Market Indices

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

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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

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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

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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

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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

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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.

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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

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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

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AgPa #4: Measuring the World’s Assets (2/2)

Historical Returns of the Market Portfolio (2019)
Ronald Doeswijk, Trevin Lam, Laurens Swinkels
The Review of Asset Pricing Studies 10(3), 521-567, URL

This is the second post on the global market portfolio and again examines two papers. It is designed to be a sequel, so I recommend to read the first part before.

The global market portfolio is a tough empirical challenge. Different methodology leads to different results and the papers disagree on several points. But there are some common insights that enhance our understanding of the market portfolio.

  • Most assets are not publicly traded
  • Stock markets are relatively small
  • Recent historical returns were 4.4% to 6.3% per year
  • The market portfolio is a good starting point

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AgPa #3: Measuring the World’s Assets (1/2)

The Global Market Portfolio (2021)
Gregory Gadzinski, Markus Schuller, Andrea Vacchino
The Journal of Portfolio Management 47(8), 151-163, URL

This week’s AGNOSTIC Paper attempts to translate an important theoretical concept into practice – the global market portfolio.

The global market portfolio captures all available assets and each is weighted by its market value. The authors develop two proxies for this portfolio and present some interesting insights:

  • Global assets were worth about $667T in 2019
  • The investable market portfolio returned 4.7% p.a. from 2005-2020/Q1
  • The non-investable market portfolio returned 5.9% p.a. from 2005-2020/Q1

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