Market Indices

AgPa #82: Equity Risk Premiums and Interest Rates (2/2)

Expected Stock Returns When Interest Rates Are Low (2022)
David Blitz
The Journal of Portfolio Management 48(7), URL/SSRN

The second AGNOSTIC Paper on equity risk premiums when interest rates are high(er). This one was actually published before the last one, so David Blitz deserves credit for the original idea. He also examines a longer and more comprehensive dataset that serves as a nice out-of-sample test. So I think it makes sense to conclude the posts on equity risk premiums and interest rates with this more comprehensive paper.

  • Equity risk premiums were lower when interest rates are higher
  • Controlling for other factors doesn’t change the negative relation
  • EPS growth seems to explain the pattern

Read the Full Post

AgPa #81: Equity Risk Premiums and Interest Rates (1/2)

Honey, the Fed Shrunk the Equity Premium: Asset Allocation in a Higher-Rate World (2024)
Thomas Maloney
The Journal of Portfolio Management 50(6), URL/AQR

Risk-free interest rates, the most fundamental anchor of asset prices, increased dramatically in 2022 and are still considerably higher than over the last 10+ years. At the same time, equity markets around the world posted strong performance in 2023 and 2024 (so far). Many investors thus wonder how this fits together. Why should we pay the same multiple for stocks when the risk-free alternative is much better than a few years ago? Or more technically, why should we accept such a low equity risk premium? This week’s AGNOSTIC Paper is the first of two that sheds some light on this (very important, but also very difficult) issue.

  • Equity returns and risk-premiums were lower in higher-rates environments
  • EPS growth, valuations, and interest rate changes explain the effect
  • Treasuries and absolute-return strategies historically benefitted from higher rates

Read the Full Post

AgPa #73: Country and Industry Momentum

Can exchange traded funds be used to exploit industry and country momentum? (2013)
Laura Andreu, Laurens Swinkels, Liam Tjong-A-Tjoe
Financial Markets and Portfolio Management, URL/SSRN

Even if you believe in factor investing, it is very difficult for most investors to actually implement it. Trading portfolios with hundreds of stocks requires considerable infrastructure, enough money, and efficient transaction cost management. This is already a challenge for many institutional investors, so it is logically even more difficult for people like you and me. This week’s AGNOSTIC Paper addresses this issue and presents an idea to still benefit from momentum via equity indices and the corresponding ETFs.

  • Country and industry momentum worked historically
  • The strategies seem to be implementable via ETFs
  • The strategies remained profitable after trading costs

Read the Full Post

AgPa #71: Go Where the Earnings (per Share) Are

What Matters More for Emerging Markets Investors: Economic Growth or EPS Growth? (2022)
Jason Hsu, Jay Ritter, Phillip Wool, Harry Zhao
The Journal of Portfolio Management Emerging Markets 2022, 48 (8), URL/PDF

This week’s AGNOSTIC Paper is one from the myth-busting category and examines the relation between countries’ GDP growth and stock market returns. The idea and analyses are admittedly not new and the paper is basically an update of one of the authors previous work. Nonetheless, I think the question is very interesting and still very relevant for regional asset allocation.

  • GDP growth and stock returns are not correlated over the long-term
  • Theoretically, the missing relation is not surprising
  • Go Where the Earnings (per Share) Are

Read the Full Post

AgPa #42: Global Factors since 1800

Global factor premiums (2021)
Guido Baltussen, Laurens Swinkels, Pim van Vliet
Journal of Financial Economics 124(3), 1128-1154, URL

This week’s AGNOSTIC Paper is another out-of-sample test of the major factors and goes even further back in time than the last one. The authors examine the major factor premiums among equity indices, government bond indices, currencies, and commodities in a sample that ranges from December 31, 1799 to December 31, 2016.

  • Momentum, Value, and Low-Risk “worked” globally, in different asset classes, and out-of-sample
  • There is little evidence for factor decay

Read the Full Post

AgPa #33: World Cups and Stock Markets

Sports Sentiment and Stock Returns (2007)
Alex Edmans, Diego García and Øyvind Norli
The Journal of Finance 62(4), 1967-1998, URL

Given that this week’s AGNOSTIC Paper coincides with the final of the World Cup, I couldn’t resist the temptation. Below you can see a chart of the knockout stage of this year’s tournament. But since you are visiting a nerdy finance website, the focus is not on the results, but on the post-match stock market returns of the playing countries…


You may (understandably) say that this is some nice storytelling but not much more. However, I didn’t made this up to create a story but the idea of this analysis actually comes from this week’s AGNOSTIC paper…

  • Stock markets of losing countries tend to underperform after important matches
  • The effect most likely comes from bad mood after sport losses

Read the Full Post

AgPa #24: Market Capitalization vs. GDP

The big bang: Stock market capitalization in the long run (2022)
Dmitry Kuvshinov, Kaspar Zimmermann
Journal of Financial Economics 145(2), 527-552, URL

This week’s AGNOSTIC Paper is admittedly not very practical but probably more relevant today than ever before. The authors examine the outstanding performance of equity markets since the end of the inflationary 1970s and early 80s. A regime shift that they call the big bang. There are some surprising results, especially beyond the general debate about steadily falling interest rates…

  • The Big Bang: market capitalization detached from GDP growth after the 1980s
  • Most of the Big Bang comes from higher stock prices
  • Falling interest rates are surprisingly not the main driver
  • Higher profitability of listed firms is much more important

Read the Full Post

AgPa #23: Trading on the Weather

Global weather-based trading strategies (2022)
Ming Dong, Andréanne Tremblay
Journal of Banking & Finance, Volume 143, 106558, URL/SSRN

People tend to be in a better mood when the sun is shining. That’s nothing dramatically new but this week’s AGNOSTIC Paper shows that this apparently also applies to investors. An investment strategy that went long (short) the stock market index from the country with the best (worst) weather on a particular day generated meaningful (hypothetical) outperformance…

  • The global long-short weather strategy returned 15.2% p.a. between 1993 and 2012
  • The long-only version of the strategy returned 13.4% p.a.

Read the Full Post

AgPa #7: Spotify Streaming and Stock Returns

Music sentiment and stock returns around the world (2021)
Alex Edmans, Adrian Fernandez-Perez, Alexandre Garel, Ivan Indriawan
Journal of Financial Economics, In Press, Corrected Proof, URL

This week’s AGNOSTIC Paper examines the role of music sentiment in the stock market. What sounds like statistical hocus-pocus is part of an important question. Do other factors than rational information drive stock markets?

I like the paper for its creative use of alternative data and its clean methodology. But to be honest, I was somewhat skeptical when I first heard about it. However, the authors present an intuitive economic rationale and rigorously test their hypotheses in various robustness checks. The results are quite interesting…

  • Music sentiment is related to stock market returns
  • Music sentiment is more important in less efficient markets
  • Music sentiment is also related to fund flows and bond market returns

Read the Full Post

AgPa #5: The Return on Everything

The Rate of Return on Everything, 1870–2015 (2019)
Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, Alan M. Taylor
The Quarterly Journal of Economics 134(3), 1225-1298, URL

This week’s AGNOSTIC Paper is a deep dive into financial history. The authors estimate the total return of equity, housing, bonds, and bills in 16 advanced economies for the period from 1870 to 2015.

The paper is very comprehensive and I focused on the issues that are (in my opinion) most interesting for investors:

  • Real returns on risky assets were 7-8% from 1870 to 2015
  • Returns on risky assets were substantial but volatile
  • Realized risk premiums fluctuate widely across time and countries

Read the Full Post