AgPa #41: US Factors before 1926

The Cross-Section of Stock Returns before CRSP (2023)
Guido Baltussen, Bart van Vliet, Pim van Vliet
SSRN Working Paper, URL

This week’s AGNOSTIC Paper is an unprecedented out-of-sample test of the four major factors (Momentum, Value, Low-Risk, Size). The authors construct a novel dataset of US stocks that reaches from 1866 to 1926. It therefore extends the extensively studied CRSP dataset by 60 years.

  • Momentum, Value, and Low-Risk were there before 1926
  • Factors weren’t stronger before 1926
  • Machine learning models find the same factors

Read the Full Post

AgPa #40: Size Effect – Fact and Fiction

Fact, Fiction, and the Size Effect (2018)
Ron Alquist, Ronen Israel, Tobias Moskowitz
The Journal of Portfolio Management Fall 2018, 45 (1) 34-61, URL/AQR

After examining several Facts and Fictions around factor investing in general, momentum, value, and low-risk, this week’s AGNOSTIC Paper tackles the final anomaly. The size effect received a lot of attention in both academia and the investment industry, probably because it is one of the oldest documented anomalies. In this final paper of their Fact and Fictions series, the authors examine some myths around it.

  • Fiction: Size is the strongest documented factor
  • Fact: The size effect weakened since its discovery
  • Fiction: The size effect is robust across different measures
  • Fact: The size effect is strongly related to the January effect
  • Fiction: Size also works in international equity markets
  • Fact: Size does not work within other asset classes
  • Fact: Most of the size effect are micro cap stocks
  • Fact: Size is difficult to implement in real-world portfolios
  • Fiction: The size effect is more than just a liquidity effect
  • Fiction: There are economic theories for the size effect
  • Fiction: Size works because other factors are stronger among small cap stocks
  • Fact: There are reasons to overweight small caps even without the size effect
  • Fact and Fiction: The size effect is stronger when controlling for other factors
  • Fact: Size receives a lot of attention despite weak evidence

Read the Full Post