Alternative Thinking

Fire and Ice: Confronting the Twin Perils of Inflation and Deflation

The COVID-19 pandemic and the responses to it by governments, central banks and consumers have unleashed both disinflationary and inflationary forces, but we do not know which forces will win over the longer term. We explore the historical inflation sensitivities of a range of different investments and present the benefits of both risk-balanced asset allocations and dynamic directional strategies to prepare for uncertain times.

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Tax Aware

Limitation on Trader Fund Losses under the CARES Act of 2020

This paper provides a simple unifying framework for value and momentum effects in asset pricing based on the present value model. Backing out reliable expected returns from the present value model requires valuation ratios that adjust for expected future earnings growth. We show empirically that stock price momentum forecasts future growth, helps to improve value’s forecast for expected returns, and is drowned out when accounting for realized growth.

Quick Clips

The sharp deleveraging across arbitrage markets in March 2020 was followed by very strong performance in 2H 2020. In our recent webinar and summary, we review what drove last year’s returns in SPACs, convertibles and mergers, and discuss why we are optimistic about the outlook for 2021 and beyond.

Asset Allocation

2021 Capital Market Assumptions for Major Asset Classes

We update our estimates of medium-term (5- to 10-year) expected returns for major asset classes. We also discuss what investors should expect from the stock-bond correlation in the coming decade.

Macroeconomics

Fire and Ice: Confronting the Twin Perils of Inflation and Deflation

The COVID-19 pandemic and the responses to it by governments, central banks and consumers have unleashed both disinflationary and inflationary forces, but we do not know which forces will win over the longer term. We explore the historical inflation sensitivities of a range of different investments and present the benefits of both risk-balanced asset allocations and dynamic directional strategies to prepare for uncertain times.

ESG Investing

(Car)Bon Voyage: The Road to Low Carbon Investment Portfolios

We discuss how an investment portfolio could dramatically reduce its carbon footprint, potentially even achieving a ‘net zero’ carbon footprint. We discuss the pros and cons of techniques to achieve carbon reduction goals, including security selection, shorting high carbon footprint companies, and trading instruments such as carbon offsets and carbon permits.

'20 Questions

2020 is almost over, but it has left many questions unanswered. This week, I’ll answer eleven of them in a not-so-fond farewell to the year. It will be forecast-free. If you want forecasts you can go to any news site or turn on any TV channel. Or wait in line anywhere. Happy New Year!

ESG Investing

Does ESG Help or Hurt Returns?

Combining several large data sets, we compute the empirical ESG-efficient frontier and show the costs and benefits of responsible investing.

Not Your Average Economic Cycle

Market analysis is often based on comparisons with past economic cycles. This week, we look at why we should be cautious in drawing analogies to previous recessions and recoveries.

Fixed Income

Modeling Corporate Bond Returns

We propose a new conditional factor model for corporate bond returns with four factors and time-varying factor loadings instrumented by observable bond characteristics. We find our factor model excels in describing the risks and returns of corporate bonds, improving over previously proposed models in the literature by a large margin.

Macroeconomics

It’s Not a Bound; It’s an Opinion

In the second paper of our “Bonds Today” series, we review the popular belief that bond yields are too close to zero to fall much further and then explain why we disagree.