<?xml version="1.0" encoding="UTF-8"?><rss version="2.0" xmlns:atom="http://www.w3.org/2005/Atom"><channel><title>Fama/French Forum</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx</link><atom:link href="http://famafrench.dimensional.com/famafrench/atom.aspx" rel="self" type="application/rss+xml" /><description><![CDATA[Observations, opinion, research and links from financial economists 
Eugene Fama and Kenneth French.]]></description><language> en </language><item><title>Q&amp;A: Are Stock Returns Normally Distributed?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-are-stock-returns-normally-distributed.aspx</link><pubDate>Tue, 18 Mar 2014 10:52:35 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-are-stock-returns-normally-distributed.aspx</guid><description><![CDATA[What is the best way to describe the distribution of stock returns—a normal distribution, lognormal, or something else? What should investors do with this information? 

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[What is the best way to describe the distribution of stock returns—a normal distribution, lognormal, or something else? What should investors do with this information? 

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Small Stocks for the Long Run</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-small-stocks-for-the-long-run.aspx</link><pubDate>Tue, 18 Mar 2014 11:00:00 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-small-stocks-for-the-long-run.aspx</guid><description><![CDATA[In addressing a previous question ("Has the Equity Premium Puzzle Gone Away?"), you suggested that it requires 35 years or more to be reasonably confident of achieving a positive equity premium. Is the time frame similar for the size and value premiums?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[In addressing a previous question ("Has the Equity Premium Puzzle Gone Away?"), you suggested that it requires 35 years or more to be reasonably confident of achieving a positive equity premium. Is the time frame similar for the size and value premiums?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Do Low-Volatility Strategies Produce High Returns?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-do-low-volatility-strategies-produce-high-returns.aspx</link><pubDate>Tue, 18 Mar 2014 11:05:43 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-do-low-volatility-strategies-produce-high-returns.aspx</guid><description><![CDATA[Baker, Bradley and Wurgler (FAJ 2011) find that low-volatility stocks in the US outperform high-volatility stocks and attribute this apparent anomaly to investor behavioral biases as well as limits to arbitrage. What do you make of their argument?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Baker, Bradley and Wurgler (FAJ 2011) find that low-volatility stocks in the US outperform high-volatility stocks and attribute this apparent anomaly to investor behavioral biases as well as limits to arbitrage. What do you make of their argument?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Seeking the Inefficient Asset Class</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-seeking-the-inefficient-asset-class.aspx</link><pubDate>Tue, 18 Mar 2014 11:09:23 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-seeking-the-inefficient-asset-class.aspx</guid><description><![CDATA[We often hear the claim that some markets are less efficient than others—small company stocks, emerging markets, foreign exchange, and so on. Is there any evidence to support this assertion?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[We often hear the claim that some markets are less efficient than others—small company stocks, emerging markets, foreign exchange, and so on. Is there any evidence to support this assertion?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Why Use Book Value to Sort Stocks?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-why-use-book-value-to-sort-stocks.aspx</link><pubDate>Tue, 18 Mar 2014 11:11:04 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-why-use-book-value-to-sort-stocks.aspx</guid><description><![CDATA[Data from Ken French's website shows that sorting stocks on E/P or CF/P data produces a bigger spread than BtM over the last 55 years. Wouldn't it make sense to use these other factors in addition to BtM to distinguish value from growth stocks?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Data from Ken French's website shows that sorting stocks on E/P or CF/P data produces a bigger spread than BtM over the last 55 years. Wouldn't it make sense to use these other factors in addition to BtM to distinguish value from growth stocks?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Cap Weighting or GDP Weighting?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-cap-weighting-or-gdp-weighting.aspx</link><pubDate>Tue, 18 Mar 2014 11:12:40 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-cap-weighting-or-gdp-weighting.aspx</guid><description><![CDATA[What is the merit, if any, in using a country weighting scheme based on Gross Domestic Product (GDP) rather than market capitalization?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[What is the merit, if any, in using a country weighting scheme based on Gross Domestic Product (GDP) rather than market capitalization?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Expected Returns and Socially Responsible Investing</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-expected-returns-and-socially-responsible-investing.aspx</link><pubDate>Tue, 18 Mar 2014 11:14:02 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-expected-returns-and-socially-responsible-investing.aspx</guid><description><![CDATA[Are expected returns for "socially responsible" strategies lower compared to a conventional approach?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Are expected returns for "socially responsible" strategies lower compared to a conventional approach?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Front Running and Fair Pricing</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-front-running-and-fair-pricing.aspx</link><pubDate>Tue, 18 Mar 2014 11:16:08 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-front-running-and-fair-pricing.aspx</guid><description><![CDATA[What is the relation, if any, between the practice of "front running" trades and the efficient market hypothesis?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[What is the relation, if any, between the practice of "front running" trades and the efficient market hypothesis?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Liquidity and Stock Returns</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-liquidity-and-stock-returns.aspx</link><pubDate>Tue, 18 Mar 2014 11:18:35 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-liquidity-and-stock-returns.aspx</guid><description><![CDATA[Is there a liquidity risk factor in stock returns that helps explain differences in average returns?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Is there a liquidity risk factor in stock returns that helps explain differences in average returns?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Should Investors Diversify Among Government Bonds?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-should-investors-diversify-among-government-bonds.aspx</link><pubDate>Tue, 18 Mar 2014 11:44:14 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-should-investors-diversify-among-government-bonds.aspx</guid><description><![CDATA[If US Treasury bonds are not risk-free due to inflation risk, does it make sense to diversify a portfolio of government bonds with obligations of other countries?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[If US Treasury bonds are not risk-free due to inflation risk, does it make sense to diversify a portfolio of government bonds with obligations of other countries?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Beta and Stock Returns</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-beta-and-stock-returns.aspx</link><pubDate>Tue, 18 Mar 2014 11:49:07 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-beta-and-stock-returns.aspx</guid><description><![CDATA[Do high-beta stocks have high expected returns? Do stocks with historically above-average betas exhibit above-average realized returns?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Do high-beta stocks have high expected returns? Do stocks with historically above-average betas exhibit above-average realized returns?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Bond Funds or Ladders?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-bond-funds-or-ladders.aspx</link><pubDate>Tue, 18 Mar 2014 11:51:08 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-bond-funds-or-ladders.aspx</guid><description><![CDATA[Can you address the pros and cons of short-term bond funds versus laddered bond strategies holding individual issues?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Can you address the pros and cons of short-term bond funds versus laddered bond strategies holding individual issues?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Seeking the Optimal Country Weighting Scheme</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-seeking-the-optimal-country-weighting-scheme.aspx</link><pubDate>Tue, 18 Mar 2014 11:53:10 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-seeking-the-optimal-country-weighting-scheme.aspx</guid><description><![CDATA[Financial theory suggests that a global value-weight market portfolio is the logical default position for an equity investor seeking the optimal allocation scheme across countries. What are the implications for this approach if we take structural factors into account that encourage a home bias? Australia, for example, offers tax incentives applicable only to local investors, so their citizens earn higher returns than foreign investors do holding the same stocks. Brazil accomplishes the same thing by imposing additional taxes on foreign investors. Would it make sense for foreigners to weight each country using a market cap adjusted to reflect only non-local holdings?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Financial theory suggests that a global value-weight market portfolio is the logical default position for an equity investor seeking the optimal allocation scheme across countries. What are the implications for this approach if we take structural factors into account that encourage a home bias? Australia, for example, offers tax incentives applicable only to local investors, so their citizens earn higher returns than foreign investors do holding the same stocks. Brazil accomplishes the same thing by imposing additional taxes on foreign investors. Would it make sense for foreigners to weight each country using a market cap adjusted to reflect only non-local holdings?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: What Role for Commodities?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-what-role-for-commodities.aspx</link><pubDate>Tue, 18 Mar 2014 11:55:34 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-what-role-for-commodities.aspx</guid><description><![CDATA[There seems to be some confusion about your opinion on the role of commodities in a portfolio, based on a conference presentation for financial advisors in 2004. Have your views changed since then?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[There seems to be some confusion about your opinion on the role of commodities in a portfolio, based on a conference presentation for financial advisors in 2004. Have your views changed since then?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: When Does Active Management Shine?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-when-does-active-management-shine.aspx</link><pubDate>Tue, 18 Mar 2014 11:57:47 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-when-does-active-management-shine.aspx</guid><description><![CDATA[If you are familiar with a recent survey of mutual fund performance by Fundquest (Jane Li, "When Active Management Shines vs. Passive," June 2010), your comments would be appreciated.

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[If you are familiar with a recent survey of mutual fund performance by Fundquest (Jane Li, "When Active Management Shines vs. Passive," June 2010), your comments would be appreciated.

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Market Timing with Moving Averages</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-market-timing-with-moving-averages.aspx</link><pubDate>Tue, 18 Mar 2014 12:01:19 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-market-timing-with-moving-averages.aspx</guid><description><![CDATA[Some researchers argue that a market timing strategy based on buy/sell signals generated by a 50- or 200-day moving average offers a more appealing combination of risk and return than a buy-and-hold approach. What is your view?
EFF/KRF: An ancient tale with no empirical support.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Some researchers argue that a market timing strategy based on buy/sell signals generated by a 50- or 200-day moving average offers a more appealing combination of risk and return than a buy-and-hold approach. What is your view?
EFF/KRF: An ancient tale with no empirical support.]]></content:encoded></item><item><title>Q&amp;A: A "Stock Picker's Market"?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-a-stock-pickers-market.aspx</link><pubDate>Tue, 18 Mar 2014 12:04:45 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-a-stock-pickers-market.aspx</guid><description><![CDATA[Many experts characterize the current environment as a "stock picker's market." Is there any evidence that stock selection is more successful under certain market conditions?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Many experts characterize the current environment as a "stock picker's market." Is there any evidence that stock selection is more successful under certain market conditions?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Commodity Exposure through Stocks?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-commodity-exposure-through-stocks.aspx</link><pubDate>Tue, 18 Mar 2014 12:06:48 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-commodity-exposure-through-stocks.aspx</guid><description><![CDATA[How can investors achieve exposure to commodities by investing in stocks?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[How can investors achieve exposure to commodities by investing in stocks?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: High Frequency Trading and the "Flash Crash"</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-high-frequency-trading-and-the-flash-crash.aspx</link><pubDate>Tue, 18 Mar 2014 12:08:52 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-high-frequency-trading-and-the-flash-crash.aspx</guid><description><![CDATA[The "Flash Crash" on May 6, 2010, is generally attributed to the growth of automated or "high frequency" trading programs. How have they affected market volatility and security valuation and what, if anything, should investors do differently?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[The "Flash Crash" on May 6, 2010, is generally attributed to the growth of automated or "high frequency" trading programs. How have they affected market volatility and security valuation and what, if anything, should investors do differently?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Dividends: Is Bigger Better?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-dividends-is-bigger-better.aspx</link><pubDate>Tue, 18 Mar 2014 12:13:07 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-dividends-is-bigger-better.aspx</guid><description><![CDATA[Does an equity strategy focusing on stocks with above-average dividend yield offer an appealing risk/reward tradeoff? Have dividend-paying stocks outperformed non-dividend payers in the U.S.?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Does an equity strategy focusing on stocks with above-average dividend yield offer an appealing risk/reward tradeoff? Have dividend-paying stocks outperformed non-dividend payers in the U.S.?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Are Treasury Bonds Risk-Free?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-are-treasury-bonds-risk-free.aspx</link><pubDate>Tue, 18 Mar 2014 12:15:20 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-are-treasury-bonds-risk-free.aspx</guid><description><![CDATA[Does the deteriorating financial condition of the U.S. government diminish the appeal of U.S. Treasury securities as a risk-free asset? Should investors consider adding government securities from other countries to diversify?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Does the deteriorating financial condition of the U.S. government diminish the appeal of U.S. Treasury securities as a risk-free asset? Should investors consider adding government securities from other countries to diversify?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Are Chief Executives Overpaid?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-are-chief-executives-overpaid.aspx</link><pubDate>Tue, 18 Mar 2014 12:17:21 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-are-chief-executives-overpaid.aspx</guid><description><![CDATA[What model for executive compensation at public companies would you like to see? Should shareholders vote on these matters?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[What model for executive compensation at public companies would you like to see? Should shareholders vote on these matters?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: The Limits of Arbitrage</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-the-limits-of-arbitrage.aspx</link><pubDate>Tue, 18 Mar 2014 12:19:13 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-the-limits-of-arbitrage.aspx</guid><description><![CDATA[To what extent do the limits of arbitrage (Schleifer and Vishny, 1997) discredit the idea of market efficiency?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[To what extent do the limits of arbitrage (Schleifer and Vishny, 1997) discredit the idea of market efficiency?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Public vs. Private Equity</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-public-vs-private-equity.aspx</link><pubDate>Tue, 18 Mar 2014 12:21:16 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-public-vs-private-equity.aspx</guid><description><![CDATA[Should investors expect higher returns from private equity investments as compensation for the lack of liquidity? Does private equity offer a useful diversification benefit in a balanced portfolio?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Should investors expect higher returns from private equity investments as compensation for the lack of liquidity? Does private equity offer a useful diversification benefit in a balanced portfolio?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Reducing Risk with Options</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-reducing-risk-with-options.aspx</link><pubDate>Tue, 18 Mar 2014 12:24:30 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-reducing-risk-with-options.aspx</guid><description><![CDATA[Can put or call options be used to achieve a more predictable risk-return tradeoff? For example, should I purchase put options to minimize equity portfolio losses?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Can put or call options be used to achieve a more predictable risk-return tradeoff? For example, should I purchase put options to minimize equity portfolio losses?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Is Insider Trading Beneficial?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-is-insider-trading-beneficial.aspx</link><pubDate>Wed, 19 Mar 2014 10:47:52 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-is-insider-trading-beneficial.aspx</guid><description><![CDATA[Some economists argue that prohibiting insider trading does more harm than good by reducing the flow of useful information. Do you agree?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Some economists argue that prohibiting insider trading does more harm than good by reducing the flow of useful information. Do you agree?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Semi-Variance: A Better Risk Measure?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-semi-variance-a-better-risk-measure.aspx</link><pubDate>Wed, 19 Mar 2014 10:52:28 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-semi-variance-a-better-risk-measure.aspx</guid><description><![CDATA[Is semi-variance a more useful measure of downside risk than standard deviation? My clients aren't worried about market surges, they're worried about market crashes.

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Is semi-variance a more useful measure of downside risk than standard deviation? My clients aren't worried about market surges, they're worried about market crashes.

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Does Gold Belong in My Portfolio?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-does-gold-belong-in-my-portfolio.aspx</link><pubDate>Wed, 19 Mar 2014 10:56:30 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-does-gold-belong-in-my-portfolio.aspx</guid><description><![CDATA[Based on spot price data from January 1970 through February 2010, the average return on gold bullion was almost exactly the same as the S&amp;P 500 at 88 basis points per month. Volatility was significantly greater for gold, but since gold prices tended to zig when equity prices zagged over this period, a portfolio composed of 80% stocks and 20% gold (rebalanced annually) had lower volatility than either of its component parts. Doesn't portfolio theory suggest that gold can make a useful contribution?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Based on spot price data from January 1970 through February 2010, the average return on gold bullion was almost exactly the same as the S&amp;P 500 at 88 basis points per month. Volatility was significantly greater for gold, but since gold prices tended to zig when equity prices zagged over this period, a portfolio composed of 80% stocks and 20% gold (rebalanced annually) had lower volatility than either of its component parts. Doesn't portfolio theory suggest that gold can make a useful contribution?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Bankrupt Firms: Who's Buying?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-bankrupt-firms-whos-buying.aspx</link><pubDate>Wed, 19 Mar 2014 10:59:58 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-bankrupt-firms-whos-buying.aspx</guid><description><![CDATA[Why do shares of widely held bankrupt firms such as GM often trade well above zero even though the interests of common stock holders appear almost certain to be eliminated in reorganization? Is this behavior an example of mispricing?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Why do shares of widely held bankrupt firms such as GM often trade well above zero even though the interests of common stock holders appear almost certain to be eliminated in reorganization? Is this behavior an example of mispricing?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Do Fundamentals Tell Us When Stocks Are Overpriced?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-do-fundamentals-tell-us-when-stocks-are-overpriced.aspx</link><pubDate>Wed, 19 Mar 2014 11:02:59 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-do-fundamentals-tell-us-when-stocks-are-overpriced.aspx</guid><description><![CDATA[In their book Valuing Wall Street published in early 2000, Andrew Smithers and Stephen Wright claim that the q ratio popularized by Nobel laureate James Tobin reliably identifies periods of extreme overvaluation and undervaluation in stock prices. Can investors use this indicator to implement a successful market timing strategy?
EFF/KRF: This proposition has been tested in several papers, and the answer is no. The market-to-book ratio for the market (a proxy for q) shows some ability to predict stock returns during the 1930s, but not thereafter.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[In their book Valuing Wall Street published in early 2000, Andrew Smithers and Stephen Wright claim that the q ratio popularized by Nobel laureate James Tobin reliably identifies periods of extreme overvaluation and undervaluation in stock prices. Can investors use this indicator to implement a successful market timing strategy?
EFF/KRF: This proposition has been tested in several papers, and the answer is no. The market-to-book ratio for the market (a proxy for q) shows some ability to predict stock returns during the 1930s, but not thereafter.]]></content:encoded></item><item><title>Q&amp;A: Can Investors Profit from Momentum?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-can-investors-profit-from-momentum.aspx</link><pubDate>Wed, 19 Mar 2014 11:06:12 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-can-investors-profit-from-momentum.aspx</guid><description><![CDATA[A prominent money management firm has recently launched several mutual funds that seek to exploit the positive momentum effect in stock prices. Why does this well-publicized anomaly persist and under what circumstances can investors expect to profit from it?

(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[A prominent money management firm has recently launched several mutual funds that seek to exploit the positive momentum effect in stock prices. Why does this well-publicized anomaly persist and under what circumstances can investors expect to profit from it?

(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Seeking the Best Inflation Hedge</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-seeking-the-best-inflation-hedge.aspx</link><pubDate>Wed, 19 Mar 2014 11:13:12 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-seeking-the-best-inflation-hedge.aspx</guid><description><![CDATA[How do TIPS and one-month Treasury bills compare as inflation hedges?
EFF: TIPs are obviously a great hedge against inflation, but there is still uncertainty about the short-term real return on long-term TIPS. A long-term TIPS is a long-term loan to the Government at a fixed real interest rate. Variation through time in the expected real return that investors require to make this long-term commitment leads to capital gains and losses that affect short-term real returns.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[How do TIPS and one-month Treasury bills compare as inflation hedges?
EFF: TIPs are obviously a great hedge against inflation, but there is still uncertainty about the short-term real return on long-term TIPS. A long-term TIPS is a long-term loan to the Government at a fixed real interest rate. Variation through time in the expected real return that investors require to make this long-term commitment leads to capital gains and losses that affect short-term real returns.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Are Stocks Safer in the Long Run?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-are-stocks-safer-in-the-long-run.aspx</link><pubDate>Wed, 19 Mar 2014 11:58:28 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-are-stocks-safer-in-the-long-run.aspx</guid><description><![CDATA[Lubos Pastor and Robert Stambaugh argue that long-horizon stock investors actually face more volatility than short-horizon investors. How should investors interpret this evidence?
KRF: The Pastor-Stambaugh result is driven by uncertainty about the true expected return. The volatility or standard deviation of returns is usually defined as the expected variation relative to the true mean of the process generating returns - as if we knew the true expected return. But, as Pastor and Stambaugh emphasize, we never actually know the true mean. When they include uncertainty about the true mean (as well as uncertainty about other true parameters) in the analysis, they find that long-run returns are indeed more volatile than short-run returns. 
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Lubos Pastor and Robert Stambaugh argue that long-horizon stock investors actually face more volatility than short-horizon investors. How should investors interpret this evidence?
KRF: The Pastor-Stambaugh result is driven by uncertainty about the true expected return. The volatility or standard deviation of returns is usually defined as the expected variation relative to the true mean of the process generating returns - as if we knew the true expected return. But, as Pastor and Stambaugh emphasize, we never actually know the true mean. When they include uncertainty about the true mean (as well as uncertainty about other true parameters) in the analysis, they find that long-run returns are indeed more volatile than short-run returns. 
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Financial Innovation -- A Blessing or a Curse?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-financial-innovation-a-blessing-or-a-curse.aspx</link><pubDate>Wed, 19 Mar 2014 14:39:56 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-financial-innovation-a-blessing-or-a-curse.aspx</guid><description><![CDATA[Real economic risk appears to have decreased over time as global economies have become more advanced and diversified. But market risks appear to have increased due to innovative financial instruments with unexpected characteristics. Is financial innovation a good thing?
EFF/KRF: We do not agree with the reading of the facts in this question. We know of no solid evidence that market risks have increased relative to the risks of real economic activity. Market volatility and the volatility of real economic activity were both extremely high in the great depression, and both declined thereafter. During the post WWII period, market volatility tends to increase during recessions, along with (and typically in advance of) the volatility of real economic activity. From 2002 to late 2007 the volatility of real activity was low and market volatility hit all time lows. With the subsequent onset of a severe recession, market volatility increased, along with uncertainty about future real economic activity.
(Read the full entry) ]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Real economic risk appears to have decreased over time as global economies have become more advanced and diversified. But market risks appear to have increased due to innovative financial instruments with unexpected characteristics. Is financial innovation a good thing?
EFF/KRF: We do not agree with the reading of the facts in this question. We know of no solid evidence that market risks have increased relative to the risks of real economic activity. Market volatility and the volatility of real economic activity were both extremely high in the great depression, and both declined thereafter. During the post WWII period, market volatility tends to increase during recessions, along with (and typically in advance of) the volatility of real economic activity. From 2002 to late 2007 the volatility of real activity was low and market volatility hit all time lows. With the subsequent onset of a severe recession, market volatility increased, along with uncertainty about future real economic activity.
(Read the full entry) ]]></content:encoded></item><item><title>Q&amp;A: Who Should Hold Long Term Bonds?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-who-should-hold-long-term-bonds.aspx</link><pubDate>Wed, 19 Mar 2014 14:48:16 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-who-should-hold-long-term-bonds.aspx</guid><description><![CDATA[Is the absence of a meaningful premium for US long-term bonds relative to short-term bonds evidence of market inefficiency? Does this relation hold in other global bond markets?
EFF: Unfortunately, we need long periods of data to do the relevant tests, and we do not have good long-term data on bond markets outside the U.S. For the U.S. we only have good long-term data (from CRSP) for Government bonds. Tests on the U.S. data do not indicate that the small average premiums observed in the returns on long-term versus short-term Government bonds are badly out of line with the predictions of asset pricing models. The models do not predict big differences in the returns on long-term and short-term governments, and the observed premiums are statistically consistent with the models. The same is true for the rather small premiums of corporate bond returns over Government bond returns. Is the absence of a meaningful premium for US long-term bonds relative to short-term bonds evidence of market inefficiency? Does this relation hold in other global bond markets? 
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Is the absence of a meaningful premium for US long-term bonds relative to short-term bonds evidence of market inefficiency? Does this relation hold in other global bond markets?
EFF: Unfortunately, we need long periods of data to do the relevant tests, and we do not have good long-term data on bond markets outside the U.S. For the U.S. we only have good long-term data (from CRSP) for Government bonds. Tests on the U.S. data do not indicate that the small average premiums observed in the returns on long-term versus short-term Government bonds are badly out of line with the predictions of asset pricing models. The models do not predict big differences in the returns on long-term and short-term governments, and the observed premiums are statistically consistent with the models. The same is true for the rather small premiums of corporate bond returns over Government bond returns. Is the absence of a meaningful premium for US long-term bonds relative to short-term bonds evidence of market inefficiency? Does this relation hold in other global bond markets? 
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Does Your Optimizer Need a Tune-Up?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-does-your-optimizer-need-a-tune-up.aspx</link><pubDate>Wed, 19 Mar 2014 14:58:16 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-does-your-optimizer-need-a-tune-up.aspx</guid><description><![CDATA[The realized equity premium for U.S. stocks relative to long-term government bonds has been negative for the 5, 10, 15, 20, and 25-year periods ending in 2008 despite substantially greater standard deviation for stocks. How do I use this information to develop a sensible portfolio based on mean-variance optimization?
EFF: We have emphasized in previous posts that there is substantial uncertainty about the size of the expected equity premium, that is, the true expected return on stocks less the expected return on riskless bonds. Whatever estimate you use, 5, 10, or even 15 years of recent evidence should not change your estimate much. 20 or 25 years of data are more serious, but then there is another issue.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[The realized equity premium for U.S. stocks relative to long-term government bonds has been negative for the 5, 10, 15, 20, and 25-year periods ending in 2008 despite substantially greater standard deviation for stocks. How do I use this information to develop a sensible portfolio based on mean-variance optimization?
EFF: We have emphasized in previous posts that there is substantial uncertainty about the size of the expected equity premium, that is, the true expected return on stocks less the expected return on riskless bonds. Whatever estimate you use, 5, 10, or even 15 years of recent evidence should not change your estimate much. 20 or 25 years of data are more serious, but then there is another issue.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Is Market Efficiency the Culprit?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-is-market-efficiency-the-culprit.aspx</link><pubDate>Thu, 20 Mar 2014 08:59:39 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-is-market-efficiency-the-culprit.aspx</guid><description><![CDATA[Justin Fox ("The Myth of the Rational Market") and many other financial writers claim that much of the blame for the financial meltdown is attributable to a misguided faith in market efficiency that encouraged market participants to accept security prices as the best estimate of value rather than conduct their own investigation. Is this a fair assessment? If so, how should policymakers respond?
EFF: The premise of the Fox book is that our current economic problems are largely due to blind acceptance of the efficient markets hypothesis (EMH), which posits that market prices reflect all available information. The claim is that the world's investors and their advisors in the financial industry bought into this model. Because they ceased to investigate the true value of assets, we have been hit with "bubbles" in asset prices. The most recent is the rise and sharp decline in real estate prices which froze financial markets and led to the worst recession since the Great Depression of the 1930s.
(Read the full entry)
 ]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Justin Fox ("The Myth of the Rational Market") and many other financial writers claim that much of the blame for the financial meltdown is attributable to a misguided faith in market efficiency that encouraged market participants to accept security prices as the best estimate of value rather than conduct their own investigation. Is this a fair assessment? If so, how should policymakers respond?
EFF: The premise of the Fox book is that our current economic problems are largely due to blind acceptance of the efficient markets hypothesis (EMH), which posits that market prices reflect all available information. The claim is that the world's investors and their advisors in the financial industry bought into this model. Because they ceased to investigate the true value of assets, we have been hit with "bubbles" in asset prices. The most recent is the rise and sharp decline in real estate prices which froze financial markets and led to the worst recession since the Great Depression of the 1930s.
(Read the full entry)
 ]]></content:encoded></item><item><title>Q&amp;A: What if Everybody Indexed?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-what-if-everybody-indexed.aspx</link><pubDate>Thu, 20 Mar 2014 09:03:55 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-what-if-everybody-indexed.aspx</guid><description><![CDATA[If a growing percentage of market participants pursued passive investment strategies, at what point would market efficiency break down? Is this a practical concern?
EFF/KRF: This is a complicated question that we address at length in "Disagreement, Tastes, and Asset Prices" (Journal of Financial Economics 2007). The answer depends to some extent on who turns passive. If misinformed and uninformed active investors (who make prices less efficient) turn passive, the efficiency of prices improves. If some informed active investors turn passive, prices tend to become less efficient. But the effect can be small if there is sufficient competition among remaining informed active investors. The answer also depends on the costs of uncovering and evaluating relevant knowable information. If the costs are low, then not much active investing is needed to get efficient prices.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[If a growing percentage of market participants pursued passive investment strategies, at what point would market efficiency break down? Is this a practical concern?
EFF/KRF: This is a complicated question that we address at length in "Disagreement, Tastes, and Asset Prices" (Journal of Financial Economics 2007). The answer depends to some extent on who turns passive. If misinformed and uninformed active investors (who make prices less efficient) turn passive, the efficiency of prices improves. If some informed active investors turn passive, prices tend to become less efficient. But the effect can be small if there is sufficient competition among remaining informed active investors. The answer also depends on the costs of uncovering and evaluating relevant knowable information. If the costs are low, then not much active investing is needed to get efficient prices.]]></content:encoded></item><item><title>Q&amp;A: Bear Markets and Monte Carlo Analysis</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-bear-markets-and-monte-carlo-analysis.aspx</link><pubDate>Thu, 20 Mar 2014 09:06:58 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-bear-markets-and-monte-carlo-analysis.aspx</guid><description><![CDATA[How useful was Monte Carlo-type analysis in preparing for the recent downturn in the economy and stock market? Is there an alternative approach that investors should consider in an effort to address the uncertainty of future returns?
EFF: Monte Carlo analysis is overkill here. All one really needs is good historical perspective on the volatility of volatility. Our white paper, "How Unusual Was the Stock Market of 2008?", is a good start. KRF: Monte Carlo analysis is often worse than overkill because it gives many users a false sense of precision. If used right, it can provide some perspective about the payoff on a long-term investment. Investors who do Monte Carlo simulations, however, often assume returns are drawn from a normal distribution with a constant volatility. In fact, a normal distribution produces far fewer extreme returns than we see in the market. Moreover, it is easy to forget that the inputs for the analysis - the estimated expected returns, variances, and covariances - are almost certainly grossly imprecise.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[How useful was Monte Carlo-type analysis in preparing for the recent downturn in the economy and stock market? Is there an alternative approach that investors should consider in an effort to address the uncertainty of future returns?
EFF: Monte Carlo analysis is overkill here. All one really needs is good historical perspective on the volatility of volatility. Our white paper, "How Unusual Was the Stock Market of 2008?", is a good start. KRF: Monte Carlo analysis is often worse than overkill because it gives many users a false sense of precision. If used right, it can provide some perspective about the payoff on a long-term investment. Investors who do Monte Carlo simulations, however, often assume returns are drawn from a normal distribution with a constant volatility. In fact, a normal distribution produces far fewer extreme returns than we see in the market. Moreover, it is easy to forget that the inputs for the analysis - the estimated expected returns, variances, and covariances - are almost certainly grossly imprecise.]]></content:encoded></item><item><title>Q&amp;A: NASDAQ at 5,000: A Mistake?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-nasdaq-at-5,000-a-mistake.aspx</link><pubDate>Thu, 20 Mar 2014 09:09:15 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-nasdaq-at-5,000-a-mistake.aspx</guid><description><![CDATA[Richard Thaler observes "Efficient market guys have to be willing to claim that the NASDAQ is efficiently priced at 5,000 and at 1,400. That's a tough sell." Comments?
EFF: Stock prices depend on two factors: expected profitability and the expected returns investors require to hold stocks. Both can vary dramatically through time. Thus, widely different levels of the market at different times are quite consistent with market efficiency. Indeed, they are required for market efficiency. This might well be a tough sell, but it's Finance 101. KRF: Dick is referring to the behavior of stock prices during the tech boom and bust of 1995-2001. Gene is certainly right that market efficiency requires prices to adjust to new information about future cashflows and discount rates. 
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Richard Thaler observes "Efficient market guys have to be willing to claim that the NASDAQ is efficiently priced at 5,000 and at 1,400. That's a tough sell." Comments?
EFF: Stock prices depend on two factors: expected profitability and the expected returns investors require to hold stocks. Both can vary dramatically through time. Thus, widely different levels of the market at different times are quite consistent with market efficiency. Indeed, they are required for market efficiency. This might well be a tough sell, but it's Finance 101. KRF: Dick is referring to the behavior of stock prices during the tech boom and bust of 1995-2001. Gene is certainly right that market efficiency requires prices to adjust to new information about future cashflows and discount rates. 
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Is There a "New Normal"?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-is-there-a-new-normal.aspx</link><pubDate>Thu, 20 Mar 2014 09:11:52 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-is-there-a-new-normal.aspx</guid><description><![CDATA[We often hear that the investment world must adjust to a "new normal", reflecting a permanent shift to greater market volatility worldwide. How should investors revise their portfolios in response to these developments?
EFF: There has always been lots of variation through time in market volatility, and volatility tends to be mean-reverting. (See our white paper, "How Unusual Was the Stock Market of 2008?") If investors can't tolerate periods of high volatility in stocks, this should affect their decisions about stocks, whether or not volatility is currently high. KRF: It is certainly true that stock market volatility is higher now than it was two or three years ago. At the end of 2006, the VIX, a measure of the annual stock market volatility implied by S&amp;P 500 option prices, was below 12%. 
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[We often hear that the investment world must adjust to a "new normal", reflecting a permanent shift to greater market volatility worldwide. How should investors revise their portfolios in response to these developments?
EFF: There has always been lots of variation through time in market volatility, and volatility tends to be mean-reverting. (See our white paper, "How Unusual Was the Stock Market of 2008?") If investors can't tolerate periods of high volatility in stocks, this should affect their decisions about stocks, whether or not volatility is currently high. KRF: It is certainly true that stock market volatility is higher now than it was two or three years ago. At the end of 2006, the VIX, a measure of the annual stock market volatility implied by S&amp;P 500 option prices, was below 12%. 
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Bonds for the Long Run?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-bonds-for-the-long-run.aspx</link><pubDate>Thu, 20 Mar 2014 09:13:47 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-bonds-for-the-long-run.aspx</guid><description><![CDATA[Long-term government bonds outperformed the S&amp;P 500 Index by 0.12% per year for the forty-year period ending March 2009. Does a negative risk premium for stocks vs. bonds over such a long period challenge conventional thinking about risk and return?
EFF/KRF: It is important to distinguish between the expected equity premium, which should be positive, and the realized premium, which is the expected premium plus the unexpected premium. Investing in stocks is risky because we do not know what the unexpected premium will be. 
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Long-term government bonds outperformed the S&amp;P 500 Index by 0.12% per year for the forty-year period ending March 2009. Does a negative risk premium for stocks vs. bonds over such a long period challenge conventional thinking about risk and return?
EFF/KRF: It is important to distinguish between the expected equity premium, which should be positive, and the realized premium, which is the expected premium plus the unexpected premium. Investing in stocks is risky because we do not know what the unexpected premium will be. 
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Protecting Purchasing Power</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-protecting-purchasing-power.aspx</link><pubDate>Thu, 20 Mar 2014 09:16:24 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-protecting-purchasing-power.aspx</guid><description><![CDATA[U.S. budget deficits keep expanding and some of our largest trading partners have begun to question the dollar's role as the world's reserve currency. Both trends suggest a dim future for the purchasing power of the U.S. dollar. Does a diversified equity / fixed income strategy represent the soundest way to address this challenge?
EFF/KRF: Recent Government actions, both fiscal and monetary have created lots of uncertainty about future inflation. Stocks may compensate for inflation in the long-term, but in the short-term they are not very good. And there is so much other uncertainty in stock returns, stocks are not in any case a good specific inflation hedge. TIPS and short-term bonds are good inflation hedges. If you are concerned about inflation risk, you may want to allocate more to them, probably in the tax-sheltered components of client portfolios.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[U.S. budget deficits keep expanding and some of our largest trading partners have begun to question the dollar's role as the world's reserve currency. Both trends suggest a dim future for the purchasing power of the U.S. dollar. Does a diversified equity / fixed income strategy represent the soundest way to address this challenge?
EFF/KRF: Recent Government actions, both fiscal and monetary have created lots of uncertainty about future inflation. Stocks may compensate for inflation in the long-term, but in the short-term they are not very good. And there is so much other uncertainty in stock returns, stocks are not in any case a good specific inflation hedge. TIPS and short-term bonds are good inflation hedges. If you are concerned about inflation risk, you may want to allocate more to them, probably in the tax-sheltered components of client portfolios.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Hedge Funds and Securities Prices</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-hedge-funds-and-securities-prices.aspx</link><pubDate>Thu, 20 Mar 2014 09:18:23 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-hedge-funds-and-securities-prices.aspx</guid><description><![CDATA[Stock market analysts often claim that hedge funds represent a significant percentage of trading volume in securities markets. What effect, if any, do hedge funds have on stock and bond prices?
EFF/KRF: Good question, but we know of no evidence on the matter. For example, hedge funds might make markets more efficient or they might reduce the accuracy of financial prices.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Stock market analysts often claim that hedge funds represent a significant percentage of trading volume in securities markets. What effect, if any, do hedge funds have on stock and bond prices?
EFF/KRF: Good question, but we know of no evidence on the matter. For example, hedge funds might make markets more efficient or they might reduce the accuracy of financial prices.]]></content:encoded></item><item><title>Q&amp;A: The Equity Premium over Long Periods</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-the-equity-premium-over-long-periods.aspx</link><pubDate>Thu, 20 Mar 2014 09:24:23 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-the-equity-premium-over-long-periods.aspx</guid><description><![CDATA[A buy-and-hold for stocks appears to work well for long periods (such as 1975 - 1999) but then does poorly for extended periods as well, such as the most recent ten years. Isn't it clear that there are "seasons" for stocks that make the climate favorable or unfavorable for investors?
EFF: We always emphasize that ten years is not a long period for stock returns, and ten-year periods with negative market premiums are common. A long period is basically an investment lifetime (35+ years).KRF: After the fact it is easy to identify periods in which stocks did well and periods in which they did poorly. But if you want to use these "seasons" to build an investment strategy, you have to identify them before they occur - and that is not so easy. The seasons analogy creates the false impression that, like spring, summer, fall, and winter, the favorable and unfavorable periods follow a regular and predictable cycle. Droughts in Australia might be a better analogy. We don't know when the next one will occur and we don't know how long it will last when it does.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[A buy-and-hold for stocks appears to work well for long periods (such as 1975 - 1999) but then does poorly for extended periods as well, such as the most recent ten years. Isn't it clear that there are "seasons" for stocks that make the climate favorable or unfavorable for investors?
EFF: We always emphasize that ten years is not a long period for stock returns, and ten-year periods with negative market premiums are common. A long period is basically an investment lifetime (35+ years).KRF: After the fact it is easy to identify periods in which stocks did well and periods in which they did poorly. But if you want to use these "seasons" to build an investment strategy, you have to identify them before they occur - and that is not so easy. The seasons analogy creates the false impression that, like spring, summer, fall, and winter, the favorable and unfavorable periods follow a regular and predictable cycle. Droughts in Australia might be a better analogy. We don't know when the next one will occur and we don't know how long it will last when it does.]]></content:encoded></item><item><title>Q&amp;A: Do Index Funds Contribute to Mispricing?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-do-index-funds-contribute-to-mispricing.aspx</link><pubDate>Thu, 20 Mar 2014 09:25:28 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-do-index-funds-contribute-to-mispricing.aspx</guid><description><![CDATA[Index funds buy stocks "blind" without regard to company fundamentals. Do their activities contribute to mispricing of securities?
EFF: Index funds typically buy cap-weighted portfolios so they do not contribute to mispricing. KRF: We analyze a general version of this question in "Disagreement, Tastes, and Asset Pricing" (Journal of Financial Economics, 2007). Suppose index fund investors hold a passive market portfolio. Then from a pricing perspective they are sitting on the sideline. They are not overweighting or underweighting any securities, so they do not affect (relative) prices. As a result, it is hard to argue that they contribute to mispricing.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Index funds buy stocks "blind" without regard to company fundamentals. Do their activities contribute to mispricing of securities?
EFF: Index funds typically buy cap-weighted portfolios so they do not contribute to mispricing. KRF: We analyze a general version of this question in "Disagreement, Tastes, and Asset Pricing" (Journal of Financial Economics, 2007). Suppose index fund investors hold a passive market portfolio. Then from a pricing perspective they are sitting on the sideline. They are not overweighting or underweighting any securities, so they do not affect (relative) prices. As a result, it is hard to argue that they contribute to mispricing.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Narrowly Held Risks</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-narrowly-held-risks.aspx</link><pubDate>Thu, 20 Mar 2014 09:27:27 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-narrowly-held-risks.aspx</guid><description><![CDATA[John Cochrane* has suggested that the historical premiums for small cap and value stocks reflect "narrowly held risks" and that these premiums are likely to shrink in the future "until the markets have reached equilibrium, in which every investor has bought as much risk as he likes." Do you agree, and, if so, what are the implications for investors considering a small cap or value tilt in their portfolios? *"Portfolio Advice for a Multifactor World", Economic Perspectives, Federal ResereveReserve Bank of Chicago, 1999
EFF/KRF: Cochrane offers this notion of narrowly held risks as one of several explanations for the size and value premiums. The premise is that until the last couple of decades, individual investors had limited access to diversified portfolios of small stocks and value stocks. As a result, the prices of small and value stocks were lower than they would be if all investors had easy access, and their expected returns were higher. The introduction and growth of mutual funds that invest in small-cap and value stocks would then reduce the expected returns on these securities.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[John Cochrane* has suggested that the historical premiums for small cap and value stocks reflect "narrowly held risks" and that these premiums are likely to shrink in the future "until the markets have reached equilibrium, in which every investor has bought as much risk as he likes." Do you agree, and, if so, what are the implications for investors considering a small cap or value tilt in their portfolios? *"Portfolio Advice for a Multifactor World", Economic Perspectives, Federal ResereveReserve Bank of Chicago, 1999
EFF/KRF: Cochrane offers this notion of narrowly held risks as one of several explanations for the size and value premiums. The premise is that until the last couple of decades, individual investors had limited access to diversified portfolios of small stocks and value stocks. As a result, the prices of small and value stocks were lower than they would be if all investors had easy access, and their expected returns were higher. The introduction and growth of mutual funds that invest in small-cap and value stocks would then reduce the expected returns on these securities.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Costs of Corporate Acquisition</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-costs-of-corporate-acquisition.aspx</link><pubDate>Thu, 20 Mar 2014 09:30:23 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-costs-of-corporate-acquisition.aspx</guid><description><![CDATA[Firms often pay a substantial premium to the market price when making acquisitions. Does their willingness to pay a premium suggest the shares of target firms were mispriced?
EFF: The empirical evidence says that all the gains from mergers are eaten up in the premiums paid to acquire firms. On average, the acquiring firm gets nothing. This doesn't necessarily imply that the shares of the acquired firm were mispriced since there can be synergies (real business gains) from mergers. KRF: Takeover premiums do not imply that the target firms were mispriced. Since we do not expect the market to accurately forecast every acquisition that will create value, we should not be surprised that prices rise when tender offers and mergers are announced.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Firms often pay a substantial premium to the market price when making acquisitions. Does their willingness to pay a premium suggest the shares of target firms were mispriced?
EFF: The empirical evidence says that all the gains from mergers are eaten up in the premiums paid to acquire firms. On average, the acquiring firm gets nothing. This doesn't necessarily imply that the shares of the acquired firm were mispriced since there can be synergies (real business gains) from mergers. KRF: Takeover premiums do not imply that the target firms were mispriced. Since we do not expect the market to accurately forecast every acquisition that will create value, we should not be surprised that prices rise when tender offers and mergers are announced.]]></content:encoded></item><item><title>Q&amp;A: Equity Premium Puzzle</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-equity-premium-puzzle.aspx</link><pubDate>Thu, 20 Mar 2014 09:31:38 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-equity-premium-puzzle.aspx</guid><description><![CDATA[Has the equity premium puzzle gone away?
EFF: There never was one. The "puzzle" comes out of a simplified economic model that says the average spread of the equity market return over the t-bill return has been too high, given the risk of equities. It is easy to show that this argument is silly. Thus, the returns from equity investing are quite risky. As a result, if the high average stock return of the past is the true long-term expected return, the high volatility of stock returns nevertheless means that getting a positive equity premium (of any size) is highly likely only for holding periods of 35 years (an investment lifetime) or more. Given this result, the historical equity premium does not seem too high.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Has the equity premium puzzle gone away?
EFF: There never was one. The "puzzle" comes out of a simplified economic model that says the average spread of the equity market return over the t-bill return has been too high, given the risk of equities. It is easy to show that this argument is silly. Thus, the returns from equity investing are quite risky. As a result, if the high average stock return of the past is the true long-term expected return, the high volatility of stock returns nevertheless means that getting a positive equity premium (of any size) is highly likely only for holding periods of 35 years (an investment lifetime) or more. Given this result, the historical equity premium does not seem too high.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Bias in the EMH?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-bias-in-the-emh.aspx</link><pubDate>Thu, 20 Mar 2014 09:34:37 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-bias-in-the-emh.aspx</guid><description><![CDATA[George Soros claims (in his op-ed in the Wall Street Journal) that the Efficient Market Hypothesis is invalid, because prices in financial markets "always provide a biased view of the future, and that distortions of prices in financial markets may affect the underlying reality." Thoughts?
EFF: All the evidence I know says that market predictions are unbiased. It's understandable, however, that hedge fund managers are immune to this evidence since it's a threat to their existence.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[George Soros claims (in his op-ed in the Wall Street Journal) that the Efficient Market Hypothesis is invalid, because prices in financial markets "always provide a biased view of the future, and that distortions of prices in financial markets may affect the underlying reality." Thoughts?
EFF: All the evidence I know says that market predictions are unbiased. It's understandable, however, that hedge fund managers are immune to this evidence since it's a threat to their existence.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Signs of a Recovery?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-signs-of-a-recovery.aspx</link><pubDate>Thu, 20 Mar 2014 09:36:46 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-signs-of-a-recovery.aspx</guid><description><![CDATA[I read an article recently profiling five signs that the recession is ending. What signs might you look at to indicate when the recession is ending?
EFF/KRF: We are not experts, but know enough about the academic research to be skeptical of the signals suggested by casual observers. The academics who study this find that the best leading indicators are not very powerful. It is hard to say when the recession will end until it has.
From an investment perspective, the market is always doing its best to incorporate information about future business conditions in current prices. As a result, other signals about the end of the recession are not likely to help you forecast the market.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[I read an article recently profiling five signs that the recession is ending. What signs might you look at to indicate when the recession is ending?
EFF/KRF: We are not experts, but know enough about the academic research to be skeptical of the signals suggested by casual observers. The academics who study this find that the best leading indicators are not very powerful. It is hard to say when the recession will end until it has.
From an investment perspective, the market is always doing its best to incorporate information about future business conditions in current prices. As a result, other signals about the end of the recession are not likely to help you forecast the market.]]></content:encoded></item><item><title>Q&amp;A: How True is "Too Big to Fail?"</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-how-true-is-too-big-to-fail.aspx</link><pubDate>Thu, 20 Mar 2014 09:41:11 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-how-true-is-too-big-to-fail.aspx</guid><description><![CDATA[Is there such a thing as systemic risk in the financial system? Are some of our banking institutions truly "too big to fail?"
EFF: The term "systemic risk" is less than 20 years old. It has become a scare term that governments use to justify bailout actions detrimental to taxpayers.
"Too big to fail" is an especially perverse use of the systemic risk scare tactic. I think the policy rule should be "too big not to fail," that is, big losers among financial firms get shut down first, to signal other big financial firms that "too big to fail" bailouts are over, so the firms will behave more responsibly in the future.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Is there such a thing as systemic risk in the financial system? Are some of our banking institutions truly "too big to fail?"
EFF: The term "systemic risk" is less than 20 years old. It has become a scare term that governments use to justify bailout actions detrimental to taxpayers.
"Too big to fail" is an especially perverse use of the systemic risk scare tactic. I think the policy rule should be "too big not to fail," that is, big losers among financial firms get shut down first, to signal other big financial firms that "too big to fail" bailouts are over, so the firms will behave more responsibly in the future.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: An Optimal Allocation?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-an-optimal-allocation.aspx</link><pubDate>Thu, 20 Mar 2014 09:43:16 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-an-optimal-allocation.aspx</guid><description><![CDATA[I represent an endowment of about $30 million. In public equities we have most of our investments in market-wide mutual funds. What mix would you recommend between domestic, international and emerging markets for the public equity part of our portfolio?
EFF/KRF: There is no single right answer to this question. If there were one answer, it would have to be the market portfolio of domestic, international, and emerging stocks, since that is the only portfolio that can be held by everyone. Different tastes and circumstances, however, push investors away from the market portfolio and the optimal deviations vary across investors. For example, perhaps because of exchange rate uncertainty, people tend to overweight their domestic market. Similarly, some investors are happy to increase their expected return by tilting toward small stocks, while others prefer to reduce their risk by tilting toward large caps. It is important to diversify, but there is no single optimal mix.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[I represent an endowment of about $30 million. In public equities we have most of our investments in market-wide mutual funds. What mix would you recommend between domestic, international and emerging markets for the public equity part of our portfolio?
EFF/KRF: There is no single right answer to this question. If there were one answer, it would have to be the market portfolio of domestic, international, and emerging stocks, since that is the only portfolio that can be held by everyone. Different tastes and circumstances, however, push investors away from the market portfolio and the optimal deviations vary across investors. For example, perhaps because of exchange rate uncertainty, people tend to overweight their domestic market. Similarly, some investors are happy to increase their expected return by tilting toward small stocks, while others prefer to reduce their risk by tilting toward large caps. It is important to diversify, but there is no single optimal mix.]]></content:encoded></item><item><title>Q&amp;A: Foregoing Future Expected Returns?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-foregoing-future-expected-returns.aspx</link><pubDate>Thu, 20 Mar 2014 09:44:50 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-foregoing-future-expected-returns.aspx</guid><description><![CDATA[A recent change to a client's life needs would normally warrant a reduction in portfolio risk. In doing so immediately, he would forego future expected returns that he paid so dearly for in the last year. Could the severity of the recent downturn justify delaying a risk reduction?
EFF/KRF: No. Although the expected market return probably increased over the last year, this is the result of greater uncertainty about future returns and perhaps an increase in the overall level of risk aversion. If your client's circumstances warrant a reduction in risk, an increase in expected return that is caused by an increase in risk is not a good reason to stay in the market. ]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[A recent change to a client's life needs would normally warrant a reduction in portfolio risk. In doing so immediately, he would forego future expected returns that he paid so dearly for in the last year. Could the severity of the recent downturn justify delaying a risk reduction?
EFF/KRF: No. Although the expected market return probably increased over the last year, this is the result of greater uncertainty about future returns and perhaps an increase in the overall level of risk aversion. If your client's circumstances warrant a reduction in risk, an increase in expected return that is caused by an increase in risk is not a good reason to stay in the market. ]]></content:encoded></item><item><title>Q&amp;A: Challenging S&amp;P 500 Earnings</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-challenging-sp-500-earnings.aspx</link><pubDate>Thu, 20 Mar 2014 09:47:41 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-challenging-sp-500-earnings.aspx</guid><description><![CDATA[Recently, Professor Jeremy Siegel has challenged the method of calculating earnings for the S&amp;P 500. He believes the calculation should be market weighted, as is the index. Standards and Poor's disagrees. In your view, who is correct?
EFF/KRF: In our research we calculate the E/P ratio for a portfolio just as S&amp;P does, dividing the aggregate earnings of the firms in the portfolio by the total market equity. It is easy to see the logic if you imagine merging all of the firms into one giant conglomerate. The new firm's earnings and market equity are just the sum of the individual firms' earnings and market equity.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Recently, Professor Jeremy Siegel has challenged the method of calculating earnings for the S&amp;P 500. He believes the calculation should be market weighted, as is the index. Standards and Poor's disagrees. In your view, who is correct?
EFF/KRF: In our research we calculate the E/P ratio for a portfolio just as S&amp;P does, dividing the aggregate earnings of the firms in the portfolio by the total market equity. It is easy to see the logic if you imagine merging all of the firms into one giant conglomerate. The new firm's earnings and market equity are just the sum of the individual firms' earnings and market equity.]]></content:encoded></item><item><title>Q&amp;A: When Market Timers Succeed</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-when-market-timers-succeed.aspx</link><pubDate>Thu, 20 Mar 2014 09:48:57 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-when-market-timers-succeed.aspx</guid><description><![CDATA[Recently, I've heard some say "I got out of the market in May 2008 and I am sure glad I did." Given the obviously positive results of this decision, what is the best argument to convince people that buy and hold is better than timing the market?
EFF: Wins and losses from market timing bets are both just unpredictable chance outcomes, and good luck is, of course, better than bad luck. The problem with market timing is that you may be out of the market in periods of strong returns.
KRF: There is a large academic literature on whether market returns are predictable. The general conclusion is that it is impossible to predict the market return with any confidence... "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," by Amit Goyal and Ivo Welch (Review of Financial Studies, 2008), is a good summary of the evidence.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Recently, I've heard some say "I got out of the market in May 2008 and I am sure glad I did." Given the obviously positive results of this decision, what is the best argument to convince people that buy and hold is better than timing the market?
EFF: Wins and losses from market timing bets are both just unpredictable chance outcomes, and good luck is, of course, better than bad luck. The problem with market timing is that you may be out of the market in periods of strong returns.
KRF: There is a large academic literature on whether market returns are predictable. The general conclusion is that it is impossible to predict the market return with any confidence... "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," by Amit Goyal and Ivo Welch (Review of Financial Studies, 2008), is a good summary of the evidence.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Inverted Yield Curves</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-inverted-yield-curves.aspx</link><pubDate>Thu, 20 Mar 2014 10:01:12 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-inverted-yield-curves.aspx</guid><description><![CDATA[I have a client who is convinced that an inverted yield curve is a signal to get out of equities. What are your thoughts on this topic?
EFF/KRF: Inverted yield curves are often observed at the front end of recessions. But there's no evidence that they predict stock returns, which also tend to predict (decline in advance of) recessions. Your client's implicit premise is that bond market investors predict future economic activity better than stock market investors. The evidence says that both markets are moderately good at predicting future economic activity, and inverted yield curves are not reliable predictors of stock returns.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[I have a client who is convinced that an inverted yield curve is a signal to get out of equities. What are your thoughts on this topic?
EFF/KRF: Inverted yield curves are often observed at the front end of recessions. But there's no evidence that they predict stock returns, which also tend to predict (decline in advance of) recessions. Your client's implicit premise is that bond market investors predict future economic activity better than stock market investors. The evidence says that both markets are moderately good at predicting future economic activity, and inverted yield curves are not reliable predictors of stock returns.]]></content:encoded></item><item><title>Q&amp;A: Thoughts on Mark-to-Market</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-thoughts-on-mark-to-market.aspx</link><pubDate>Thu, 20 Mar 2014 10:03:37 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-thoughts-on-mark-to-market.aspx</guid><description><![CDATA[What do you think of the mark to market issue?
EFF: It gives investors a good estimate of what a financial institution is worth. It has more flexibility than commonly realized, especially for illiquid assets, where best estimates of value can be used.
KRF: There is not enough empirical evidence to be sure who is right about this issue, but we can guess. Those against marking to market argue that the transaction prices for securities sold under duress do not reflect their true value. If you and I both own relatively illiquid assets and you choose to sell yours quickly at a fire sale price, mark to market accounting may force me to write down the value of my assets to your transaction price. Unless I also plan to sell my position quickly, this undervalues my position. The critical question, however, is whether your transaction price is more accurate than the model value I would use if I am not forced to mark to market. My guess—and this is only a guess—is that the observed transaction price is typically more accurate than the model. In other words, marking to market would improve the accuracy of my balance sheet.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[What do you think of the mark to market issue?
EFF: It gives investors a good estimate of what a financial institution is worth. It has more flexibility than commonly realized, especially for illiquid assets, where best estimates of value can be used.
KRF: There is not enough empirical evidence to be sure who is right about this issue, but we can guess. Those against marking to market argue that the transaction prices for securities sold under duress do not reflect their true value. If you and I both own relatively illiquid assets and you choose to sell yours quickly at a fire sale price, mark to market accounting may force me to write down the value of my assets to your transaction price. Unless I also plan to sell my position quickly, this undervalues my position. The critical question, however, is whether your transaction price is more accurate than the model value I would use if I am not forced to mark to market. My guess—and this is only a guess—is that the observed transaction price is typically more accurate than the model. In other words, marking to market would improve the accuracy of my balance sheet.]]></content:encoded></item><item><title>Q&amp;A: Confidence in the Bell Curve</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-confidence-in-the-bell-curve.aspx</link><pubDate>Thu, 20 Mar 2014 10:05:11 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-confidence-in-the-bell-curve.aspx</guid><description><![CDATA[It would be very enlightening if you would comment on the Nassim Nicholas Taleb ("The Black Swan") attack on the use of Gaussian (normal bell curve) mathematics as the foundation of finance. As you may know, Taleb is a fan of Mandelbrot, whose mathematics account for fat tails. He argues that the bell curve doesn't reflect reality. He is also quite critical of academics who teach modern portfolio theory because it is based on the assumption that returns are normally distributed. Doesn't all this imply that academics should start doing reality-based research?
EFF: Half of my 1964 Ph.D. thesis is tests of market efficiency, and the other half is a detailed examination of the distribution of stock returns. Mandelbrot is right. The distribution is fat-tailed relative to the normal distribution. In other words, extreme returns occur much more often than would be expected if returns were normal.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[It would be very enlightening if you would comment on the Nassim Nicholas Taleb ("The Black Swan") attack on the use of Gaussian (normal bell curve) mathematics as the foundation of finance. As you may know, Taleb is a fan of Mandelbrot, whose mathematics account for fat tails. He argues that the bell curve doesn't reflect reality. He is also quite critical of academics who teach modern portfolio theory because it is based on the assumption that returns are normally distributed. Doesn't all this imply that academics should start doing reality-based research?
EFF: Half of my 1964 Ph.D. thesis is tests of market efficiency, and the other half is a detailed examination of the distribution of stock returns. Mandelbrot is right. The distribution is fat-tailed relative to the normal distribution. In other words, extreme returns occur much more often than would be expected if returns were normal.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Derivatives in an Efficient Market</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-derivatives-in-an-efficient-market.aspx</link><pubDate>Thu, 20 Mar 2014 10:10:14 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-derivatives-in-an-efficient-market.aspx</guid><description><![CDATA[What is the role of various derivatives instruments in maintaining an efficient market?
EFF: Theoretically, derivatives increase the range of bets people can make, and this should help to wipe out potential inefficiencies. Whether this actually happens is a difficult, perhaps impossible, empirical question. The "problem" is that markets seemed rather efficient before Black-Scholes (which initiated the derivatives industry), so there wasn't much for derivatives to do.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[What is the role of various derivatives instruments in maintaining an efficient market?
EFF: Theoretically, derivatives increase the range of bets people can make, and this should help to wipe out potential inefficiencies. Whether this actually happens is a difficult, perhaps impossible, empirical question. The "problem" is that markets seemed rather efficient before Black-Scholes (which initiated the derivatives industry), so there wasn't much for derivatives to do.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Diversification's Role Today</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-diversifications-role-today.aspx</link><pubDate>Thu, 20 Mar 2014 10:12:54 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-diversifications-role-today.aspx</guid><description><![CDATA[Is diversification working today, when we need it most?
EFF/KRF: When overall market volatility increases, idiosyncratic (security-specific) volatility also tends to increase. For example, market volatility is currently quite high, and the dispersion of the cross section of stock returns (which is idiosyncratic volatility) is also unusually high. Diversification has no effect on the volatility of the overall market, but it reduces the effect of idiosyncratic volatility on a portfolio's return. To put it differently, active investment is a riskier strategy when volatility is high because active portfolios are, almost by definition, poorly diversified.
In short, diversification is now more important than usual.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Is diversification working today, when we need it most?
EFF/KRF: When overall market volatility increases, idiosyncratic (security-specific) volatility also tends to increase. For example, market volatility is currently quite high, and the dispersion of the cross section of stock returns (which is idiosyncratic volatility) is also unusually high. Diversification has no effect on the volatility of the overall market, but it reduces the effect of idiosyncratic volatility on a portfolio's return. To put it differently, active investment is a riskier strategy when volatility is high because active portfolios are, almost by definition, poorly diversified.
In short, diversification is now more important than usual.]]></content:encoded></item><item><title>Q&amp;A: The First Global Recession?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-the-first-global-recession.aspx</link><pubDate>Thu, 20 Mar 2014 10:14:07 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-the-first-global-recession.aspx</guid><description><![CDATA[Some have suggested this downturn is different because it is affecting the entire planet, not just a country or region, so previous downturns don't necessarily compare. Given the state of the world economy, is recovery beyond our grasp?
EFF/KRF: In the past, other countries have had recessions that the U.S. has not shared. But the U.S. is big, and every U.S. recession has been global. Thus, the global aspect of the current U.S. recession is characteristic of past U.S. recessions. Every past recession has ended. This one will too.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Some have suggested this downturn is different because it is affecting the entire planet, not just a country or region, so previous downturns don't necessarily compare. Given the state of the world economy, is recovery beyond our grasp?
EFF/KRF: In the past, other countries have had recessions that the U.S. has not shared. But the U.S. is big, and every U.S. recession has been global. Thus, the global aspect of the current U.S. recession is characteristic of past U.S. recessions. Every past recession has ended. This one will too.]]></content:encoded></item><item><title>Q&amp;A: Bailout Banks at All Costs?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-bailout-banks-at-all-costs.aspx</link><pubDate>Thu, 20 Mar 2014 10:15:47 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-bailout-banks-at-all-costs.aspx</guid><description><![CDATA[Some think the exposures associated with credit derivatives are so extreme that the failure of one or two large financial institutions will ruin the nation. Could the use—or abuse—of credit default swap exposures be that dangerous?
EFF/KRF: As far as I can tell, the government bailout of AIG has gone largely to prop up its $2 trillion of credit default swaps. The fear of the Treasury and the Fed is that if AIG is forced to default on its credit default swaps, the "insurance" they provide to the value of bank assets will disappear, the value of the assets will fall, and lots of big banks will be insolvent. I agree that this is likely to be the eventual outcome, in other words, the Fed and the Treasury will eventually say "uncle" and let AIG and the bad banks fail. I think this is what they should have done from the beginning, and if they had we would be in better shape now. The stockholders and the bondholders of AIG and the failed banks will lose big time, but this will allow the banking sector as a whole to emerge in a stronger state. (See also my little paper "Bailouts and Stimulus Plans.")]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Some think the exposures associated with credit derivatives are so extreme that the failure of one or two large financial institutions will ruin the nation. Could the use—or abuse—of credit default swap exposures be that dangerous?
EFF/KRF: As far as I can tell, the government bailout of AIG has gone largely to prop up its $2 trillion of credit default swaps. The fear of the Treasury and the Fed is that if AIG is forced to default on its credit default swaps, the "insurance" they provide to the value of bank assets will disappear, the value of the assets will fall, and lots of big banks will be insolvent. I agree that this is likely to be the eventual outcome, in other words, the Fed and the Treasury will eventually say "uncle" and let AIG and the bad banks fail. I think this is what they should have done from the beginning, and if they had we would be in better shape now. The stockholders and the bondholders of AIG and the failed banks will lose big time, but this will allow the banking sector as a whole to emerge in a stronger state. (See also my little paper "Bailouts and Stimulus Plans.")]]></content:encoded></item><item><title>Q&amp;A: Capitalism Under Obama</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-capitalism-under-obama.aspx</link><pubDate>Thu, 20 Mar 2014 10:18:17 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-capitalism-under-obama.aspx</guid><description><![CDATA[Some political commentators argue that Obama's economic policies are our path to ruin. Is capitalism really threatened by our recent political decisions?
EFF/KRF: Even in good times, economic systems are often changed dramatically by political decisions. (Think about South America over the last 30 years.) Capitalism is always under threat in the U.S., and the threat is higher when the legislative and executive branches are both in the control of liberal Democrats, who seem to be big admirers of the European system of high social welfare expenditures and "managed" (or better, mismanaged) capitalism. Unfortunately, the current political period may result in stagnation of the sort that other managed capitalist economies (Japan and most of Europe) have experienced. But we hope the pioneering free enterprise spirit of the U.S. can quickly reassert itself.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Some political commentators argue that Obama's economic policies are our path to ruin. Is capitalism really threatened by our recent political decisions?
EFF/KRF: Even in good times, economic systems are often changed dramatically by political decisions. (Think about South America over the last 30 years.) Capitalism is always under threat in the U.S., and the threat is higher when the legislative and executive branches are both in the control of liberal Democrats, who seem to be big admirers of the European system of high social welfare expenditures and "managed" (or better, mismanaged) capitalism. Unfortunately, the current political period may result in stagnation of the sort that other managed capitalist economies (Japan and most of Europe) have experienced. But we hope the pioneering free enterprise spirit of the U.S. can quickly reassert itself.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Stock Returns Under Socialism</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-stock-returns-under-socialism.aspx</link><pubDate>Thu, 20 Mar 2014 10:20:32 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-stock-returns-under-socialism.aspx</guid><description><![CDATA[Newsweek recently proclaimed "we are all socialists now". How has government intervention changed expected stock returns?
EFF/KRF: Government intervention affects the market in two ways. First, it affects the level of expected future profitability, which has direct effects on stock prices. Second, government intervention and uncertainty about the government's future actions change the risk of expected future profits, which affects stock prices by raising or lowering the discount rates for expected future profits, and thus raising or lowering expected stock returns. Our view is that the rhetoric and sweeping initiatives of the new administration have lowered market expectations of future profitability, and the uncertainty about government policies has increased the risk of expected future profits. Both effects have contributed to the lower stock prices we have seen as the policies of the new administration have unfolded. If the market has it right (that is, if the market is efficient) all this is built into current stock prices, and expected returns are higher going forward. (See also the answers to Expected Return and Stimulus Efforts, Hedging Inflation with Bonds.)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Newsweek recently proclaimed "we are all socialists now". How has government intervention changed expected stock returns?
EFF/KRF: Government intervention affects the market in two ways. First, it affects the level of expected future profitability, which has direct effects on stock prices. Second, government intervention and uncertainty about the government's future actions change the risk of expected future profits, which affects stock prices by raising or lowering the discount rates for expected future profits, and thus raising or lowering expected stock returns. Our view is that the rhetoric and sweeping initiatives of the new administration have lowered market expectations of future profitability, and the uncertainty about government policies has increased the risk of expected future profits. Both effects have contributed to the lower stock prices we have seen as the policies of the new administration have unfolded. If the market has it right (that is, if the market is efficient) all this is built into current stock prices, and expected returns are higher going forward. (See also the answers to Expected Return and Stimulus Efforts, Hedging Inflation with Bonds.)]]></content:encoded></item><item><title>Q&amp;A: Hedging Inflation with Bonds</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-hedging-inflation-with-bonds.aspx</link><pubDate>Thu, 20 Mar 2014 10:22:35 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-hedging-inflation-with-bonds.aspx</guid><description><![CDATA[Is cash (that is, short-term riskless bonds) a safe investment if we think about future consumption and not about nominal dollars?
EFF/KRF: Short-term high grade bonds are a good hedge against inflation. If hedging inflation is your overriding goal, short-term high grade bonds are the route for you. (Gene has been saying this for about 40 years.) But don't expect much in the way of a real return. Short-term bonds maintain purchasing power, but they don't enhance it, since the real returns they produce are quite low (for example, less than %1 per year on T-bills). In other words, if you don't take much real risk, you can't expect much real return.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Is cash (that is, short-term riskless bonds) a safe investment if we think about future consumption and not about nominal dollars?
EFF/KRF: Short-term high grade bonds are a good hedge against inflation. If hedging inflation is your overriding goal, short-term high grade bonds are the route for you. (Gene has been saying this for about 40 years.) But don't expect much in the way of a real return. Short-term bonds maintain purchasing power, but they don't enhance it, since the real returns they produce are quite low (for example, less than %1 per year on T-bills). In other words, if you don't take much real risk, you can't expect much real return.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Expected Return and Stimulus Efforts</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-expected-return-and-stimulus-efforts.aspx</link><pubDate>Thu, 20 Mar 2014 10:24:53 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-expected-return-and-stimulus-efforts.aspx</guid><description><![CDATA[What can we say about expected return if we do not think the stimulus plan can have positive impact on the economy?
EFF/KRF: The recent sharp decline in prices suggests that the market does not think the actions of the government (including the stimulus plan) are, in aggregate, good for the economy. If you think the market has it right, then expected stock returns are high, for the reasons outlined above. If you are more pessimistic than the market about the effects of government actions, then (at least on this score) you think prices are too high, which means expected returns are low. Conversely, if you are more optimistic than the market about the effects of government actions, then you think prices are too low, which means expected returns are quite high. Keep in mind, however, that the empirical evidence says you are on thin ice when you decide your forecast of the future is better than the market's.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[What can we say about expected return if we do not think the stimulus plan can have positive impact on the economy?
EFF/KRF: The recent sharp decline in prices suggests that the market does not think the actions of the government (including the stimulus plan) are, in aggregate, good for the economy. If you think the market has it right, then expected stock returns are high, for the reasons outlined above. If you are more pessimistic than the market about the effects of government actions, then (at least on this score) you think prices are too high, which means expected returns are low. Conversely, if you are more optimistic than the market about the effects of government actions, then you think prices are too low, which means expected returns are quite high. Keep in mind, however, that the empirical evidence says you are on thin ice when you decide your forecast of the future is better than the market's.]]></content:encoded></item><item><title>Q&amp;A: Expected Return in a Bad Economy</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-expected-return-in-a-bad-economy.aspx</link><pubDate>Thu, 20 Mar 2014 10:26:17 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-expected-return-in-a-bad-economy.aspx</guid><description><![CDATA[]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[]]></content:encoded></item><item><title>Q&amp;A: Avoid Firms in Trouble?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-avoid-firms-in-trouble.aspx</link><pubDate>Thu, 20 Mar 2014 10:28:29 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-avoid-firms-in-trouble.aspx</guid><description><![CDATA[It seems obvious now that firms facing extreme financial difficulty should be avoided.
EFF: This is a market efficiency question. If firms facing extreme financial difficulty are properly priced to take account of the risks they face, there is no reason to avoid them, unless you don't like the risks.
KRF: Whenever you think about a proposition like this, you should ask yourself, "What do you know that the market doesn't?" Does the market know the firms are facing extreme difficulty? If so, your best bet is that the price is right. This does not mean that the price is always right, or even that the market always incorporates all publicly available information. Sure the price of a distressed firm may be too high, but it is equally likely it is too low. To decide how the market has erred in a specific case, you have to know more than the market or you need a better model than the market. Although most investors seem to think they have the expertise to beat the market, an enormous amount of empirical evidence says this is a very high bar.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[It seems obvious now that firms facing extreme financial difficulty should be avoided.
EFF: This is a market efficiency question. If firms facing extreme financial difficulty are properly priced to take account of the risks they face, there is no reason to avoid them, unless you don't like the risks.
KRF: Whenever you think about a proposition like this, you should ask yourself, "What do you know that the market doesn't?" Does the market know the firms are facing extreme difficulty? If so, your best bet is that the price is right. This does not mean that the price is always right, or even that the market always incorporates all publicly available information. Sure the price of a distressed firm may be too high, but it is equally likely it is too low. To decide how the market has erred in a specific case, you have to know more than the market or you need a better model than the market. Although most investors seem to think they have the expertise to beat the market, an enormous amount of empirical evidence says this is a very high bar.]]></content:encoded></item><item><title>Q&amp;A: The Impact of Fiscal Stimulus</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-the-impact-of-fiscal-stimulus.aspx</link><pubDate>Thu, 20 Mar 2014 11:05:43 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-the-impact-of-fiscal-stimulus.aspx</guid><description><![CDATA[What are the possible impacts from the ballooning Federal Reserve balance sheet? Will this necessarily lead to an inflationary environment? Is deflation a possibility? Are there any charts or figures to illustrate the effects?
EFF/KRF: Rather than provide a superficial answer to this question, Gene's colleague at Chicago Booth, John Cochrane, has a short but brilliant analysis of this and other issues related to recent government actions.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[What are the possible impacts from the ballooning Federal Reserve balance sheet? Will this necessarily lead to an inflationary environment? Is deflation a possibility? Are there any charts or figures to illustrate the effects?
EFF/KRF: Rather than provide a superficial answer to this question, Gene's colleague at Chicago Booth, John Cochrane, has a short but brilliant analysis of this and other issues related to recent government actions.]]></content:encoded></item><item><title>Q&amp;A: Stick with Passive Management?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-stick-with-passive-management.aspx</link><pubDate>Thu, 20 Mar 2014 10:29:52 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-stick-with-passive-management.aspx</guid><description><![CDATA[Does passive management makes sense in all market conditions?
EFF/KRF: Active management is always a zero sum game, before fees, expenses, and trading costs, regardless of market conditions. If there are active winners, they win at the expense of active losers. And active management is always a negative sum game after costs. This is an algebraic condition, not a hypothesis. We call it equilibrium accounting.
Moreover, our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors. Funds that seem to be winners, based on past returns, were probably lucky rather than smart. After costs, that is in terms of returns to investors, there is no game to play; there is no evidence of managers with enough information to cover costs, other than on a purely chance basis. And there is no evidence that this depends on market conditions. If you are interested, see our paper Mutual Fund Performance.In short, passive management and passive investing always make sense.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Does passive management makes sense in all market conditions?
EFF/KRF: Active management is always a zero sum game, before fees, expenses, and trading costs, regardless of market conditions. If there are active winners, they win at the expense of active losers. And active management is always a negative sum game after costs. This is an algebraic condition, not a hypothesis. We call it equilibrium accounting.
Moreover, our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors. Funds that seem to be winners, based on past returns, were probably lucky rather than smart. After costs, that is in terms of returns to investors, there is no game to play; there is no evidence of managers with enough information to cover costs, other than on a purely chance basis. And there is no evidence that this depends on market conditions. If you are interested, see our paper Mutual Fund Performance.In short, passive management and passive investing always make sense.]]></content:encoded></item><item><title>Q&amp;A: How Much Longer?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-how-much-longer.aspx</link><pubDate>Thu, 20 Mar 2014 10:33:03 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-how-much-longer.aspx</guid><description><![CDATA[]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[]]></content:encoded></item><item><title>Q&amp;A: Securities Lending</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-securities-lending.aspx</link><pubDate>Thu, 20 Mar 2014 10:34:38 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-securities-lending.aspx</guid><description><![CDATA[Does it make sense to lend securities to speculators who are driving down prices and contributing to the volatility in the markets? Sure, the revenue from lending is nice, but if security lending pushes down stock prices, the net contribution maybe negative.
EFF: The evidence that short-sellers actually know something about market prices is weak. And even if they do, they only push prices more quickly to lower equilibrium levels, so they have little effect on the returns of long-term investors.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Does it make sense to lend securities to speculators who are driving down prices and contributing to the volatility in the markets? Sure, the revenue from lending is nice, but if security lending pushes down stock prices, the net contribution maybe negative.
EFF: The evidence that short-sellers actually know something about market prices is weak. And even if they do, they only push prices more quickly to lower equilibrium levels, so they have little effect on the returns of long-term investors.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Deflation Hedge</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-deflation-hedge.aspx</link><pubDate>Thu, 20 Mar 2014 10:38:03 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-deflation-hedge.aspx</guid><description><![CDATA[Should I put some portion of my portfolio in long-term US Treasury bonds as a hedge against deflation?
EFF/KRF: Perhaps, but you would have to put a high probability on deflation. Severe downturns in business activity do not always result in deflation. For example, during the depression of the 1930s, some countries experienced deflation and some experienced hyperinflation. There is lots of talk currently about deflation, but the huge commitments the Fed has made recently seem to be pushing toward higher inflation.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Should I put some portion of my portfolio in long-term US Treasury bonds as a hedge against deflation?
EFF/KRF: Perhaps, but you would have to put a high probability on deflation. Severe downturns in business activity do not always result in deflation. For example, during the depression of the 1930s, some countries experienced deflation and some experienced hyperinflation. There is lots of talk currently about deflation, but the huge commitments the Fed has made recently seem to be pushing toward higher inflation.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Factor Correlations</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-factor-correlations.aspx</link><pubDate>Thu, 20 Mar 2014 10:41:00 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-factor-correlations.aspx</guid><description><![CDATA[Are the Fama/French factors more correlated when markets go down? Are value portfolios riskier in bad times?
EFF/KRF: The two questions are related. Throughout the period from 1926 to now, small stocks have higher market βs (sensitivity to market returns) than big stocks. This means small stocks go up more in good market times and down more in bad market times. In terms of market sensitivity (β), small stocks are riskier than big stocks. Prior to 1963, value stocks have higher market βs than growth stocks, and during this period value stocks tend to move up or down more than the market. After 1963, value stocks have lower market βs than growth stocks, and after 1963 value stocks tend to move up or down less than the market. It is important to emphasize, however, that in the three-factor model of Fama and French, market β is not sufficient to describe the risks of common stocks. In the three-factor model, value stocks are always riskier than growth stocks because they are more exposed to a value-growth risk factor that is separate from market risk and is compensated differently in expected returns. In the three-factor model, portfolios of value and growth stocks have similar exposure to the market. This means that when there are big market moves, like those of the last few months, value and growth stocks (or at least diversified portfolios of value and growth stocks) move in much the same way. In other words, big market moves tend to dominate the returns on value and growth stocks alike.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Are the Fama/French factors more correlated when markets go down? Are value portfolios riskier in bad times?
EFF/KRF: The two questions are related. Throughout the period from 1926 to now, small stocks have higher market βs (sensitivity to market returns) than big stocks. This means small stocks go up more in good market times and down more in bad market times. In terms of market sensitivity (β), small stocks are riskier than big stocks. Prior to 1963, value stocks have higher market βs than growth stocks, and during this period value stocks tend to move up or down more than the market. After 1963, value stocks have lower market βs than growth stocks, and after 1963 value stocks tend to move up or down less than the market. It is important to emphasize, however, that in the three-factor model of Fama and French, market β is not sufficient to describe the risks of common stocks. In the three-factor model, value stocks are always riskier than growth stocks because they are more exposed to a value-growth risk factor that is separate from market risk and is compensated differently in expected returns. In the three-factor model, portfolios of value and growth stocks have similar exposure to the market. This means that when there are big market moves, like those of the last few months, value and growth stocks (or at least diversified portfolios of value and growth stocks) move in much the same way. In other words, big market moves tend to dominate the returns on value and growth stocks alike.]]></content:encoded></item><item><title>Q&amp;A: Equilibrium During a Downturn?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-equilibrium-during-a-downturn.aspx</link><pubDate>Thu, 20 Mar 2014 10:42:11 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-equilibrium-during-a-downturn.aspx</guid><description><![CDATA[The Dow peaked around 14K in October 2007, one year later the Dow went to 7500. Was the market really in equilibrium last October given that it was on the verge of such a steep collapse? How can one address equilibrium given the daily volatility we are experiencing?
EFF: Every market determined price is an equilibrium price that should take account of all information available at the time the price is set. (This is the definition of market efficiency.) But things inevitably change, and equilibrium prices change along with them. All we can say about the recent market turmoil is that the volatility of information and its implications for forecasts of profitability must be quite high. KRF: Market efficiency does not imply prices cannot change. It does not even say they cannot change by a lot. The key question is whether we should have known the Dow would drop from 14,000 to 7500. Some who made fortunes by anticipating the drop seem to have convinced many observers that the outcome was obvious, but that is just history being written by the victor. Unlike the technology boom of 1999-2000, I don't recall lots of conversations in which people struggled to understand why the Dow was at 14,000.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[The Dow peaked around 14K in October 2007, one year later the Dow went to 7500. Was the market really in equilibrium last October given that it was on the verge of such a steep collapse? How can one address equilibrium given the daily volatility we are experiencing?
EFF: Every market determined price is an equilibrium price that should take account of all information available at the time the price is set. (This is the definition of market efficiency.) But things inevitably change, and equilibrium prices change along with them. All we can say about the recent market turmoil is that the volatility of information and its implications for forecasts of profitability must be quite high. KRF: Market efficiency does not imply prices cannot change. It does not even say they cannot change by a lot. The key question is whether we should have known the Dow would drop from 14,000 to 7500. Some who made fortunes by anticipating the drop seem to have convinced many observers that the outcome was obvious, but that is just history being written by the victor. Unlike the technology boom of 1999-2000, I don't recall lots of conversations in which people struggled to understand why the Dow was at 14,000.]]></content:encoded></item><item><title>Q&amp;A: Global Correlations</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-global-correlations.aspx</link><pubDate>Thu, 20 Mar 2014 10:43:15 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-global-correlations.aspx</guid><description><![CDATA[Have global correlations gone, effectively, to 1? Have cross-country and cross asset-class correlations behaved any differently this time than in previous downturns?
EFF/KRF: When market volatility goes up, cross-country and cross-asset-class correlations tend to go up. When market volatility is normal, events that are specific to countries, asset classes, or individual firms are a larger part of total volatility and correlations are low. When market volatility increases relative to other sources of volatility, the common variation becomes a larger part of total volatility and correlations go up. This effect has been particularly apparent recently because volatility has been extraordinarily high.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Have global correlations gone, effectively, to 1? Have cross-country and cross asset-class correlations behaved any differently this time than in previous downturns?
EFF/KRF: When market volatility goes up, cross-country and cross-asset-class correlations tend to go up. When market volatility is normal, events that are specific to countries, asset classes, or individual firms are a larger part of total volatility and correlations are low. When market volatility increases relative to other sources of volatility, the common variation becomes a larger part of total volatility and correlations go up. This effect has been particularly apparent recently because volatility has been extraordinarily high.]]></content:encoded></item><item><title>Q&amp;A: Recessions</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-recessions.aspx</link><pubDate>Thu, 20 Mar 2014 10:44:39 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-recessions.aspx</guid><description><![CDATA[The US economy is in a recession. Does it make sense to own stocks during a recession?
EFF/KRF: There is no evidence that market timing in response to economic events enhances expected returns. The market tends to lead economic activity. Stock prices tend to fall in advance of recessions and rise in advance of economic upturns. To time markets successfully, you have to come up with better forecasts of economic activity than those already built into stock prices. We don't know anyone who can do this.
Moreover, investors who try to time the market by selling after news of a recession is already in prices are probably reducing their expected returns. Although realized returns are too volatile to make strong statements, there is some evidence that expected stock returns are relatively high during recessions and low during expansions. One can avoid the higher risk of stocks during recessions, but apparently only by passing up higher expected returns.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[The US economy is in a recession. Does it make sense to own stocks during a recession?
EFF/KRF: There is no evidence that market timing in response to economic events enhances expected returns. The market tends to lead economic activity. Stock prices tend to fall in advance of recessions and rise in advance of economic upturns. To time markets successfully, you have to come up with better forecasts of economic activity than those already built into stock prices. We don't know anyone who can do this.
Moreover, investors who try to time the market by selling after news of a recession is already in prices are probably reducing their expected returns. Although realized returns are too volatile to make strong statements, there is some evidence that expected stock returns are relatively high during recessions and low during expansions. One can avoid the higher risk of stocks during recessions, but apparently only by passing up higher expected returns.]]></content:encoded></item><item><title>Q&amp;A: Regulation</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-regulation.aspx</link><pubDate>Thu, 20 Mar 2014 10:45:43 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-regulation.aspx</guid><description><![CDATA[Some people have argued that the turmoil was caused by a lack of government regulation. What do you think? Do we need more regulation?
KRF: It is not obvious that financial regulations were weakened during the last few years. This claim seems to have been the product of a Presidential election in which both candidates were running against the incumbent. In fact, one could easily point to important new laws and regulations such as Sarbanes-Oxley to argue that market regulation increased. As more tangible evidence, the SEC's budget increased from $377 million in 2000 to $906 million in 2008. It is certainly true that different regulations could have reduced the magnitude of the current turmoil, but that is like saying a different portfolio allocation could have produced higher returns.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Some people have argued that the turmoil was caused by a lack of government regulation. What do you think? Do we need more regulation?
KRF: It is not obvious that financial regulations were weakened during the last few years. This claim seems to have been the product of a Presidential election in which both candidates were running against the incumbent. In fact, one could easily point to important new laws and regulations such as Sarbanes-Oxley to argue that market regulation increased. As more tangible evidence, the SEC's budget increased from $377 million in 2000 to $906 million in 2008. It is certainly true that different regulations could have reduced the magnitude of the current turmoil, but that is like saying a different portfolio allocation could have produced higher returns.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Market Turmoil</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-market-turmoil.aspx</link><pubDate>Thu, 20 Mar 2014 10:48:29 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-market-turmoil.aspx</guid><description><![CDATA[Is the market turmoil a sign that markets are not efficient? EFF/KRF: The market turmoil is caused by some combination of (i) quickly fluctuating changes in expected cashflows (future profitability), and (ii) variation in investor risk aversion that leads to variation in expected returns (the discount rates for expected cashflows). Both responses can be rational. In short, a change in volatility, by itself, says nothing about market efficiency. Of course, it is interesting to ask why the volatility of expected cashflows and expected returns increased so much, but that requires a much longer analysis.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Is the market turmoil a sign that markets are not efficient? EFF/KRF: The market turmoil is caused by some combination of (i) quickly fluctuating changes in expected cashflows (future profitability), and (ii) variation in investor risk aversion that leads to variation in expected returns (the discount rates for expected cashflows). Both responses can be rational. In short, a change in volatility, by itself, says nothing about market efficiency. Of course, it is interesting to ask why the volatility of expected cashflows and expected returns increased so much, but that requires a much longer analysis.]]></content:encoded></item><item><title>Q&amp;A: The Value of Historical Data</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-the-value-of-historical-data.aspx</link><pubDate>Thu, 20 Mar 2014 10:49:36 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-the-value-of-historical-data.aspx</guid><description><![CDATA[How useful is an approach based on historical data when the current situation appears to be unprecedented?
EFF/KRF: Any current situation is always somewhat unprecedented and somewhat old stuff. Large declines in stock prices occur several times during the last 80 years. The nearby plot of the volatility of daily market returns shows that the current high volatility also has precedents in 1987 and in the 1930s, and to a lesser extent in 2000-2002. Periods of business uncertainty (for example, the onset of a recession) are typically associated with stock price declines and increases in volatility.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[How useful is an approach based on historical data when the current situation appears to be unprecedented?
EFF/KRF: Any current situation is always somewhat unprecedented and somewhat old stuff. Large declines in stock prices occur several times during the last 80 years. The nearby plot of the volatility of daily market returns shows that the current high volatility also has precedents in 1987 and in the 1930s, and to a lesser extent in 2000-2002. Periods of business uncertainty (for example, the onset of a recession) are typically associated with stock price declines and increases in volatility.]]></content:encoded></item><item><title>Q&amp;A: T-bills Shift</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-t-bills-shift.aspx</link><pubDate>Thu, 20 Mar 2014 10:50:45 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-t-bills-shift.aspx</guid><description><![CDATA[What would happen if many investors decided to sell their stocks and invest in Treasury bills instead?
EFF/KRF: Stock prices would go down and T-bill prices would go up - the usual response of prices to changes in demand. Of course, when T-bill prices go up the yield falls. Similarly, a reduction in prices caused by a large number of investors moving out of stocks pushes expected returns up.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[What would happen if many investors decided to sell their stocks and invest in Treasury bills instead?
EFF/KRF: Stock prices would go down and T-bill prices would go up - the usual response of prices to changes in demand. Of course, when T-bill prices go up the yield falls. Similarly, a reduction in prices caused by a large number of investors moving out of stocks pushes expected returns up.]]></content:encoded></item><item><title>Q&amp;A: Timing Volatility</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-timing-volatility.aspx</link><pubDate>Fri, 14 Mar 2014 08:39:36 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-timing-volatility.aspx</guid><description><![CDATA[Stock market volatility is currently quite high. Does it make sense for investors to get out of the market until volatility settles down?
EFF: If the current high volatility makes you permanently averse to stock market volatility, and the inevitable variation in market volatility, you should get out. But you shouldn't have been in the stock market in the first place since fluctuations in volatility are the norm. If you eventually want to come back into the market, then you shouldn't leave. Bouncing in and out of the market is risky if your desired long-term asset allocation involves exposure to the market.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Stock market volatility is currently quite high. Does it make sense for investors to get out of the market until volatility settles down?
EFF: If the current high volatility makes you permanently averse to stock market volatility, and the inevitable variation in market volatility, you should get out. But you shouldn't have been in the stock market in the first place since fluctuations in volatility are the norm. If you eventually want to come back into the market, then you shouldn't leave. Bouncing in and out of the market is risky if your desired long-term asset allocation involves exposure to the market.]]></content:encoded></item><item><title>Q&amp;A: Gold as a Haven?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-gold-as-a-haven.aspx</link><pubDate>Fri, 14 Mar 2014 08:39:26 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-gold-as-a-haven.aspx</guid><description><![CDATA[Should I consider gold as a possible safe haven for some portion of my portfolio?
EFF/KRF: The volatility of gold prices (and of commodity prices in general) is much like that of stock returns. Gold is far from a safe haven.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Should I consider gold as a possible safe haven for some portion of my portfolio?
EFF/KRF: The volatility of gold prices (and of commodity prices in general) is much like that of stock returns. Gold is far from a safe haven.]]></content:encoded></item><item><title>Q&amp;A: Recent Deleveraging</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-recent-deleveraging.aspx</link><pubDate>Fri, 14 Mar 2014 08:39:14 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-recent-deleveraging.aspx</guid><description><![CDATA[Do you think that the current investor deleveraging is playing a significant role in asset pricing? If so, has it been consistent with your views on asset pricing? Is this something we should be really concerned about?
EFF/KRF: The tools we develop in "Disagreement, Tastes, and Asset Pricing," published in the Journal of Financial Economics 83 (March 2007), 667-689, are helpful here. To keep the analysis simple, let's assume that (i) there is only one stock, (ii) I have $100,000 to invest, and (iii) for some reason, I want to own as much of the stock as possible. Compare two scenarios. In the first I cannot borrow so I just buy $100,000 of equity. In the second scenario, you are willing to lend me money to buy more stock. You are not crazy, however, so you limit my leverage to four to one. With $100,000 to invest I can borrow $400,000 and buy $500,000 of stock.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Do you think that the current investor deleveraging is playing a significant role in asset pricing? If so, has it been consistent with your views on asset pricing? Is this something we should be really concerned about?
EFF/KRF: The tools we develop in "Disagreement, Tastes, and Asset Pricing," published in the Journal of Financial Economics 83 (March 2007), 667-689, are helpful here. To keep the analysis simple, let's assume that (i) there is only one stock, (ii) I have $100,000 to invest, and (iii) for some reason, I want to own as much of the stock as possible. Compare two scenarios. In the first I cannot borrow so I just buy $100,000 of equity. In the second scenario, you are willing to lend me money to buy more stock. You are not crazy, however, so you limit my leverage to four to one. With $100,000 to invest I can borrow $400,000 and buy $500,000 of stock.]]></content:encoded></item><item><title>Q&amp;A: Three-Factor Model and Recent Returns</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-three-factor-model-and-recent-returns.aspx</link><pubDate>Fri, 14 Mar 2014 08:39:01 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-three-factor-model-and-recent-returns.aspx</guid><description><![CDATA[How well has the three-factor model explained the recent behavior of stock returns?
 
EFF/KRF: For diversified portfolios, quite well. For example, the model's market, size, and value-growth factor automatically pick up changes in the volatility of the three factors. Keep in mind, however, that the model is not designed to predict the return on the market (or on SMB and HML), so it cannot call market turns.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[How well has the three-factor model explained the recent behavior of stock returns?
 
EFF/KRF: For diversified portfolios, quite well. For example, the model's market, size, and value-growth factor automatically pick up changes in the volatility of the three factors. Keep in mind, however, that the model is not designed to predict the return on the market (or on SMB and HML), so it cannot call market turns.]]></content:encoded></item><item><title>Q&amp;A: Prediction in Valuations?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-prediction-in-valuations.aspx</link><pubDate>Fri, 14 Mar 2014 08:38:52 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-prediction-in-valuations.aspx</guid><description><![CDATA[Do valuation measures such as price/earnings or price/dividend ratios help predict future returns? Are they telling us anything now?
EFF/KRF: Yes, but not with lots of confidence. The market return tends to be lower when aggregate ratios like E/P and D/P are low, and vice versa. The economic logic is based on the same discount rate effect we use to explain the higher expected return on value stocks. The empirical evidence leans toward a positive relation between aggregate fundamental to price ratios and future market returns, but there is lots of uncertainty about the forecast.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Do valuation measures such as price/earnings or price/dividend ratios help predict future returns? Are they telling us anything now?
EFF/KRF: Yes, but not with lots of confidence. The market return tends to be lower when aggregate ratios like E/P and D/P are low, and vice versa. The economic logic is based on the same discount rate effect we use to explain the higher expected return on value stocks. The empirical evidence leans toward a positive relation between aggregate fundamental to price ratios and future market returns, but there is lots of uncertainty about the forecast.]]></content:encoded></item><item><title>Q&amp;A: Defined Benefit Dilemma</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-defined-benefit-dilemma.aspx</link><pubDate>Fri, 14 Mar 2014 08:38:35 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-defined-benefit-dilemma.aspx</guid><description><![CDATA[What suggestions do you have for defined benefit plans as equities have lost 40% to 60% of value, year-to-date, with interest rates at historical lows, and liabilities that are growing.
EFF/KRF: Sorry, but there is no magic bullet here. Market events of the last few months underscore the risks of defined benefit plans to plan sponsors. As a result, we expect that DB plans will be even less popular among plan sponsors in the future.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[What suggestions do you have for defined benefit plans as equities have lost 40% to 60% of value, year-to-date, with interest rates at historical lows, and liabilities that are growing.
EFF/KRF: Sorry, but there is no magic bullet here. Market events of the last few months underscore the risks of defined benefit plans to plan sponsors. As a result, we expect that DB plans will be even less popular among plan sponsors in the future.]]></content:encoded></item><item><title>Q&amp;A: Book Value</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-book-value.aspx</link><pubDate>Fri, 14 Mar 2014 07:53:48 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-book-value.aspx</guid><description><![CDATA[What is the validity of book value in today's environment, especially as it applies to financial firms?
EFF/KRF: There is always an issue about how to "properly" measure value. But all the work we have done says that at least for diversified portfolios, it doesn't much matter.
Alternative price ratios, like earnings/price and cashflow/price, work about as well as book/price, in terms of identifying value stocks and growth stocks. Every ratio has its problems because whatever fundamental one puts in the numerator has its own accounting issues. As a result, there are inevitable misclassifications of stocks, but they should wash out in diversified portfolios like ours.
We don't see any special problems with the book/price ratios of financial companies.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[What is the validity of book value in today's environment, especially as it applies to financial firms?
EFF/KRF: There is always an issue about how to "properly" measure value. But all the work we have done says that at least for diversified portfolios, it doesn't much matter.
Alternative price ratios, like earnings/price and cashflow/price, work about as well as book/price, in terms of identifying value stocks and growth stocks. Every ratio has its problems because whatever fundamental one puts in the numerator has its own accounting issues. As a result, there are inevitable misclassifications of stocks, but they should wash out in diversified portfolios like ours.
We don't see any special problems with the book/price ratios of financial companies.]]></content:encoded></item><item><title>Q&amp;A: What does it mean to say HML is redundant?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-what-does-it-mean-to-say-hml-is-redundant.aspx</link><pubDate>Tue, 02 Dec 2014 08:35:19 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-what-does-it-mean-to-say-hml-is-redundant.aspx</guid><description><![CDATA[EFF/KRF: There is some confusion about the interpretation of the evidence in Fama and French (2014, “A Five-Factor Model of Expected Returns”) that HML is redundant for explaining average U.S. stock returns for 1963-2013.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF/KRF: There is some confusion about the interpretation of the evidence in Fama and French (2014, “A Five-Factor Model of Expected Returns”) that HML is redundant for explaining average U.S. stock returns for 1963-2013.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: What can one learn from one, three, or five years of past returns about a manager’s skill or the future performance of an investment?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-what-can-one-learn-from-one,-three,-or-five-years-of-past-returns-about-a-manager’s-skill-or-the-future-performance-of-an-investment.aspx</link><pubDate>Mon, 16 Mar 2015 10:49:57 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-what-can-one-learn-from-one,-three,-or-five-years-of-past-returns-about-a-manager’s-skill-or-the-future-performance-of-an-investment.aspx</guid><description><![CDATA[EFF/KRF: The short answer: usually almost nothing.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF/KRF: The short answer: usually almost nothing.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: Can we evaluate an investment manager’s skill more quickly by using daily returns instead of monthly or annual returns?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-can-we-evaluate-an-investment-manager’s-skill-more-quickly-by-using-daily-returns-instead-of-monthly-or-annual-returns.aspx</link><pubDate>Mon, 16 Mar 2015 10:56:05 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-can-we-evaluate-an-investment-manager’s-skill-more-quickly-by-using-daily-returns-instead-of-monthly-or-annual-returns.aspx</guid><description><![CDATA[EFF/KRF: Unfortunately, daily returns don’t provide more information.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF/KRF: Unfortunately, daily returns don’t provide more information.
(Read the full entry)]]></content:encoded></item><item><title>Q&amp;A: How do you decide which research papers to read?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-how-do-you-decide-which-research-papers-to-read.aspx</link><pubDate>Mon, 16 Mar 2015 10:58:34 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/questions-answers/qa-how-do-you-decide-which-research-papers-to-read.aspx</guid><description><![CDATA[EFF/KRF: Our strategies for choosing papers are similar. Sometimes we don’t have a choice. If we agree to referee a paper or discuss it at a conference, we are certain to read it, and we read most of the papers our colleagues write.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF/KRF: Our strategies for choosing papers are similar. Sometimes we don’t have a choice. If we agree to referee a paper or discuss it at a conference, we are certain to read it, and we read most of the papers our colleagues write.
(Read the full entry)]]></content:encoded></item><item><title>Long/Short Investment Strategies</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/longshort-investment-strategies.aspx</link><pubDate>Tue, 10 May 2016 09:09:16 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/longshort-investment-strategies.aspx</guid><description><![CDATA[Long/Short (LS) strategies buy one equity portfolio and short another. They are often sold as a way to add a premium with special diversification benefits that arise because the premium is not highly correlated with the rest of an investor’s equity portfolio. We provide examples to show how to evaluate these claims.
(Read more)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Long/Short (LS) strategies buy one equity portfolio and short another. They are often sold as a way to add a premium with special diversification benefits that arise because the premium is not highly correlated with the rest of an investor’s equity portfolio. We provide examples to show how to evaluate these claims.
(Read more)]]></content:encoded></item><item><title>Portable Alpha</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/portable-alpha.aspx</link><pubDate>Thu, 05 May 2016 10:58:09 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/portable-alpha.aspx</guid><description><![CDATA[Portable alpha is the return from an active investment strategy that has no exposure to some index, such as the S&amp;P 500 or the Russell 2000. It is often sold as a way to get the benefits of active management at lower cost. For the moment we leave aside whether there are benefits to active management and focus on the claim about costs.
(Read more)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Portable alpha is the return from an active investment strategy that has no exposure to some index, such as the S&amp;P 500 or the Russell 2000. It is often sold as a way to get the benefits of active management at lower cost. For the moment we leave aside whether there are benefits to active management and focus on the claim about costs.
(Read more)]]></content:encoded></item><item><title>Things I've Learned from Gene</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/things-ive-learned-from-gene.aspx</link><pubDate>Mon, 17 Nov 2014 11:28:19 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/things-ive-learned-from-gene.aspx</guid><description><![CDATA[KRF: Gene Fama has taught us a lot over the last 50 years. In this essay, I describe some of the things Gene has taught me about doing research, writing papers, and life in general.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[KRF: Gene Fama has taught us a lot over the last 50 years. In this essay, I describe some of the things Gene has taught me about doing research, writing papers, and life in general.
(Read the full entry)]]></content:encoded></item><item><title>Does the Fed Control Interest Rates?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/does-the-fed-control-interest-rates.aspx</link><pubDate>Fri, 14 Mar 2014 08:41:29 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/does-the-fed-control-interest-rates.aspx</guid><description><![CDATA[EFF: I have a new paper, "Does the Fed Control Interest Rates?". In it, I find that The Federal funds rate, FF, moves strongly toward the Fed's target, TF, but other rates show little day-to-day convergence to TF. When the Fed changes TF, it moves toward existing short rates. This suggests a passive Fed that follows the market, but it is also consistent with an active Fed that controls rates and rates adjust to reflect predictable changes in TF. When TF changes, short rates move toward the new TF. This is consistent with a Fed that controls short rates or a Fed that has no control but is an informed investor whose signals affect rates.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF: I have a new paper, "Does the Fed Control Interest Rates?". In it, I find that The Federal funds rate, FF, moves strongly toward the Fed's target, TF, but other rates show little day-to-day convergence to TF. When the Fed changes TF, it moves toward existing short rates. This suggests a passive Fed that follows the market, but it is also consistent with an active Fed that controls rates and rates adjust to reflect predictable changes in TF. When TF changes, short rates move toward the new TF. This is consistent with a Fed that controls short rates or a Fed that has no control but is an informed investor whose signals affect rates.]]></content:encoded></item><item><title>Volatility and Premiums</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/volatility-and-premiums.aspx</link><pubDate>Fri, 14 Mar 2014 08:41:20 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/volatility-and-premiums.aspx</guid><description><![CDATA[By Eugene F. Fama and Kenneth R. French
Understanding volatility is crucial for informed investment decisions. Our paper explores the volatility of the market, size, and value premiums of the Fama-French three-factor model for US equity returns.
Volatility and Premiums in US Equity Returns (PDF)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[By Eugene F. Fama and Kenneth R. French
Understanding volatility is crucial for informed investment decisions. Our paper explores the volatility of the market, size, and value premiums of the Fama-French three-factor model for US equity returns.
Volatility and Premiums in US Equity Returns (PDF)]]></content:encoded></item><item><title>My Life in Finance</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/my-life-in-finance.aspx</link><pubDate>Fri, 14 Mar 2014 08:41:14 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/my-life-in-finance.aspx</guid><description><![CDATA[By Eugene F. Fama 
Foreword
I was invited by the editors to contribute a professional autobiography for the Annual Review of Financial Economics.  I focus on what I think is my best stuff.  Readers interested in the rest can download my vita from the website of the University of Chicago, Booth School of Business.  I only briefly discuss ideas and their origins, to give the flavor of context and motivation.  I do not attempt to review the contributions of others, which is likely to raise feathers.  Mea culpa in advance.
Professor Fama was invited by the editors of the Annual Review of Financial Economics to contribute a professional autobiography. In this essay, he highlights some of the key ideas and their origins that mark his distinguished career to give the flavor of context and motivation. 
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[By Eugene F. Fama 
Foreword
I was invited by the editors to contribute a professional autobiography for the Annual Review of Financial Economics.  I focus on what I think is my best stuff.  Readers interested in the rest can download my vita from the website of the University of Chicago, Booth School of Business.  I only briefly discuss ideas and their origins, to give the flavor of context and motivation.  I do not attempt to review the contributions of others, which is likely to raise feathers.  Mea culpa in advance.
Professor Fama was invited by the editors of the Annual Review of Financial Economics to contribute a professional autobiography. In this essay, he highlights some of the key ideas and their origins that mark his distinguished career to give the flavor of context and motivation. 
(Read the full entry)]]></content:encoded></item><item><title>Luck versus Skill in Mutual Fund Performance</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/luck-versus-skill-in-mutual-fund-performance.aspx</link><pubDate>Fri, 14 Mar 2014 08:40:54 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/luck-versus-skill-in-mutual-fund-performance.aspx</guid><description><![CDATA[By Eugene F. Fama and Kenneth R. French
Our paper, "Luck versus Skill in the Cross Section of Mutual Fund Returns," examines the performance during 1984-2006 of actively managed US mutual funds that invest primarily in US equities.  It is an academic paper with lots of technical detail.  The purpose of this white paper is to provide a summary of the results that are relevant for investors.  We begin by examining the overall α for aggregate wealth invested in actively managed mutual funds.  We then turn to the performance of individual funds.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[By Eugene F. Fama and Kenneth R. French
Our paper, "Luck versus Skill in the Cross Section of Mutual Fund Returns," examines the performance during 1984-2006 of actively managed US mutual funds that invest primarily in US equities.  It is an academic paper with lots of technical detail.  The purpose of this white paper is to provide a summary of the results that are relevant for investors.  We begin by examining the overall α for aggregate wealth invested in actively managed mutual funds.  We then turn to the performance of individual funds.
(Read the full entry)]]></content:encoded></item><item><title>Why Active Investing Is a Negative Sum Game</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/why-active-investing-is-a-negative-sum-game.aspx</link><pubDate>Fri, 14 Mar 2014 08:40:48 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/why-active-investing-is-a-negative-sum-game.aspx</guid><description><![CDATA[By Eugene F. Fama and Kenneth R. French
William F. Sharpe has a great article in the January/February 1991 issue of The Financial Analysts Journal (Vol. 47, No.1, pages 7-9). The title is "The Arithmetic of Active Management." It should be required reading for academics and investment professionals alike.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[By Eugene F. Fama and Kenneth R. French
William F. Sharpe has a great article in the January/February 1991 issue of The Financial Analysts Journal (Vol. 47, No.1, pages 7-9). The title is "The Arithmetic of Active Management." It should be required reading for academics and investment professionals alike.
(Read the full entry)]]></content:encoded></item><item><title>How Unusual Was the Stock Market of 2008?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/how-unusual-was-the-stock-market-of-2008.aspx</link><pubDate>Fri, 14 Mar 2014 08:40:41 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/how-unusual-was-the-stock-market-of-2008.aspx</guid><description><![CDATA[By Eugene F. Fama and Kenneth R. French
The cap-weighted market portfolio of NYSE-Amex-Nasdaq stocks delivered a -38.31% return for 2008. The experience was painful, but was it out of bounds? The volatility of returns also increased a lot during 2008. Was the observed volatility consistent with prior experience? These are the questions addressed here.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[By Eugene F. Fama and Kenneth R. French
The cap-weighted market portfolio of NYSE-Amex-Nasdaq stocks delivered a -38.31% return for 2008. The experience was painful, but was it out of bounds? The volatility of returns also increased a lot during 2008. Was the observed volatility consistent with prior experience? These are the questions addressed here.
(Read the full entry)]]></content:encoded></item><item><title>Bailouts and Stimulus Plans - Addendum 1/28/09</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/bailouts-and-stimulus-plans-addendum-12809.aspx</link><pubDate>Fri, 14 Mar 2014 08:40:29 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/bailouts-and-stimulus-plans-addendum-12809.aspx</guid><description><![CDATA[By EUGENE F. FAMA
In his NY Times blog Paul Krugman attacks my piece on the stimulus plan.
Again, here is my argument in three sentences.
1. Bailouts and stimulus plans must be financed.
2. If the financing takes the form of additional government debt, the added debt displaces other uses of the same funds.
3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
Are any of these statements incorrect?
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[By EUGENE F. FAMA
In his NY Times blog Paul Krugman attacks my piece on the stimulus plan.
Again, here is my argument in three sentences.
1. Bailouts and stimulus plans must be financed.
2. If the financing takes the form of additional government debt, the added debt displaces other uses of the same funds.
3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
Are any of these statements incorrect?
(Read the full entry)]]></content:encoded></item><item><title>Bailouts and Stimulus Plans - Addendum 1/16/09</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/bailouts-and-stimulus-plans-addendum-11609.aspx</link><pubDate>Fri, 14 Mar 2014 08:40:19 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/bailouts-and-stimulus-plans-addendum-11609.aspx</guid><description><![CDATA[By EUGENE F. FAMA
There has been lots of response to my little essay on bailouts and stimulus plans. I will only comment on the negative ones that I think have merit and are overlooked in my original paper.
First, however, I want to restate my argument in simple terms.
1. Bailouts and stimulus plans must be financed.
2. If the financing takes the form of additional government debt, the added debt displaces other uses of the funds.
3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
Are any of these statements incorrect?
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[By EUGENE F. FAMA
There has been lots of response to my little essay on bailouts and stimulus plans. I will only comment on the negative ones that I think have merit and are overlooked in my original paper.
First, however, I want to restate my argument in simple terms.
1. Bailouts and stimulus plans must be financed.
2. If the financing takes the form of additional government debt, the added debt displaces other uses of the funds.
3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
Are any of these statements incorrect?
(Read the full entry)]]></content:encoded></item><item><title>Bailouts and Stimulus Plans</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/bailouts-and-stimulus-plans.aspx</link><pubDate>Fri, 14 Mar 2014 08:40:10 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/bailouts-and-stimulus-plans.aspx</guid><description><![CDATA[By EUGENE F. FAMA
There is an identity in macroeconomics. It says that in any given year private investment must equal the sum of private savings, corporate savings (retained earnings), and government savings (the government surplus, which is more likely negative, that is, a deficit),
PI = PS + CS + GS
(1)
In a global economy the quantities in the equation are global. This means the equation need not hold in a particular country, but it must hold in the world as a whole. For example, in recent years private investment in the US has been greater than the sum of private, corporate, and government savings in the US. This means the US has been importing savings from the rest of the world (by selling US securities to the rest of the world). But the equation always holds for the world as whole.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[By EUGENE F. FAMA
There is an identity in macroeconomics. It says that in any given year private investment must equal the sum of private savings, corporate savings (retained earnings), and government savings (the government surplus, which is more likely negative, that is, a deficit),
PI = PS + CS + GS
(1)
In a global economy the quantities in the equation are global. This means the equation need not hold in a particular country, but it must hold in the world as a whole. For example, in recent years private investment in the US has been greater than the sum of private, corporate, and government savings in the US. This means the US has been importing savings from the rest of the world (by selling US securities to the rest of the world). But the equation always holds for the world as whole.
(Read the full entry)]]></content:encoded></item><item><title>Government Equity Capital for Financial Firms</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/government-equity-capital-for-financial-firms.aspx</link><pubDate>Fri, 14 Mar 2014 08:39:59 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/government-equity-capital-for-financial-firms.aspx</guid><description><![CDATA[By EUGENE F. FAMA
The financial sector provides the grease that makes the transfer of savings to productive investments more efficient. This role is critical for the health of the economy.
Government injections of equity capital into financial institutions can make sense if the whole financial system is in danger. But it is important that injections are at minimum cost to taxpayers, that is, without unnecessary subsidies. Problems on this score arise when the funds go primarily to prop up the value of a financial institution's existing debt. In this case the true amount of new equity capital is less than the injection of funds by the government, and the subsidy to debt holders is a loss to taxpayers with no clear offsetting benefits. My purpose here is to describe how this problem arises and how it can be avoided.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[By EUGENE F. FAMA
The financial sector provides the grease that makes the transfer of savings to productive investments more efficient. This role is critical for the health of the economy.
Government injections of equity capital into financial institutions can make sense if the whole financial system is in danger. But it is important that injections are at minimum cost to taxpayers, that is, without unnecessary subsidies. Problems on this score arise when the funds go primarily to prop up the value of a financial institution's existing debt. In this case the true amount of new equity capital is less than the injection of funds by the government, and the subsidy to debt holders is a loss to taxpayers with no clear offsetting benefits. My purpose here is to describe how this problem arises and how it can be avoided.
(Read the full entry)]]></content:encoded></item><item><title>Bayes Rule Spreadsheet</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/bayes-rule-spreadsheet.aspx</link><pubDate>Fri, 26 Jan 2018 10:41:19 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/bayes-rule-spreadsheet.aspx</guid><description><![CDATA[By KENNETH R. FRENCH
Bayes rule is a way to update your model of the world when you have new information. Suppose we are interested in assessing the probability that a specific hypothesis is true. We start with an initial assessment, called our prior, which is based on all the data we have observed, books we have read, and our other life experiences. This post explains how we should update our initial assessment when we observe new data.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[By KENNETH R. FRENCH
Bayes rule is a way to update your model of the world when you have new information. Suppose we are interested in assessing the probability that a specific hypothesis is true. We start with an initial assessment, called our prior, which is based on all the data we have observed, books we have read, and our other life experiences. This post explains how we should update our initial assessment when we observe new data.
(Read the full entry)]]></content:encoded></item><item><title>Volatility Lessons</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/volatility-lessons.aspx</link><pubDate>Wed, 26 Sep 2018 14:49:42 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/volatility-lessons.aspx</guid><description><![CDATA[By Eugene F. Fama and Kenneth R. French
The high volatility of stock returns is common knowledge, but many investors may not fully appreciate the implications of return volatility. Investors cannot draw strong inferences about expected returns from three, five, or even ten years of realized returns. Those who act on such noisy evidence should reconsider their approach.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[By Eugene F. Fama and Kenneth R. French
The high volatility of stock returns is common knowledge, but many investors may not fully appreciate the implications of return volatility. Investors cannot draw strong inferences about expected returns from three, five, or even ten years of realized returns. Those who act on such noisy evidence should reconsider their approach.]]></content:encoded></item><item><title>Inverted Yield Curves and Expected Stock Returns</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/inverted-yield-curves-and-expected-stock-returns.aspx</link><pubDate>Tue, 30 Jul 2019 16:26:55 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/inverted-yield-curves-and-expected-stock-returns.aspx</guid><description><![CDATA[By Eugene F. Fama and Kenneth R. French
We test the hypothesis that inverted yield curves predict negative equity premiums. Using monthly observations for the U.S. and 11 other developed markets, we examine whether shifting from equities to Treasury bills following a recent term structure inversion increases expected returns relative to a passive strategy of simply holding the value weight market. We find no evidence that inverted yield curves predict stocks will underperform bills.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[By Eugene F. Fama and Kenneth R. French
We test the hypothesis that inverted yield curves predict negative equity premiums. Using monthly observations for the U.S. and 11 other developed markets, we examine whether shifting from equities to Treasury bills following a recent term structure inversion increases expected returns relative to a passive strategy of simply holding the value weight market. We find no evidence that inverted yield curves predict stocks will underperform bills.]]></content:encoded></item><item><title>Investing in FAANG Stocks</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/investing-in-faang-stocks.aspx</link><pubDate>Thu, 24 Sep 2020 08:17:22 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/essays/investing-in-faang-stocks.aspx</guid><description><![CDATA[By KENNETH R. FRENCH
Returns for FAANG stocks over the last decade were extraordinary. Professor Ken French explores whether the strong performance tells us much about what to expect next.
(Read the full entry)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[By KENNETH R. FRENCH
Returns for FAANG stocks over the last decade were extraordinary. Professor Ken French explores whether the strong performance tells us much about what to expect next.
(Read the full entry)]]></content:encoded></item><item><title>Fama's Market</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/famas-market.aspx</link><pubDate>Mon, 17 Mar 2014 15:16:25 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/famas-market.aspx</guid><description><![CDATA[EFF: My undergraduate alma mater, Tufts University, features my life and academic career in their Winter 2014 magazine.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF: My undergraduate alma mater, Tufts University, features my life and academic career in their Winter 2014 magazine.]]></content:encoded></item><item><title>Fama: Nobel Prize Talks podcast</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-nobel-prize-talks-podcast.aspx</link><pubDate>Mon, 17 Mar 2014 15:27:50 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-nobel-prize-talks-podcast.aspx</guid><description><![CDATA[EFF: In an interview for Nobel Media, Adam Smith and I spoke on many topics, including the pros and cons of having research debated in the public sphere and the unique research environment at Chicago. You can find the podcast here.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF: In an interview for Nobel Media, Adam Smith and I spoke on many topics, including the pros and cons of having research debated in the public sphere and the unique research environment at Chicago. You can find the podcast here.]]></content:encoded></item><item><title>Fama: What's a Bubble?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-whats-a-bubble.aspx</link><pubDate>Mon, 17 Mar 2014 15:31:26 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-whats-a-bubble.aspx</guid><description><![CDATA[EFF: Robert Shiller and I talked with NPR about the definition of market "bubbles."]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF: Robert Shiller and I talked with NPR about the definition of market "bubbles."]]></content:encoded></item><item><title>Congratulations, Gene</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/congratulations,-gene.aspx</link><pubDate>Mon, 17 Mar 2014 15:32:59 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/congratulations,-gene.aspx</guid><description><![CDATA[]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[]]></content:encoded></item><item><title>Cochrane: Fama's Nobel Prize</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/cochrane-famas-nobel-prize.aspx</link><pubDate>Mon, 17 Mar 2014 16:08:35 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/cochrane-famas-nobel-prize.aspx</guid><description><![CDATA[John Cochrane explains Gene Fama's many contributions to finance. UPDATE, November 8: Professor Cochrane added to and refined his commentary on Gene's Efficient Markets work here.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[John Cochrane explains Gene Fama's many contributions to finance. UPDATE, November 8: Professor Cochrane added to and refined his commentary on Gene's Efficient Markets work here.]]></content:encoded></item><item><title>Fama: The Best Advice I Ever Got</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-the-best-advice-i-ever-got.aspx</link><pubDate>Mon, 17 Mar 2014 16:15:42 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-the-best-advice-i-ever-got.aspx</guid><description><![CDATA[EFF: I shared with CNNMoney a piece of advice I received from a statistics professor that has guided my research for 50 years.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF: I shared with CNNMoney a piece of advice I received from a statistics professor that has guided my research for 50 years.]]></content:encoded></item><item><title>Fama: Do Active Managers Earn Their Fees?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-do-active-managers-earn-their-fees.aspx</link><pubDate>Mon, 17 Mar 2014 16:20:43 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-do-active-managers-earn-their-fees.aspx</guid><description><![CDATA[EFF: In an interview with Client Insights host Dan Richards, I explain the key findings of the paper "Luck vs. Skill in Mutual Fund Performance" that Ken French and I published in 2010. Looking at funds over their entire lifetimes, only 3% demonstrate skill after accounting for their fees, and that's what you would expect purely based on chance. Even the active funds that have generated extraordinary returns are unlikely to do better than a low-cost passive fund in the future.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF: In an interview with Client Insights host Dan Richards, I explain the key findings of the paper "Luck vs. Skill in Mutual Fund Performance" that Ken French and I published in 2010. Looking at funds over their entire lifetimes, only 3% demonstrate skill after accounting for their fees, and that's what you would expect purely based on chance. Even the active funds that have generated extraordinary returns are unlikely to do better than a low-cost passive fund in the future.]]></content:encoded></item><item><title>Fama: Why Small and Value Stocks Outperform</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-why-small-and-value-stocks-outperform.aspx</link><pubDate>Mon, 17 Mar 2014 16:37:23 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-why-small-and-value-stocks-outperform.aspx</guid><description><![CDATA[EFF: I talked with Client Insights host Dan Richards about the problems with the Capital Asset Pricing Model (CAPM) and the development of the Fama/French three-factor model as a more accurate way of determining how average returns differ from one another. I also explain why higher expected returns for small and value stocks should persist.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF: I talked with Client Insights host Dan Richards about the problems with the Capital Asset Pricing Model (CAPM) and the development of the Fama/French three-factor model as a more accurate way of determining how average returns differ from one another. I also explain why higher expected returns for small and value stocks should persist.]]></content:encoded></item><item><title>Fama: Is Warren Buffett Lucky or Skilled?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-is-warren-buffett-lucky-or-skilled.aspx</link><pubDate>Mon, 17 Mar 2014 16:38:30 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-is-warren-buffett-lucky-or-skilled.aspx</guid><description><![CDATA[EFF: I spoke with Client Insights host Dan Richards about the importance of effectively communicating the risks associated with equity investing. Also, I discuss how Warren Buffett's success is more properly viewed in the context of business ownership than equity investment.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF: I spoke with Client Insights host Dan Richards about the importance of effectively communicating the risks associated with equity investing. Also, I discuss how Warren Buffett's success is more properly viewed in the context of business ownership than equity investment.]]></content:encoded></item><item><title>Financial Times Interview</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/financial-times-interview.aspx</link><pubDate>Thu, 20 Mar 2014 11:58:34 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/financial-times-interview.aspx</guid><description><![CDATA[EFF: Last week I was interviewed by James Mackintosh from the Financial Times. We discussed the relevance of market efficiency for investors, the definition of market "bubbles," and measurements of active manager outcomes. Watch the seven-minute interview here: Defending efficient markets (Financial Times).]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF: Last week I was interviewed by James Mackintosh from the Financial Times. We discussed the relevance of market efficiency for investors, the definition of market "bubbles," and measurements of active manager outcomes. Watch the seven-minute interview here: Defending efficient markets (Financial Times).]]></content:encoded></item><item><title>Distinguished Speaker Series: Eugene Fama and David Booth</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/distinguished-speaker-series-eugene-fama-and-david-booth.aspx</link><pubDate>Fri, 14 Mar 2014 08:43:11 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/distinguished-speaker-series-eugene-fama-and-david-booth.aspx</guid><description><![CDATA[]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[]]></content:encoded></item><item><title>Fama on EconTalk Podcast</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-on-econtalk-podcast.aspx</link><pubDate>Fri, 14 Mar 2014 08:43:28 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-on-econtalk-podcast.aspx</guid><description><![CDATA[EFF: I spoke with EconTalk host Russ Roberts about how the efficient market hypothesis relates to macroeconomic events of the past few years, with some additional thoughts on behavioral finance and the evolving nature of financial academic research.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF: I spoke with EconTalk host Russ Roberts about how the efficient market hypothesis relates to macroeconomic events of the past few years, with some additional thoughts on behavioral finance and the evolving nature of financial academic research.]]></content:encoded></item><item><title>Efficient Markets, Economic Growth, and Market Volatility</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/efficient-markets,-economic-growth,-and-market-volatility.aspx</link><pubDate>Fri, 14 Mar 2014 08:43:19 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/efficient-markets,-economic-growth,-and-market-volatility.aspx</guid><description><![CDATA[Professor Eugene Fama discusses the connections between the financial crisis of 2008 and efficient markets, economic growth, and market volatility with students from the Chicago Booth Finance Club on October 15 at the Gleacher Center.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Professor Eugene Fama discusses the connections between the financial crisis of 2008 and efficient markets, economic growth, and market volatility with students from the Chicago Booth Finance Club on October 15 at the Gleacher Center.]]></content:encoded></item><item><title>The Squam Lake Group</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/the-squam-lake-group.aspx</link><pubDate>Fri, 14 Mar 2014 08:43:02 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/the-squam-lake-group.aspx</guid><description><![CDATA[KRF: The Squam Lake Group recently published "The Squam Lake Report: Fixing the Financial System". We launched the book with a conference in New York.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[KRF: The Squam Lake Group recently published "The Squam Lake Report: Fixing the Financial System". We launched the book with a conference in New York.]]></content:encoded></item><item><title>Robert Lucas in The Economist</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/robert-lucas-in-the-economist.aspx</link><pubDate>Fri, 14 Mar 2014 08:42:51 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/robert-lucas-in-the-economist.aspx</guid><description><![CDATA[KRF: Professor Robert Lucas of the University of Chicago has an interesting guest article in The Economist, "In defense of the dismal science."]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[KRF: Professor Robert Lucas of the University of Chicago has an interesting guest article in The Economist, "In defense of the dismal science."]]></content:encoded></item><item><title>Cliff Asness on the U.S. Healthcare Bill</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/cliff-asness-on-the-us-healthcare-bill.aspx</link><pubDate>Fri, 14 Mar 2014 08:42:41 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/cliff-asness-on-the-us-healthcare-bill.aspx</guid><description><![CDATA[EFF/KRF: For an interesting and colorful economic analysis of the proposed U.S. Healthcare Bill we recommend "Health Care Mythology" by Cliff Asness, a Chicago Booth Ph.D.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF/KRF: For an interesting and colorful economic analysis of the proposed U.S. Healthcare Bill we recommend "Health Care Mythology" by Cliff Asness, a Chicago Booth Ph.D.]]></content:encoded></item><item><title>Performance of Mutual Funds</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/performance-of-mutual-funds.aspx</link><pubDate>Fri, 14 Mar 2014 08:42:34 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/performance-of-mutual-funds.aspx</guid><description><![CDATA[EFF/KRF: Our new paper, Luck versus Skill in the Cross Section of Mutual Fund Alpha Estimates, takes another look at the performance of mutual funds. Bootstrap simulations produce no evidence that any managers have enough skill to cover the costs they impose on investors. If there are managers with sufficient skill to cover costs, they are hidden among the mass of managers with insufficient skill.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF/KRF: Our new paper, Luck versus Skill in the Cross Section of Mutual Fund Alpha Estimates, takes another look at the performance of mutual funds. Bootstrap simulations produce no evidence that any managers have enough skill to cover the costs they impose on investors. If there are managers with sufficient skill to cover costs, they are hidden among the mass of managers with insufficient skill.]]></content:encoded></item><item><title>Historical Returns</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/historical-returns.aspx</link><pubDate>Fri, 14 Mar 2014 08:42:19 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/historical-returns.aspx</guid><description><![CDATA[KRF: If you are looking for historical returns on our three factors and many other interesting portfolios, you can find them on my web site.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[KRF: If you are looking for historical returns on our three factors and many other interesting portfolios, you can find them on my web site.]]></content:encoded></item><item><title>Economist Podcasts</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/economist-podcasts.aspx</link><pubDate>Fri, 14 Mar 2014 08:42:11 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/economist-podcasts.aspx</guid><description><![CDATA[EFF/KRF: The Economist provides unusually clear and accurate analysis of economic and financial issues. You can download podcasts from The Economist on iTunes.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF/KRF: The Economist provides unusually clear and accurate analysis of economic and financial issues. You can download podcasts from The Economist on iTunes.]]></content:encoded></item><item><title>Working Papers</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/working-papers.aspx</link><pubDate>Fri, 14 Mar 2014 08:42:03 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/working-papers.aspx</guid><description><![CDATA[EFF/KRF: There is often a two or three year gap between the first draft of a paper and publication in a top finance journal. Most financial economists post their working papers on SSRN.com and, because the publication process is so slow, that is where they look for the latest research. Most papers on SSRN are available for free.
Ours are available here:

Papers by Fama (SSRN)
Papers by French (SSRN)
]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF/KRF: There is often a two or three year gap between the first draft of a paper and publication in a top finance journal. Most financial economists post their working papers on SSRN.com and, because the publication process is so slow, that is where they look for the latest research. Most papers on SSRN are available for free.
Ours are available here:

Papers by Fama (SSRN)
Papers by French (SSRN)
]]></content:encoded></item><item><title>The Becker-Posner Blog</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/the-becker-posner-blog.aspx</link><pubDate>Fri, 14 Mar 2014 08:41:55 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/the-becker-posner-blog.aspx</guid><description><![CDATA[EFF/KRF: Gary Becker (University of Chicago faculty member in economics and business and a Nobel Prize winner in economics) and Richard Posner (University of Chicago Law School professor and a US Appellate Judge) are intellectual giants of economics and law.  Whatever they have to say is worth a read.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF/KRF: Gary Becker (University of Chicago faculty member in economics and business and a Nobel Prize winner in economics) and Richard Posner (University of Chicago Law School professor and a US Appellate Judge) are intellectual giants of economics and law.  Whatever they have to say is worth a read.]]></content:encoded></item><item><title>IGM Website</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/igm-website.aspx</link><pubDate>Fri, 14 Mar 2014 08:41:47 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/igm-website.aspx</guid><description><![CDATA[EFF/KRF: The IGM (Initiative on Global Markets of the University of Chicago Booth School of Business) web site has lots of good stuff from op eds to links to serious academic papers of the business school faculty.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF/KRF: The IGM (Initiative on Global Markets of the University of Chicago Booth School of Business) web site has lots of good stuff from op eds to links to serious academic papers of the business school faculty.]]></content:encoded></item><item><title>Fama: American Enterprise Institute Award and Interview</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-american-enterprise-institute-award-and-interview.aspx</link><pubDate>Thu, 22 May 2014 11:29:09 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-american-enterprise-institute-award-and-interview.aspx</guid><description><![CDATA[EFF: I was honored to be the recipient of the American Enterprise Institute's 2014 Irving Kristol Award at their annual dinner May 6. The institute has posted a video of the dinner, which includes an interview with me conducted by Paul Gigot of the Wall Street Journal at the 20 minute mark.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF: I was honored to be the recipient of the American Enterprise Institute's 2014 Irving Kristol Award at their annual dinner May 6. The institute has posted a video of the dinner, which includes an interview with me conducted by Paul Gigot of the Wall Street Journal at the 20 minute mark.]]></content:encoded></item><item><title>Fama: Friedman 50 Years Later</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-friedman-50-years-later.aspx</link><pubDate>Tue, 06 Oct 2020 13:40:12 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/interesting-links/fama-friedman-50-years-later.aspx</guid><description><![CDATA[EFF: Promarket, a publication of the Stigler Center at the University of Chicago Booth School of Business, asked a range of experts to reflect on the 50th anniversary of Milton Friedman’s influential New York Times article on the social responsibility of business. I shared my thoughts on market forces, stakeholder capitalism, and ESG. You can read the full article here. ]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF: Promarket, a publication of the Stigler Center at the University of Chicago Booth School of Business, asked a range of experts to reflect on the 50th anniversary of Milton Friedman’s influential New York Times article on the social responsibility of business. I shared my thoughts on market forces, stakeholder capitalism, and ESG. You can read the full article here. ]]></content:encoded></item><item><title>Q&amp;A with Fama at the Fiduciary Investors Symposium</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/qa-with-fama-at-the-fiduciary-investors-symposium.aspx</link><pubDate>Thu, 17 Dec 2015 11:37:58 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/qa-with-fama-at-the-fiduciary-investors-symposium.aspx</guid><description><![CDATA[Fama speaks candidly about academic progress, smart beta, and the efficient markets hypothesis.
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Fama speaks candidly about academic progress, smart beta, and the efficient markets hypothesis.
(View the video)]]></content:encoded></item><item><title>Home Bias</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/home-bias.aspx</link><pubDate>Thu, 20 Mar 2014 12:11:38 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/home-bias.aspx</guid><description><![CDATA[Investors tend to overweight their equity portfolios with stocks from their home country market. Ken French says that, while home bias is still the norm, investors have significantly increased their allocation to foreign markets over the last 30 years. He explains that investors might overweight their home market for economic reasons, perhaps to hedge consumption risk or to offset tax disadvantages they suffer in some foreign markets. Home bias can also be driven by behavioral factors. For example, investors may overweight their home country because of their uncertainty (the unknown unknowns) about foreign markets, or because they are overconfident about picking stocks in their home market. Ken says the best approach is to start with a global market portfolio, then make adjustments based on personal preference. 
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Investors tend to overweight their equity portfolios with stocks from their home country market. Ken French says that, while home bias is still the norm, investors have significantly increased their allocation to foreign markets over the last 30 years. He explains that investors might overweight their home market for economic reasons, perhaps to hedge consumption risk or to offset tax disadvantages they suffer in some foreign markets. Home bias can also be driven by behavioral factors. For example, investors may overweight their home country because of their uncertainty (the unknown unknowns) about foreign markets, or because they are overconfident about picking stocks in their home market. Ken says the best approach is to start with a global market portfolio, then make adjustments based on personal preference. 
(View the video)]]></content:encoded></item><item><title>Homemade Dividends</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/homemade-dividends.aspx</link><pubDate>Thu, 20 Mar 2014 12:15:47 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/homemade-dividends.aspx</guid><description><![CDATA[Should retirees limit their spending to the interest and dividends they receive? Ken French says investors should be indifferent to how they raise cash, whether through dividends and interest, or through the sale of shares--a method Merton Miller called "homemade dividends." Despite the economic logic, some investors focus on dividends and interest. While this approach may encourage disciplined spending, Ken explains that it also can distort one's investment approach--for example, when investors choose dividend-paying stocks over broad diversification, or chase higher yields by holding riskier bonds. In an effort to get more, they actually lose. 
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Should retirees limit their spending to the interest and dividends they receive? Ken French says investors should be indifferent to how they raise cash, whether through dividends and interest, or through the sale of shares--a method Merton Miller called "homemade dividends." Despite the economic logic, some investors focus on dividends and interest. While this approach may encourage disciplined spending, Ken explains that it also can distort one's investment approach--for example, when investors choose dividend-paying stocks over broad diversification, or chase higher yields by holding riskier bonds. In an effort to get more, they actually lose. 
(View the video)]]></content:encoded></item><item><title>How Can Retirees Determine a Sustainable Withdrawal Rate?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/how-can-retirees-determine-a-sustainable-withdrawal-rate.aspx</link><pubDate>Thu, 20 Mar 2014 12:17:54 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/how-can-retirees-determine-a-sustainable-withdrawal-rate.aspx</guid><description><![CDATA[Ken French says the simplest answer is found in the rate offered on a long-term Treasury Inflation Protected Security (TIPS). You can go beyond the TIPS rate if you don't plan to live forever. Retirees with a shorter life expectancy might choose to consume more. Finally, you might increase your expected investment return and your expected sustainable withdrawal rate by taking more risk. But Ken warns that the expected return and the return you ultimately receive could be very different. That is the nature of risk.
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Ken French says the simplest answer is found in the rate offered on a long-term Treasury Inflation Protected Security (TIPS). You can go beyond the TIPS rate if you don't plan to live forever. Retirees with a shorter life expectancy might choose to consume more. Finally, you might increase your expected investment return and your expected sustainable withdrawal rate by taking more risk. But Ken warns that the expected return and the return you ultimately receive could be very different. That is the nature of risk.
(View the video)]]></content:encoded></item><item><title>Diversification by Omission</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/diversification-by-omission.aspx</link><pubDate>Thu, 20 Mar 2014 12:21:00 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/diversification-by-omission.aspx</guid><description><![CDATA[Can investors build a better portfolio by combining asset classes that have low correlations? It is possible, explains Ken French, but not in the way that most investors attempt it. Some think they can enhance diversification by eliminating mid caps and concentrating on only large and small cap stocks because these asset classes are less correlated. Ken explains that portfolio variance is determined not only by correlation, but also by variance of the individual asset classes and, critically, by their weighting in the portfolio. He emphasizes that throwing out mid caps is equivalent to doubling up on the risk of large and small caps, which is the opposite of diversification.
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Can investors build a better portfolio by combining asset classes that have low correlations? It is possible, explains Ken French, but not in the way that most investors attempt it. Some think they can enhance diversification by eliminating mid caps and concentrating on only large and small cap stocks because these asset classes are less correlated. Ken explains that portfolio variance is determined not only by correlation, but also by variance of the individual asset classes and, critically, by their weighting in the portfolio. He emphasizes that throwing out mid caps is equivalent to doubling up on the risk of large and small caps, which is the opposite of diversification.
(View the video)]]></content:encoded></item><item><title>Principal-Guaranteed Products: Paying Others to Bear Risk</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/principal-guaranteed-products-paying-others-to-bear-risk.aspx</link><pubDate>Thu, 20 Mar 2014 12:33:08 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/principal-guaranteed-products-paying-others-to-bear-risk.aspx</guid><description><![CDATA[Can principal-guaranteed products help an investor better manage portfolio risk? Ken French explains that principal protection would certainly be attractive if it were free. Unfortunately for investors, it is not. French discusses potential problems with principal-guaranteed products and argues that before purchasing these instruments investors should consider portfolio solutions that are simpler, transparent and more cost effective.
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Can principal-guaranteed products help an investor better manage portfolio risk? Ken French explains that principal protection would certainly be attractive if it were free. Unfortunately for investors, it is not. French discusses potential problems with principal-guaranteed products and argues that before purchasing these instruments investors should consider portfolio solutions that are simpler, transparent and more cost effective.
(View the video)]]></content:encoded></item><item><title>Hedging Inflation: Do TIPS Beat T-Bills?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/hedging-inflation-do-tips-beat-t-bills.aspx</link><pubDate>Thu, 20 Mar 2014 12:38:17 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/hedging-inflation-do-tips-beat-t-bills.aspx</guid><description><![CDATA[Rising government spending around the world has many investors considering ways to hedge potential inflation, which may include holding TIPS or rolling over short-term Treasury securities. Ken French explains that investors can essentially eliminate inflation uncertainty by buying TIPS that mature when they want to consume. However, uncertainty about changes in real interest rates can make the choice harder for investors who will have to sell their TIPS before maturity.
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Rising government spending around the world has many investors considering ways to hedge potential inflation, which may include holding TIPS or rolling over short-term Treasury securities. Ken French explains that investors can essentially eliminate inflation uncertainty by buying TIPS that mature when they want to consume. However, uncertainty about changes in real interest rates can make the choice harder for investors who will have to sell their TIPS before maturity.
(View the video)]]></content:encoded></item><item><title>Should Investors Fear the "New Normal"?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/should-investors-fear-the-new-normal.aspx</link><pubDate>Thu, 20 Mar 2014 13:26:57 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/should-investors-fear-the-new-normal.aspx</guid><description><![CDATA[In this video, Kenneth French explains why lower economic growth may not hinder future stock returns. In fact, history shows that average returns tend to be higher during periods of economic difficulty. The information about a current recession is factored into stock prices, and investors may require a higher expected return to induce them to take higher perceived risk. 
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[In this video, Kenneth French explains why lower economic growth may not hinder future stock returns. In fact, history shows that average returns tend to be higher during periods of economic difficulty. The information about a current recession is factored into stock prices, and investors may require a higher expected return to induce them to take higher perceived risk. 
(View the video)]]></content:encoded></item><item><title>Future of Money Management</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/future-of-money-management.aspx</link><pubDate>Thu, 20 Mar 2014 13:35:31 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/future-of-money-management.aspx</guid><description><![CDATA[This video, recorded at the Chicago Booth 2010 Management Conference, features Eugene Fama and David Booth providing insights into what lies ahead for active and passive money management.
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[This video, recorded at the Chicago Booth 2010 Management Conference, features Eugene Fama and David Booth providing insights into what lies ahead for active and passive money management.
(View the video)]]></content:encoded></item><item><title>Father of Modern Finance Weighs In</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/father-of-modern-finance-weighs-in.aspx</link><pubDate>Thu, 20 Mar 2014 13:38:27 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/father-of-modern-finance-weighs-in.aspx</guid><description><![CDATA[EFF: I was interviewed on CNBC's "Squawk Box" this past Friday about the recent financial crisis and financial regulatory reform.
View the video here.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[EFF: I was interviewed on CNBC's "Squawk Box" this past Friday about the recent financial crisis and financial regulatory reform.
View the video here.]]></content:encoded></item><item><title>Fama Lecture: Masters of Finance</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/fama-lecture-masters-of-finance.aspx</link><pubDate>Thu, 20 Mar 2014 13:47:17 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/fama-lecture-masters-of-finance.aspx</guid><description><![CDATA[From the American Finance Association's "Masters in Finance" video series, Eugene F. Fama presents a brief history of the efficient market theory. The lecture was recorded at the University of Chicago in October 2008 with an introduction by John Cochrane. 
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[From the American Finance Association's "Masters in Finance" video series, Eugene F. Fama presents a brief history of the efficient market theory. The lecture was recorded at the University of Chicago in October 2008 with an introduction by John Cochrane. 
(View the video)]]></content:encoded></item><item><title>Eugene F. Fama: Economist</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/eugene-f-fama-economist.aspx</link><pubDate>Thu, 20 Mar 2014 13:50:35 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/eugene-f-fama-economist.aspx</guid><description><![CDATA[In an interview conducted by Professor Richard Roll, famed University of Chicago economist Eugene F. Fama discusses his life, research, and contributions to the field of finance. Produced by Dimensional in conjunction with the American Finance Association. Directed and edited by Gene Fama Jr.
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[In an interview conducted by Professor Richard Roll, famed University of Chicago economist Eugene F. Fama discusses his life, research, and contributions to the field of finance. Produced by Dimensional in conjunction with the American Finance Association. Directed and edited by Gene Fama Jr.
(View the video)]]></content:encoded></item><item><title>Fama on Market Efficiency in a Volatile Market</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/fama-on-market-efficiency-in-a-volatile-market.aspx</link><pubDate>Thu, 20 Mar 2014 13:55:29 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/fama-on-market-efficiency-in-a-volatile-market.aspx</guid><description><![CDATA[Widely cited as the father of the efficient market hypothesis and one of its strongest advocates, Professor Eugene Fama examines his groundbreaking idea in the context of the 2008 and 2009 markets. He outlines the benefits and limitations of efficient markets for everyday investors and is interviewed by the Chairman of Dimensional Fund Advisors in Europe, David Salisbury.
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Widely cited as the father of the efficient market hypothesis and one of its strongest advocates, Professor Eugene Fama examines his groundbreaking idea in the context of the 2008 and 2009 markets. He outlines the benefits and limitations of efficient markets for everyday investors and is interviewed by the Chairman of Dimensional Fund Advisors in Europe, David Salisbury.
(View the video)]]></content:encoded></item><item><title>Should Stockholders Sit This One Out?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/should-stockholders-sit-this-one-out.aspx</link><pubDate>Thu, 20 Mar 2014 14:35:29 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/should-stockholders-sit-this-one-out.aspx</guid><description><![CDATA[The answer depends on why stockholders want to leave the market. During the financial crisis, some investors discovered that their tolerance for risk is lower than they thought, so it might make sense for them to permanently reduce their exposure to equities. Investors who wish to avoid the price impact of the recession, however, are probably too late. Today's stock prices already reflect the anticipated effects of the slowdown, as well as any effects the recession has on expected future returns.
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[The answer depends on why stockholders want to leave the market. During the financial crisis, some investors discovered that their tolerance for risk is lower than they thought, so it might make sense for them to permanently reduce their exposure to equities. Investors who wish to avoid the price impact of the recession, however, are probably too late. Today's stock prices already reflect the anticipated effects of the slowdown, as well as any effects the recession has on expected future returns.
(View the video)]]></content:encoded></item><item><title>Did Diversification Fail When We Needed It Most?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/did-diversification-fail-when-we-needed-it-most.aspx</link><pubDate>Fri, 14 Mar 2014 08:44:40 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/did-diversification-fail-when-we-needed-it-most.aspx</guid><description><![CDATA[Investors may doubt the usefulness of diversification after the recent market decline. In this video, Kenneth French explains that diversification cannot reduce the volatility of the overall market, but it is still important because it reduces the risk associated with individual firms or asset classes. He also discusses the perception that correlations between assets rise when market volatility is high.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Investors may doubt the usefulness of diversification after the recent market decline. In this video, Kenneth French explains that diversification cannot reduce the volatility of the overall market, but it is still important because it reduces the risk associated with individual firms or asset classes. He also discusses the perception that correlations between assets rise when market volatility is high.]]></content:encoded></item><item><title>Dollar Cost Averaging</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/dollar-cost-averaging.aspx</link><pubDate>Fri, 14 Mar 2014 08:44:28 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/dollar-cost-averaging.aspx</guid><description><![CDATA[Does it make sense to dollar cost average? It depends. Standard financial analysis says dollar cost averaging is suboptimal. If you focus on only your investment outcome, investing a lump sum immediately lets you construct the best portfolio you can today; slowing the process with dollar cost averaging just keeps you in something other than your best portfolio until you are done. Behavioral finance provides a different perspective. Because of the difference between the way people react to errors of omission and errors of commission, dollar cost averaging may give investors a better expected investment experience. ]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Does it make sense to dollar cost average? It depends. Standard financial analysis says dollar cost averaging is suboptimal. If you focus on only your investment outcome, investing a lump sum immediately lets you construct the best portfolio you can today; slowing the process with dollar cost averaging just keeps you in something other than your best portfolio until you are done. Behavioral finance provides a different perspective. Because of the difference between the way people react to errors of omission and errors of commission, dollar cost averaging may give investors a better expected investment experience. ]]></content:encoded></item><item><title>Identifying Superior Managers</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/identifying-superior-managers.aspx</link><pubDate>Fri, 14 Mar 2014 08:44:20 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/identifying-superior-managers.aspx</guid><description><![CDATA[Although it would be great if we could all hire above average active managers, that only happens in Lake Wobegon. Superior managers may exist, but most investors might as well be picking their managers at random. I describe the challenge of differentiating luck from skill, and explain how intense competition among investors makes the problem even more difficult.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[Although it would be great if we could all hire above average active managers, that only happens in Lake Wobegon. Superior managers may exist, but most investors might as well be picking their managers at random. I describe the challenge of differentiating luck from skill, and explain how intense competition among investors makes the problem even more difficult.]]></content:encoded></item><item><title>The Future of Markets</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/the-future-of-markets.aspx</link><pubDate>Fri, 14 Mar 2014 08:44:11 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/the-future-of-markets.aspx</guid><description><![CDATA[]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[]]></content:encoded></item><item><title>Is This a Good Time for Active Investing?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/is-this-a-good-time-for-active-investing.aspx</link><pubDate>Fri, 14 Mar 2014 08:44:00 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/is-this-a-good-time-for-active-investing.aspx</guid><description><![CDATA[KRF: I explain why active investing is always a negative sum game. We often hear that now is a good time (or a bad time) for active investing. That does not make sense. In aggregate, active investors always underperform by their fees and expenses.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[KRF: I explain why active investing is always a negative sum game. We often hear that now is a good time (or a bad time) for active investing. That does not make sense. In aggregate, active investors always underperform by their fees and expenses.]]></content:encoded></item><item><title>More Sellers than Buyers?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/more-sellers-than-buyers.aspx</link><pubDate>Fri, 14 Mar 2014 08:43:52 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/more-sellers-than-buyers.aspx</guid><description><![CDATA[KRF: What does it mean to say there is a flight to quality? For every seller there must be a buyer. After exploring this simple point, I explain how expectations about future cashflows and future returns affect the current price.]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[KRF: What does it mean to say there is a flight to quality? For every seller there must be a buyer. After exploring this simple point, I explain how expectations about future cashflows and future returns affect the current price.]]></content:encoded></item><item><title>Dimensional's David Booth Interviews Eugene Fama</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/dimensionals-david-booth-interviews-eugene-fama.aspx</link><pubDate>Mon, 09 Mar 2015 13:03:23 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/dimensionals-david-booth-interviews-eugene-fama.aspx</guid><description><![CDATA[David Booth, chairman and co-CEO of Dimensional Fund Advisors, has been working with Eugene Fama since the mid-1960s. David was a PhD student in Gene’s class and later asked Gene to become a board member when Dimensional got off the ground in 1981. Gene is the principal scholar whose groundbreaking work inspired the firm’s founding, continues to advise the firm on many of its strategies, and is also a frequent speaker at Dimensional conferences and seminars. In this video, they discuss Gene’s early influences, the history of modern finance, the longtime collaboration between Gene and Ken French, the philosophy underlying Dimensional’s approach to investing, financial advisors, the five-factor model, Gene’s Nobel prize, and more.
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[David Booth, chairman and co-CEO of Dimensional Fund Advisors, has been working with Eugene Fama since the mid-1960s. David was a PhD student in Gene’s class and later asked Gene to become a board member when Dimensional got off the ground in 1981. Gene is the principal scholar whose groundbreaking work inspired the firm’s founding, continues to advise the firm on many of its strategies, and is also a frequent speaker at Dimensional conferences and seminars. In this video, they discuss Gene’s early influences, the history of modern finance, the longtime collaboration between Gene and Ken French, the philosophy underlying Dimensional’s approach to investing, financial advisors, the five-factor model, Gene’s Nobel prize, and more.
(View the video)]]></content:encoded></item><item><title>Are Markets Efficient?</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/are-markets-efficient.aspx</link><pubDate>Tue, 12 Jul 2016 16:36:47 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/are-markets-efficient.aspx</guid><description><![CDATA[The efficient markets hypothesis (EMH), developed by Eugene Fama in the 1960s, simply states that prices reflect all available information. Despite its simplicity, the EMH has been difficult to test and generated decades of debate. In this video, Gene and Richard Thaler, a founding father of behavioral economics, discuss whether markets are efficient. Despite some areas of discord, Thaler sums up an important point of agreement: “Stock markets, good or bad, are the best thing we got going. So, nobody’s devised a way of allocating resources that’s better.”
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[The efficient markets hypothesis (EMH), developed by Eugene Fama in the 1960s, simply states that prices reflect all available information. Despite its simplicity, the EMH has been difficult to test and generated decades of debate. In this video, Gene and Richard Thaler, a founding father of behavioral economics, discuss whether markets are efficient. Despite some areas of discord, Thaler sums up an important point of agreement: “Stock markets, good or bad, are the best thing we got going. So, nobody’s devised a way of allocating resources that’s better.”
(View the video)]]></content:encoded></item><item><title>MIT’s Andrew Lo Interviews Eugene Fama</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/mit’s-andrew-lo-interviews-eugene-fama.aspx</link><pubDate>Mon, 19 Dec 2016 10:34:45 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/videos/mit’s-andrew-lo-interviews-eugene-fama.aspx</guid><description><![CDATA[In this video, Andrew Lo—Professor of Finance at MIT Sloan—speaks with Eugene Fama about the arc of Gene’s empirical and theoretical research. The topics covered in this interview range from Gene’s PhD dissertation on The Behavior of Stock Market Prices which laid the groundwork for the Efficient Markets Hypothesis, to tests of the Capital Asset Pricing Model that ultimately set the stage for the Fama-French Three Factor Model in 1993. Andrew and Gene also discuss the application of financial research at Dimensional. The interview concludes with a forward-looking discussion on whether a “perfect portfolio” can be constructed, as well as Gene’s reflections on the Fama-French Five Factor Model (2014).
Please do not quote. To accompany the forthcoming book, In Pursuit of the Perfect Portfolio by Steve Foerster (Ivey Business School at Western University) and Andrew W. Lo (MIT).
(View the video)]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[In this video, Andrew Lo—Professor of Finance at MIT Sloan—speaks with Eugene Fama about the arc of Gene’s empirical and theoretical research. The topics covered in this interview range from Gene’s PhD dissertation on The Behavior of Stock Market Prices which laid the groundwork for the Efficient Markets Hypothesis, to tests of the Capital Asset Pricing Model that ultimately set the stage for the Fama-French Three Factor Model in 1993. Andrew and Gene also discuss the application of financial research at Dimensional. The interview concludes with a forward-looking discussion on whether a “perfect portfolio” can be constructed, as well as Gene’s reflections on the Fama-French Five Factor Model (2014).
Please do not quote. To accompany the forthcoming book, In Pursuit of the Perfect Portfolio by Steve Foerster (Ivey Business School at Western University) and Andrew W. Lo (MIT).
(View the video)]]></content:encoded></item><item><title>Subscription Error</title><link>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/subscription-error.aspx</link><pubDate>Fri, 28 Mar 2014 16:19:08 GMT</pubDate><guid>http://famafrench.dimensional.com/famafrench/atom.aspx/famafrench/subscription-error.aspx</guid><description><![CDATA[]]></description><content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/"><![CDATA[]]></content:encoded></item></channel></rss>