Inspiring Market Efficiency Results…NOT!

///Inspiring Market Efficiency Results…NOT!

Inspiring Market Efficiency Results…NOT!

By | 2014-09-23T10:25:44+00:00 August 20th, 2014|Research Insights|3 Comments
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(Last Updated On: September 23, 2014)

Yes, it is true, lower risk securities have historically outperformed higher risk securities. We’ve seen this in a variety of academic research pieces, but sometimes you gotta grind the data on your own to really understand and get comfortable with the results. A recent paper and this paper and some of our own internal research has suggested that the “low vol” anomaly might be bunk. We are on a data adventure to get to the bottom of this anomaly…

Legend:

  • Col 1 = high idiosyncratic stocks, monthly rebalanced, equal-weight, mid/large cap only, 1927 to 2013
  • Col 2 = high beta stocks, monthly rebalanced, equal-weight, mid/large cap only, 1927 to 2013
  • Col 3 = low idiosyncratic stocks, monthly rebalanced, equal-weight, mid/large cap only, 1927 to 2013
  • Col 4 = low beta stocks, monthly rebalanced, equal-weight, mid/large cap only, 1927 to 2013

The chart below is part of a larger study we’ll be sharing in the near future (click to enlarge):

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

In the meantime, gleam over the numbers.

There is definitely a counter-intuitive relationship between risk and return. Higher risk, lower return; lower risk, higher return.

The difference between IVOL and BETA are trivial and highly correlated (90%+).

But are these spreads robust? Are they other anomalies in drag? We are going to find out…

 


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About the Author:

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.