Daily Academic Alpha: Out-of-Sample Testing
Last updated on January 18th, 2017 at 02:34 pm
The objective of this thesis is to develop and back-test an investment strategy created by professors Wesley R. Gray and Tobias E. Carlisle in their book Quantitative Value, published in 2013. Gray and Carlisle construct a quantitative strategy based on Warren Buffet’s investment philosophy and when back-tested, show that the strategy has been able to outperform the S&P500 TR Index for the last 40 years. The author tries to replicate the results shown by Gray and Carlisle for the US stock market which, despite the short period analyzed, gives promising results as the strategy generates a positive Jensen’s alpha that is statistically significant. When implemented for the Icelandic stock market the results are very impressive as the model’s return is significantly higher than the market’s. The model also manages to outperform Icelandic equity funds over a recent 18 month period, generating the highest Jensen’s alpha that is also statistically significant. The author set out to see if the model could be improved by introducing a new measure; return on invested capital (ROIC). The model’s results with ROIC included were impressive but did not improve the performance of the original model. However, due to the small sample size, the author believes that the result give cause to further research. The results support Gray and Carlisle’s findings that they have managed to find a model that systematically picks value stocks that generate excess returns.
Recently, Fama and French (2014) document a five-factor model that includes the market and factors related to size, book-to-market, profitability and investment outperforms the three-factor model of Fama and French (1993). Using an extensive sample over the period 1982 to 2013, we investigate the performance of the five-factor model in pricing Australian equities. We find that the five-factor is able to explain more asset-pricing anomalies than the three-factor model, which supports the superiority of the five-factor model. In contrast to that documented in Fama and French (2014), the book-to-market factor is found to remain its explanatory power in the presence of the investment and profitability factors. Our study provides an update to the existing Australian asset pricing literature.
Note: This site provides no information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.
Join thousands of other readers and subscribe to our blog.
Please remember that past performance is not an indicator of future results. Please read our full disclaimer. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.