Inverted Yield Curve: The Flaws in a “Infallible” Recession Indicator

As you undoubtedly know by now, the yield on the 10-year treasury fell lower than the yield on the 2-year treasury, albeit briefly, on August 14th.  If you follow the markets closely, you may have seen it coming.  After all, the spread between the 3-month and the 10-year treasury has been inverted since May of this year.  What many did not see coming was the resulting anxiety, surprise and massive sell-off that followed. A yield curve is simply a graphical depiction of the yields (or interest rates) for bonds having equal credit quality but different times to maturity.  Normally, the…

Pulling Your Risk Estimates Up By Their Bootstrapped Simulations

London Business School’s Elroy Dimson, an emeritus finance professor, memorably defined risk as the possibility that more things can happen than will happen. Picking up on this description, the late, great institutional investment adviser Peter Bernstein once explained that Dimson’s view of risk points investors on a particular analytical path. “If more things can happen than will happen, we can devise probabilities of possible outcomes, but — and this is a big ‘but’ — we will never know in advance the true range of outcomes we may face.” Certainty, as always, is off limits when attempting to forecast the future….

Does Factor Timing Pass The Smell Test?

Academics and investment practitioners have long performed deep dives on momentum as a source of excess return premia. Analysis that focuses on value, small-cap and other accounting-based factors (book to market, capitalization, etc.) is a more recent addition to the research canon, but the seminal papers by Fama and French from the 1990s aren’t spring chickens either. In recent years a new line of inquiry that combines the two disciplines seeks to answer the question: Is timing of the standard risk factors based on momentum signals a worthy pursuit in its own right? A growing list of researchers are finding…

When Uncertainty Rises, Your Model Faces Higher Failure Risk

Prediction is difficult, Nils Bohr famously warned — especially about the future. The caveat needs no explanation in economics and finance, although a bit of clarification is required, starting with the obvious. If you spend more than 20 minutes studying the history of forecasting that routinely populates the world of macro and markets, it’s blazingly apparent that true sages are as common as hail storms in the Sahara. That’s a potent reason to steer clear of forecasts, right? Well, yes… sort of.  In reality, most investors don’t have the luxury to shun the prediction game entirely.  Investing and portfolio management,…

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