Tuesday, November 9th @ 11:00 AM - 12:30PM (Pacific) ONLINE
How the Four Horsemen of the Financial Apocalypse Turned Smart Beta into Real Alpha
Dan diBartolomeo, Northfield
ABSTRACT: The ongoing COVID 19 pandemic has sharpened the attention of the financial community to the impact of rare but extreme events. We will begin the presentation with the historical context of research on how four types of large events: War, Pandemic, Corruption, and Climate Change are believed to impact financial markets and the prosperity of both nations and individual households, (diBartolomeo, Journal of Performance Measurement, Spring 2021). The remainder of the presentation will examine how classical asset pricing models (e.g. CAPM) need to be revised under the assumption that are investors are highly sensitive to large events as suggested by Barro (NBER, 2005). Using the new framework proposed in diBartolomeo and Kantos (Journal of Asset Management, December 2020) we will show that such a restatement of CAPM resolves many purported anomalies around the behavior of equity markets. Our results also radically change empirical results for factor-based equity investing strategies, such as “Growth”, “Value” and “Momentum” over the period from 1990 through 2020.