Editor’s Letter

We open the winter issue with Cornell’s insight about the extent to which market participants accept the three competing theories of price determination: the classic monetary theory, the fiscal theory, and a “Keynesian” model. Westgaard and Steen ask the question, “Is beta dead for commodities?” and show that the static long-term correlation and beta between commodities and stocks vary, but are generally low over time. Lung, Saydometov, and Uddin examine investors’ limited attention to surprising earnings news among economically linked firms and find that the notion of limited attention is not a universal phenomenon, but is subject to the nature of both the news and the parties involved. Folkinshteyn, Meric, and Meric, controlling for beta, firm size, and industry group, provide evidence that value stocks are generally less sensitive to major stock market declines than growth stocks.

Next, Haesen, Hallerbach, Markwat, and Molenaar propose a portfolio selection framework that allows an investor to position herself between these two extremes: expected returns of a risk-parity approach and the assumed certainty of expected returns in a mean–variance approach. Adams, Ahmed, and Nanda find that despite their growing popularity, long–short and market neutral funds deliver lower risk-adjusted returns than U.S. Treasuries, and the returns of both types of funds are positively and significantly correlated with the stock market. Blau and Whitby test whether or not investors are compensated for holding stocks with excess kurtosis. Grelck, Prigge, Tegtmeier, and Topalov analyze whether listed family firms are an asset class on their own with attractive diversification properties. Fong proposes an investment strategy, constructed by intersecting stocks with high gross profitability and low betas, that has no significant HML exposure but is nonetheless able to deliver value-like returns.

In our special section on active quant, Brown examines the historical performance of style risk factors and reports findings regarding returns and the need to consider investor’s goals when deciding which factors are appropriate to use to generate portfolio alpha. Guerard and Chettiappan apply their investment research and find support for simple and regression-based composite modeling using these analysts’ expectations, momentum, and fundamental data for global and emerging markets stocks, as well as multifactor models for portfolio construction and risk control. Fitzgibbons, Friedman, Pomorski, and Serban investigate two popular approaches to long-only style investing that are often considered as potential starting points for smart beta investors: the portfolio mix that combines allocations to stand-alone indexes for each style and the integrated portfolio that integrates styles directly in the portfolio construction process.

We conclude the issue with Nayar, Kampouris, and Sivitos, who present alternative ways by which outliers can be detected effectively in both the univariate and multivariate case.

As always, we welcome your submissions. We value your comments and suggestions, so please email us at journals{at}investmentresearch.org.

TOPICS: Statistical methods, analysis of individual factors/risk premia

Brian Bruce

Editor-in-Chief

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