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Alternative Market Briefing

Other Voices: Factor bubbles

Thursday, May 22, 2014

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Dr. Vinay Nair
This article was authored by Dr. Vinay Nair, Founder and CEO of Ada Investments, an equities-based investment platform with offices in New York, Mumbai and Rio de Janeiro.

We now know that a significant fraction of returns in various asset classes are explained by risk premia associated with "factors". Some of the factors involved are simple factors that represent the asset class itself. In these cases, the associated risk premia, such as the equity market premium in equities, is well appreciated. There are other more sophisticated dynamic factors such as value and momentum. Baskets of stocks constructed to capture these dynamic factors also deliver long run excess returns just as the broader equity market is considered to deliver a long run excess return. The following chapter from Andrew Ang, one of Ada’s advisory partners, clarifies further.

This knowledge has not yet been connected to investigations in speculative bubbles. While bubble watchers in practice and policy are closely monitoring price dynamics in broader asset classes, the overall price levels and bubble dynamics of more sophisticated factors are often ignored. Even as overall equity markets might appear fairly valued, there may be significant discrep......................

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