THREAD: Stop Paying for Beta; How to Fin-Dom Beta ▼😳

1\ The Volatility Effect is a well journaled factor return, with empirical evidence suggesting that in US, European, and Japanese markets, low volatility assets in equity markets have higher risk-adjusted returns.
2\ This indicates that investors tend to overpay for risky stocks. Some of the explanations include leverage, behavioural biases and “beta-chasing” funds. For example, we know that in the CAPM model, excess returns may only be obtained via beta of the market net on risk-free.
3\ In many cases, factor returns exist both cross sectionally and in time-series analysis. For example, both cross-sectional and time-series momentum are known effects.

They do not exist on equal planes, however. TS-MOM is tends to be more persistent, particularly in equities.
4\ While literature covers the Vol Effect cross sectionally across equity baskets, our alpha research shows that such idiosyncratic preferences (and overpaying) for beta/volatility exists in time-series data.
5\ That is, equities showing lower volatility relative to its own historical average also have positive expected returns. This alpha exists regardless of the absolute levels of volatility compared to its basket. This is quite effect is quite persistent.
6\ We think that the same reasons in the cross sectionality apply to the time-series effect. In addition, in time-series data, we believe that other factors such as exhaustion of trends/explosive movements (simulating some variant of mean-reversion) play a part in excess profits.
7\ Such excess returns may be harvested by overlaying cross sectional and time series effects on a basket of equities.
8\ FIN. This was from our weekly alpha program at the HangukQuant newsletter. For premium subscribers, see implementation and report:…
9\ Paper; The Volatility Effect…

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More from @HangukQuant

15 Oct
1\ While I have criticized many facets of applying AI in trading, the appeals fall on deaf ears. If you are going to use them anyway, let’s do it correctly.
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THREAD: Stochastic Optimization in Dynamic Environments: Portfolio Allocation by a Quant ▼

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1\ Thread:

A Quantum Revolution is Looming.

Why should you care?
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