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MSCI Quality Index

September 8, 2013 Comments (0)

I was unaware MSCI had beaten AQR to the punch by producing a boatload of quality indices last spring.  These are applied worldwide, so they are necessarily more parsimonious than AQRs...but jeez, these are really barebones:1) Net Income/Book Equity2) Debt/Book Equity3) Earnings volatility over 5 yearsInstructively, they Winsorize the data, which everyone should do to financial ratios (ie, truncate extremums).  But, book equity in the denominator?  Earnings volatility over 5...

de Botton on Status Anxiety

September 4, 2013 Comments (0)

I find Alain de Botton's approach to philosophy rather refreshing, because one senses his genuine lack of certainty, and appreciation of discovering, in his works.  Indeed, he was rather insightfully quoted in a NYT review of Sophie Fontanel's book on her self-induced celibacy, which highlighted his breadth and profundity.  Anyway, here's de Botton on status anxiety. He argues that status anxiety is worse than ever because now we believe we are less constrained by our birth, more...

How to Maximize Lottery Revenue

September 2, 2013 Comments (0)

As a proponent of the idea that people are oriented towards their relative success, not absolute wealth, I think this lottery idea is fiendishly clever.  Here's a description from TheWeek of a clever way to capitalize on this instinct:A salient example is the "Postcode Lottery" in the Netherlands. Weekly it awards a "Street Prize" to one postal code, the Dutch equivalent of a zip code, chosen at random. When a postal code (usually about 25 houses on a street) is drawn, everybody who played...

The Boring Premium

September 1, 2013 Comments (0)

Todd Mitton and Keith Vorkink from (boring) BYU published Why Do Firms With Diversification Discounts Have Higher Expected Returns? Their answer: no skew. People will pay up for lottery tickets, but if you take those dreams away, it becomes an asset that is neglected. They find diversified firms offers less skew, and diversification discounts are significantly greater when the diversified firm offers less skewness than typical focused firms in similar business segments. They suggest a substantial...

AQR's Quality at a Reasonable Price

August 25, 2013 Comments (0)

Our intrepid equity researchers at AQR have come out with a new paper adding to the color on how to pick a strategy given value considerations.  In Asness, Frazzini and Pedersen's latest paper, Quality Minus Junk, they first try to create a 'quality' metric, and then try to meld it with value. Quality is defined very clearly as the composite of 4 factors (each of which is made up of 3-5 ratios):Profitability (eg, Net Income/Assets)Growth (eg, change in Profitability)Safety (eg, volatility,...

Economath and the Drake Equation

August 25, 2013 Comments (0)

There were several posts last week on the hypothesis that there's too much emphasis on mathematical modeling in modern economics.  Most said yes (Dave Hendersen, Bryan Caplan, Noahpundit), though Krugman said no. Krugman's experience is very pertinent as his Nobel Prize winning model on increasing returns to scale is a good example of obtuse economodeling: its thesis was known before being the basis of the centuries-old infant industry argument, and after Krugman it was no easier to apply....

Is The Low Vol Anomaly Really a Skew Effect?

August 13, 2013 Comments (0)

The idea that low volatility stocks have higher returns than high volatility stocks is difficult for economists to digest, because it's so hard to square with standard theory.  It brings to mind Dostoyevsky's line "If God is dead, then everything is permitted." Similarly, when one sees their favored theory as being abandoned, it seems like all explanation is lost and chaos reigns. Yet, when a wrong theory is adopted, well, as the ever-logical Bertrand Russel used to note, if 1+1=1,...

Now Not the Time to Value-Tilt Low Vol

August 11, 2013 Comments (0)

Every week, a low volatility researcher has the same epiphany: tilt low volatility towards value.  This addresses two pressing issues simultaneously: avoiding overbought securities and adding value alpha. A neat articulation of this view is from Feifei Li of Research Affiliates, who first shows that lots of people are investing in low volatility. Clearly growth in low volatility is rising exponentially, and our intuition senses a Malthusian endgame that will be nasty and brutish.That might...

On the Inverse Correlation between Expected Risk and Return

August 5, 2013 Comments (0)

Imagine a world where expected returns are solely a function of covariances as standard theory implies. Then for assets with specific covariances, the market should give them specific expected returns. People should expect risk and return to be positively correlated.Instead, Sharpe and Amromin find that people expect volatility and returns to be inversely correlated: when they are bullish they expect low volatility, and when they are bearish they expect high volatility. This is counter to...

My Big Toe

July 28, 2013 Comments (0)

A large problem in physics concerns the nature of quantum reality, where as Richard Feynman famously  said, “if you think you understand it, you don’t understand it.”  A currently popular solution is the many worlds hypothesis, preferred by Eliezer Yudkowsky among others, which is that for every quantum event, everything actually happens, merely in different branching universes.  Another solution is offered by Tom Campbell, author of My Big TOE (Theory of Everything), who argues...