The traditional active vs passive debate has been shaken up by the emergence of “smart beta” strategies. As the population of these products has exploded, the quest to differentiate among them has focused on portfolio construction techniques rather than what actually matters, namely...

Our objective is to investigate the effect of model misspecification on mean-variance portfolios and to show how asset-pricing theory and asymptotic analysis (for large number of assets) can be used to provide powerful solutions to mitigate misspecification. The starting point of our analysis is...

This paper decomposes aggregate and individual stock returns into cash flow news, interest rate news, and risk premium news. We then extend the “good beta, bad beta” approach of Campbell and Vuolteenaho (2004) by allowing for a third beta: exposure to interest rate news. Using various stock...

Firm fundamentals, in particular firm size, help explain variation in factor loadings (betas) for the market, size and value factor. Surprisingly, however, they are dominated in terms of explanatory power by an unobserved time-invariant component. This leads to surprisingly stable factor...

Perhaps the most frequently used estimator of the Capital Asset Pricing Model beta in finance is the Ordinary Least Squares estimate, obtained by regressing excess security return against excess market return, with an intercept. This paper shows that the Ordinary Least Squares estimator is...

The past several years have witnessed the introduction of hundreds of so-called “smart beta” equity indices. These indices provide exposure to risk factors, such as value or low volatility, in order to seek excess return and/or risk reduction compared to cap-weighted indices. Although the...

I present a model where competition in the asset management industry has positive and negative effects on fund performance. When funds have increasing (decreasing) returns to scale at the industry level, the flow-performance relation is concave (convex). Active funds outperform their benchmark...

We introduce a regime-conditional regression model to measure the risk profile of systematic investment strategies. We apply this model to classify systematic strategies into defensive and risk-seeking strategies with either positive or negative risk-premia alpha. Using the performance of the SG...