By choosing investment strategies that intentionally create exposure to factor betas, investors may be obtaining uncompensated risks. We show across a wide variety of factors and geographical markets that factors constructed from fundamental characteristics have earned high returns, whereas...

We demonstrate that uncertainty about future preferences is of first-order importance for understanding the history of aggregate asset prices. Our analysis shows that simply relaxing the assumption of deterministic aggregate elasticity of intertemporal substitution and relative risk aversion can...

Standard risk management approaches fail to consider parameter uncertainty, which has led to improper risk management. Blind faith in parameter estimates has too often led to blind faith in the resulting VAR outputs, and when these estimates are too often exceeded the proposed solution is...

Managing risk successfully requires a detailed understanding of the distributions from which random shocks to asset prices are drawn. However, there is uncertainty in both the actual distribution of returns and the parameters characterizing the distribution. In this chapter, we focus on the...

Factor investing has been around for several decades, backed by an enormous body of literature, and yet it is still surrounded by much confusion and debate. Some of the rhetoric and myths have existed for a long time, while others have arisen in response to the difficult performance from 2018 to...

Value stocks outperform growth stocks. The academic literature provides two competing interpretations on what drives the value premium: exposure to risk factors or mispricing of securities. Existing empirical studies, which are largely based on U.S. data, have not conclusively rejected one...

Value stocks outperform growth stocks. The academic literature provides two competing interpretations on what drives the value premium: exposure to risk factors or mispricing of securities. Existing empirical studies, which are largely based on U.S. data, have not conclusively rejected one...

Stocks tend to earn high or low returns relative to other stocks every year in the same month (Heston and Sadka 2008). We show these seasonalities are balanced out by seasonal reversals: a stock that has a high expected return relative to other stocks in one month has a low expected return...