Pandemics, CAPM, and Factor Alpha
A discussion led by,
Forthcoming in Journal of Asset Management
The COVID-19 pandemic has taught us a valuable lesson in terms of how factor returns and “alpha” should be interpreted. In this presentation, we will discuss the more than thirty years of factor return history, while slightly modifying the our standard factor structure to account for the presence of “rare, extreme events” (e.g. the pandemic). The resultant model is consistent with the Black (1972) version of CAPM where the zero-beta asset is has no correlation with the market portfolio but may have non-zero volatility. It is also consistent with the work of Barro (2005) and Gabaix (2010) on rare events. The result is significant changes to the interpretation of the history of returns to many popular equity factors such as “value”, “momentum”, and “quality”. We demonstrate both a statistically significant positive return to CAPM beta as a risk factor and a significant negative return to absolute volatility. The only way both can be true is a negative return to idiosyncratic risk which we frame as a proxy for bankruptcy risk, and thus a firm level contribution to the presence of higher moments in the returns of the market portfolio.
Mr. diBartolomeo is President and founder of Northfield Information Services, Inc. Based in Boston since 1986, Northfield develops quantitative models of financial markets. He sits on boards of numerous industry organizations include IAQF and CQA and is a director and past president of the Boston Economic Club. His publication record includes more than forty books, book chapters and research journal articles. Dan spent many years as a Visiting Professor at Brunel University, and has been admitted as an expert witness in litigation matters regarding investment management practices and derivatives in both US federal and state courts. At the beginning of 2018, he became one of the two editors of the Journal of Asset Management.
Time: 7:00 PM sharpe
Registration is required. Register in advance for this meeting here:
After registering, you will receive a confirmation email containing information about joining the meeting.
This event will be streamed on Zoom and recorded and made available on YouTube. By registering you consent to this.
Boston QWAFAFEW Mailing List:
Donna Cool Murphy
The members of the Steerage Committee are responsible for coordinating the program content.
Program suggestions from members are always welcome.