media. The authors find that when buying past losers with low sentiment and selling past winners with high sentiment, the return obtained exceeds the standard reversal effect, and media sentiment has the effect of enhancing stock returns; that is, there is a media reinforcement effect. When the returns are opposite to the media sentiment, the return obtained is lower than the standard reversal effect; that is, the media reinforcement effect disappears. Using different types of media, the authors find that the state-controlled media has a media reinforcement effect, while the private media does not have this same effect. At the same time, the authors find that the stronger the heterogeneous beliefs of investors and the more severe the arbitrage restrictions, the more significant the media reinforcement effect. This article helps to clarify the internal mechanism underlying the market’s reaction to the news media.
{"title":"The Media Reinforcement Effect in the Chinese Stock Market","authors":"Qinqin Yu, Bingling Zhang","doi":"10.3905/jpm.2023.1.483","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.483","url":null,"abstract":"This article focuses on the interaction between media and asset prices and explores the potential mechanisms that drive stock market reaction to news media. The authors find that when buying past losers with low sentiment and selling past winners with high sentiment, the return obtained exceeds the standard reversal effect, and media sentiment has the effect of enhancing stock returns; that is, there is a media reinforcement effect. When the returns are opposite to the media sentiment, the return obtained is lower than the standard reversal effect; that is, the media reinforcement effect disappears. Using different types of media, the authors find that the state-controlled media has a media reinforcement effect, while the private media does not have this same effect. At the same time, the authors find that the stronger the heterogeneous beliefs of investors and the more severe the arbitrage restrictions, the more significant the media reinforcement effect. This article helps to clarify the internal mechanism underlying the market’s reaction to the news media.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"81 - 101"},"PeriodicalIF":1.4,"publicationDate":"2023-04-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42949732","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Inflation-plus strategies attempt to deliver positive real returns over reasonable horizons. The “real” in real return strategies is to adjust for inflation. This is different from the “real” in real asset strategies that focus on real assets (loosely, claims to tangible assets). The distinction is important because real assets might not be good additions to real return strategies. This article details how a portfolio view of building a real return strategy can help improve the efficiency of real return strategies compared to simply building the portfolio out of individual assets that may have favorable inflation sensitivities. We take an international perspective to highlight the importance of country-specific inflation and currency risks along with taking a dynamic approach to navigating a changing inflation landscape.
{"title":"Inflation-Plus Investing: Real Returns for Real Investors","authors":"Brian Jacobsen, Matthias Scheiber","doi":"10.3905/jpm.2023.1.484","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.484","url":null,"abstract":"Inflation-plus strategies attempt to deliver positive real returns over reasonable horizons. The “real” in real return strategies is to adjust for inflation. This is different from the “real” in real asset strategies that focus on real assets (loosely, claims to tangible assets). The distinction is important because real assets might not be good additions to real return strategies. This article details how a portfolio view of building a real return strategy can help improve the efficiency of real return strategies compared to simply building the portfolio out of individual assets that may have favorable inflation sensitivities. We take an international perspective to highlight the importance of country-specific inflation and currency risks along with taking a dynamic approach to navigating a changing inflation landscape.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"34 - 51"},"PeriodicalIF":1.4,"publicationDate":"2023-04-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45640677","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Alexander Swade, Sandra Nolte, M. Shackleton, Harald Lohre
Equal-weighted (EW) portfolios have outperformed their value-weighted (VW) counterparts over multiple decades in various investment universes. This article investigates the long-term evidence for the EW–VW return spread in a broad US equity universe across multiple factor models. Unsurprisingly, EW investing comes with a highly significant positive size factor exposure. Given its acyclic rebalancing character, EW investing is also found to benefit from short-term reversal effects while suffering from negative momentum exposure. The authors also document a pronounced seasonality effect in EW investing that would see outsized returns in January. They revisit these findings in the more investable universe of S&P 500 stocks and discuss how to best harvest the embedded factor premiums.
{"title":"Why Do Equally Weighted Portfolios Beat Value-Weighted Ones?","authors":"Alexander Swade, Sandra Nolte, M. Shackleton, Harald Lohre","doi":"10.3905/jpm.2023.1.482","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.482","url":null,"abstract":"Equal-weighted (EW) portfolios have outperformed their value-weighted (VW) counterparts over multiple decades in various investment universes. This article investigates the long-term evidence for the EW–VW return spread in a broad US equity universe across multiple factor models. Unsurprisingly, EW investing comes with a highly significant positive size factor exposure. Given its acyclic rebalancing character, EW investing is also found to benefit from short-term reversal effects while suffering from negative momentum exposure. The authors also document a pronounced seasonality effect in EW investing that would see outsized returns in January. They revisit these findings in the more investable universe of S&P 500 stocks and discuss how to best harvest the embedded factor premiums.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"167 - 187"},"PeriodicalIF":1.4,"publicationDate":"2023-03-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47415589","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article highlights some of the main practical errors and challenges associated with investing in Economic and Monetary Union (EMU) government bonds and the difficulties in implementing EMU government bond strategies. These challenges refer to both portfolio allocation and to factor bond portfolios. Different country economic fundamentals, central bank policy, market timing, market risks, model and management risks, liquidity, and idiosyncratic country risks as well as spillover effects should be considered when investing in individual EMU government bonds. These essential properties of EMU bonds are not adequately addressed in portfolio allocation models (e.g., the tracking error or the mean–variance optimization) applied to single bond portfolios from equity investing. The main EMU government bond disparities are associated with country risks, which can be generalized to the main difference between core and periphery country yield spreads.
{"title":"Errors and Challenges Associated with Investing in EMU Government Bonds","authors":"Gueorgui S. Konstantinov","doi":"10.3905/jpm.2023.1.481","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.481","url":null,"abstract":"This article highlights some of the main practical errors and challenges associated with investing in Economic and Monetary Union (EMU) government bonds and the difficulties in implementing EMU government bond strategies. These challenges refer to both portfolio allocation and to factor bond portfolios. Different country economic fundamentals, central bank policy, market timing, market risks, model and management risks, liquidity, and idiosyncratic country risks as well as spillover effects should be considered when investing in individual EMU government bonds. These essential properties of EMU bonds are not adequately addressed in portfolio allocation models (e.g., the tracking error or the mean–variance optimization) applied to single bond portfolios from equity investing. The main EMU government bond disparities are associated with country risks, which can be generalized to the main difference between core and periphery country yield spreads.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"132 - 143"},"PeriodicalIF":1.4,"publicationDate":"2023-03-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41733433","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Multi-Asset Portfolios in the New Order","authors":"W. Lee","doi":"10.3905/jpm.2023.1.479","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.479","url":null,"abstract":"","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"36 - 44"},"PeriodicalIF":1.4,"publicationDate":"2023-02-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49152676","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Editor’s Introduction for the 2023 Special Issue on Multi-Asset Strategies and Asset Allocation","authors":"Frank J. Fabozzi","doi":"10.3905/jpm.2023.1.478","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.478","url":null,"abstract":"","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"752 1","pages":"1 - 3"},"PeriodicalIF":1.4,"publicationDate":"2023-02-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41262982","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this article, the author advocates for the use of causal graphs to modernize the field of factor investing and set it on a logically coherent foundation. To do this, first he introduces the concepts of association and causation. Second, he explains the use of causal graphs and the real (causal) meaning of the ceteris paribus assumption that is so popular among economists. Third, he explains how causal graphs help us estimate causal effects in observational (nonexperimental) studies. Fourth, he illustrates all of the earlier concepts with Monte Carlo experiments. He concludes that the field of factor investing must embrace causal graphs in order to wake up from its associational slumber.
{"title":"Where Are the Factors in Factor Investing?","authors":"Marcos M. López de Prado","doi":"10.3905/jpm.2023.1.477","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.477","url":null,"abstract":"In this article, the author advocates for the use of causal graphs to modernize the field of factor investing and set it on a logically coherent foundation. To do this, first he introduces the concepts of association and causation. Second, he explains the use of causal graphs and the real (causal) meaning of the ceteris paribus assumption that is so popular among economists. Third, he explains how causal graphs help us estimate causal effects in observational (nonexperimental) studies. Fourth, he illustrates all of the earlier concepts with Monte Carlo experiments. He concludes that the field of factor investing must embrace causal graphs in order to wake up from its associational slumber.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"6 - 20"},"PeriodicalIF":1.4,"publicationDate":"2023-02-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47401331","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The author examines the different methods of volatility estimation widely used among market practitioners. These techniques range from the simple to the complex and incorporate varying degrees of backward- and forward-looking data. The author discusses the characteristics of asset class returns that make volatility inherently more predictive than returns themselves. He compares a variety of volatility estimation models, assessing their characteristics and predictive abilities across different asset classes and market environments. Finally, he assesses the application of volatility estimates as an asset allocation tool.
{"title":"Time-Series Techniques: Estimating Volatility","authors":"Stephen Marra","doi":"10.3905/jpm.2023.1.475","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.475","url":null,"abstract":"The author examines the different methods of volatility estimation widely used among market practitioners. These techniques range from the simple to the complex and incorporate varying degrees of backward- and forward-looking data. The author discusses the characteristics of asset class returns that make volatility inherently more predictive than returns themselves. He compares a variety of volatility estimation models, assessing their characteristics and predictive abilities across different asset classes and market environments. Finally, he assesses the application of volatility estimates as an asset allocation tool.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"160 - 177"},"PeriodicalIF":1.4,"publicationDate":"2023-02-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41963617","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The authors seek to establish which factors are appropriate for defensive investors, where defensiveness is defined along three dimensions: low risk of permanent capital loss, low business cycle risk, and low market risk. They analyze a range of volatility and quality factor characteristics through both a theoretical and empirical lens, discovering that low leverage, earnings volatility, and return volatility are the most consistently defensive. Profitability is the next most powerful characteristic, though for it to be reliably defensive, leverage must be controlled for in its definition or implementation. Asset turnover and earnings quality, measured by the level of accruals, have also empirically behaved like defensive characteristics, though to a lesser extent and less consistently. Low investment had lackluster results in all tests, whereas high forecast growth is confirmed to be entirely inappropriate for defensive investors.
{"title":"In Search of a Defensive Equity Factor","authors":"Ross French, Niklas Gärtner","doi":"10.3905/jpm.2023.1.473","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.473","url":null,"abstract":"The authors seek to establish which factors are appropriate for defensive investors, where defensiveness is defined along three dimensions: low risk of permanent capital loss, low business cycle risk, and low market risk. They analyze a range of volatility and quality factor characteristics through both a theoretical and empirical lens, discovering that low leverage, earnings volatility, and return volatility are the most consistently defensive. Profitability is the next most powerful characteristic, though for it to be reliably defensive, leverage must be controlled for in its definition or implementation. Asset turnover and earnings quality, measured by the level of accruals, have also empirically behaved like defensive characteristics, though to a lesser extent and less consistently. Low investment had lackluster results in all tests, whereas high forecast growth is confirmed to be entirely inappropriate for defensive investors.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"96 - 130"},"PeriodicalIF":1.4,"publicationDate":"2023-02-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43078492","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article examines the concept of quality as a factor commonly used in portfolio management. Although value and momentum are fairly well-established constructs, the third major factor in many models, quality, is not so well articulated. This research aggregates the most common components of quality into a parsimonious, well-defined factor (QAL) using the data reduction technique known as partial least square. The authors show that their factor has power independent of the other factors and significant return in excess of common risk models. Moreover, their QAL factor possesses favorable downside risk properties and works as a superior hedge during turbulent market performance periods, which they contend is the main feature one would expect of assets with high quality. Additionally, adding the authors’ QAL to an opportunity set consisting of other factors, as well as a traditional 60/40 equity/fixed-income portfolio, increases the Sharpe ratio and improves downside protection simultaneously because of its diversifying effect.
{"title":"A “Quality” Quality Factor","authors":"Zixuan Jiao, Ricky Cooper","doi":"10.3905/jpm.2023.1.471","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.471","url":null,"abstract":"This article examines the concept of quality as a factor commonly used in portfolio management. Although value and momentum are fairly well-established constructs, the third major factor in many models, quality, is not so well articulated. This research aggregates the most common components of quality into a parsimonious, well-defined factor (QAL) using the data reduction technique known as partial least square. The authors show that their factor has power independent of the other factors and significant return in excess of common risk models. Moreover, their QAL factor possesses favorable downside risk properties and works as a superior hedge during turbulent market performance periods, which they contend is the main feature one would expect of assets with high quality. Additionally, adding the authors’ QAL to an opportunity set consisting of other factors, as well as a traditional 60/40 equity/fixed-income portfolio, increases the Sharpe ratio and improves downside protection simultaneously because of its diversifying effect.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"58 - 69"},"PeriodicalIF":1.4,"publicationDate":"2023-02-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46307041","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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