Fundamental Factors Revisited, Amongst A Applied Scientific Discipline Update

Contrary to my tradition of alerting readers to novel together with fancypants factors for predicting stock returns (while non necessarily endorsing whatever of them),  I study that Lyle together with Wang convey lately published novel interrogation demonstrating the ability of 2 real familiar factors: book-to-market ratio (BM) together with return-on-equity (ROE).

The model is simple: at the terminate of each calendar quarter, compute the log of BM together with ROE for every stock based on the around recent profits announcement, together with regress the next-quarter render against these 2 factors. One subtlety of this regression is that the ingredient loadings (log BM together with ROE) together with the futurity returns for stocks inside an manufacture grouping are pooled together.  This makes for a cross-sectional ingredient model, since the ingredient loadings (log BM together with ROE) vary past times stock but the ingredient returns (the regression coefficients) are the same for all stocks inside an manufacture group. (A clear elucidation of cross-sectional vs time-series ingredient models tin terminate hold out institute inward Section 17.5 of Ruppert.) If nosotros long stocks inside the overstep decile of expected returns together with curt the bottom decile together with concur for a quarter, the expected annualized average returns of this model is an eye-popping 26% or so.

I convey tried to replicate these results, but unfortunately I couldn't. (My programme generated a measly, though positive, APR.) The information requirement together with the programme are both quite demanding. I am unable to obtain the sixty quarters of telephone substitution information that the authors recommended - I simply convey 40. I used the 65 manufacture groups defined past times the GIC manufacture classifications, spell the authors used the 48 Fama-French manufacture groups. Finally, I am unsure how to bargain alongside stocks which convey negative mass values or earnings, together with thus I omit those quarterly data. If whatever of our readers are able to replicate these results, delight exercise permit us know.

The authors together with I used Compustat database for the telephone substitution data. If you lot exercise non convey subscription to this database, you lot tin terminate regard a new, free, website called Thinknum.com. This website makes available all information extracted from companies' SEC filings starting inward 2009 (2011 for small-scale caps). There is also a great integration alongside R described here.

*** Update ***

I forgot to betoken out i essential divergence betwixt the method inward the cited newspaper together with my ain effort: the newspaper used the entire stock universe except for stocks cheaper than $1, spell I did my interrogation alone on SP500 stocks (Hat tip to Prof. Lyle who clarified this). This turns out to hold out of major importance:  a to-be-published newspaper past times our reader I. Kaplan reached the determination that "Linear models based on value factors exercise non predict futurity returns for the S&P 500 universe for the past times 15 years (from 1998 to 2013)."


===

Speaking of novel trading technology scientific discipline platforms that supply historical information for backtesting (other than Thinknum.com together with the previously mentioned Quantopian.com), hither is roughly other interesting one: QuantGo.com. It provides institutional intraday historical information through its information partners from 1 infinitesimal bars to sum depth of mass inward your ain soul cloud running on Amazon EC2 concern human relationship for a depression monthly rate. They give unlimited access to years of historical information for a monthly information access fee, for examples States equities Trades together with Quotes (TAQ) for an unlimited issue of years are $250 per calendar month of concern human relationship rental, OPRA TAQ $250 permonth together with tagged tidings is $200. Subscribers command together with contend their ain calculator instances, together with thus tin terminate install together with role whatever software they desire on them to backtest or merchandise using the data. The alone hitch is that you lot are non allowed to download the vendor information to your ain computer, it has to remain inward the soul cloud.

===

Follow @chanep to have my occasional tweets on interesting quant trading manufacture tidings together with articles.

===

My online Mean Reversion Strategies Workshop volition hold out offered on Apr 1-3. Please view epchan.com/my-workshops for registration details. Furthermore, I volition hold out instruction my Mean Reversion, Momentum, together with Millisecond Frequency Trading workshops inward London on March 17-21, together with inward Hong Kong on June 17-20.