Weekly Research Recap
Latest research on investing and trading
Welcome to this week’s recap, your curated roundup of the most actionable investing insights from the past seven days, drawing from academic research, industry reports, blogs, and social media, with links to everything.
Equities
Betting on the Leverage Effect (Doshi, Jacobs, and Sert)
Stocks with the strongest negative return-volatility correlation (”leverage effect”) earn significantly higher future returns, and the signal outperforms traditional skewness measures. The premium comes almost entirely from increases in volatility, not volatility declines. Key takeaway: Measure asymmetric risk through return-volatility dynamics, not skewness alone.
Winners Glide, Losers Stumble: A Behavioral Reversal Tilt to Momentum (Wen and Feng)
Most momentum research tries to improve the winner side. This paper argues that the real opportunity lies on the losing side. Among past losers, recent rebounds often fade, so overweighting those names on the short side improves momentum and reduces momentum crash risk. Key takeaway: Momentum has more to gain from better short selection than from better long selection.
Redeeming Value (Penman and Reggiani)
Everyone says value investing is about buying low P/B stocks. This paper argues that it’s too simplistic. Book-to-price only becomes informative when combined with earnings. Together, they help reveal the market’s implied expected return, or the growth expectations embedded in today’s price. Key takeaway: Value investing isn’t about buying “cheap” stocks. It’s about identifying mispriced growth expectations.
FX
Rethinking currency factors: The case for mean-variance optimisation (Fan, Kearney, Li, and Liu)
Instead of equal-weighting positions in carry, value, and momentum portfolios, this paper shows that optimizing constituent weights with Bayesian mean-variance optimization boosts the carry factor’s out-of-sample Sharpe ratio from 0.69 to 0.76 and the value factor’s from 0.19 to 0.50. The edge comes from better portfolio construction, not better forecasting. Key takeaway: In factor investing, portfolio construction can be as important as the signal itself.
Skewness Risk Premia and the Cross Section of Currency Returns (Li, Sarno, and Zinna)
Currency investors are potentially overlooking skewness risk premia. Currencies with the highest skewness risk premia subsequently earn the highest excess returns. The signal outperforms other option-based measures and helps explain returns beyond the classic carry trade. Key takeaway: Skewness risk is a distinct, priced source of currency risk.
Machine Learning and Large Language Models
Do AIs Make Good Traders, and Do They Make Good Traders Better? (Bell, Haghani, and White)
Instead of racing to build better market forecasts with AI, this paper suggests the bigger edge lies elsewhere. Claude and ChatGPT matched elite macro traders surprisingly well at inferring market direction from macro news. Their biggest weakness wasn’t prediction; it was position sizing. When researchers explicitly improved the AI’s risk-sizing framework, performance improved without better forecasts. Key takeaway: Correct sizing often matters more than signal.
More Than Words: Visual Sentiment in Social Media Videos and Stock Returns (Jiang, Jin, and Ma)
Using facial expressions from finance influencers’ Douyin (TikTok) videos, the authors build a visual sentiment index that predicts next-day market returns, even after controlling for what the influencers actually say. The effect is strongest during trading hours and in retail-driven stocks. Key takeaway: Nonverbal cues can contain information that text alone misses.
Options
Here Today, Gone Today: First Evidence on European Zero-Day Options (Wilkens)
This paper offers a systematic study of European 0DTE options on the EURO STOXX 50 and DAX and finds that put-call parity holds almost perfectly at mid quotes. However, once you cross the bid-ask spread, round-trip execution costs consume 10 to 13% of an ATM straddle on average and up to 40–70% in the final 30 minutes before expiry. Key takeaway: In 0DTE trading, execution quality can matter more than pricing efficiency.
Textual Risk Option Momentum (Chen, Vasquez, and Yang)
Option momentum spreads across firms with similar risk disclosures. Options on companies whose textual risk peers had strong past delta-hedged returns earn higher future delta-hedged returns, even after controlling for own-option momentum and other peer networks. Key takeaway: Risk similarity creates hidden links through which option-market information diffuses.
Portfolio Construction
An Automated Black-Litterman Framework for Global Fixed Income (Carver, Harris, and Lin)
Traditional bond allocation struggles because expected returns are noisy. This paper combines factor forecasts with an automated Black-Litterman framework that adjusts confidence based on each model's predictive power. Across 13 global bond indices, Sharpe improves from 0.31 to 0.45 with only a modest increase in drawdown. Key takeaway: Portfolio construction isn't just about better forecasts; it's about knowing how much to trust them.
When and Why Naïve Diversification Works: A Simple Diagnostic Strategy (Feng, Huang, Wang, and Zhang)
Equal weighting often beats optimization out of sample, not because optimization is wrong, but because estimation error is costly. This paper argues that equal weighting becomes nearly optimal when the forecast-error covariance structure is close to a specific eigenvector condition. As the data move away from that condition, optimized weights regain their edge. Key takeaway: Before optimizing, ask whether your data justify it.
Blogs
Bitcoin’s Fading Diversification Benefit (Quantseeker)
Economic surprises and global asset class returns (Macrosynergy)
Quantitative Value (Concretum Group)
Podcasts
Has Trend Following Changed Forever? ft. Alan Dunne (Top Traders Unplugged)
From Skid Row Showers to Short Selling Master · David Capablanca (Chat with Traders)
Social Media & Industry Research
After the Reset: Time to Focus on Fundamentals (Citadel)
Bonds Seem to Not Diversify Anymore. Now What? (Alpha Architect)
The Toolkit Expands (Citadel)
Last Week’s Most Popular Links
Does Momentum Time Risk Rather Than Returns? (Zakamulin)
Is Trend Still Your Friend?: A Microstructural Account of the Demise of Short-Term Trend-Following (Kurth, Eisler, Rej, Bouchaud)
Liquidity Premium and Investment Horizons (Aldridge)
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