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Identifying a Bubble Requires Separating Fundamentals from Speculation
Stock market bubbles are easy to identify in hindsight. The dot-com boom, the run-up to the global financial crisis, and the surge in technology stocks during the pandemic are all familiar examples. But identifying a bubble while it is forming is much more difficult. The challeng...
Diversification has been called the only free lunch in investing, but many portfolios are less diversified than they appear because equity risk dominates. In addition, within equities, a broad portfolio is often dominated by a single factor, and many factor portfolios are still built around a single style.
To address this issue
Published research often becomes part of the permanent investment toolkit. Findings are cited, models are calibrated, and strategies are built. Empirical relationships estimated decades ago can continue to influence decisions long after the original sample ends, but there are really two different questions. Can a published result be reproduced using the original sample? And d...
“The waiting is the hardest part.” — Tom Petty
The central failure of tail risk protection is usually not the crash. It is the years before the crash, when human behavior takes over: protection costs money (“the bleed”), appears unnecessary, and becomes progressively harder to defend (i.e., “everything else is going up!”). This paper addresses the acc...
Complexity is often presented as a natural consequence of financial innovation. Markets evolve, products become more sophisticated, and investors gain access to increasingly customized risk-return profiles. But complexity can also serve another purpose; it can make products harder to compare. When investors cannot easily compare alternatives, competition may become less effec...