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Raman Uppal Posts

Table tennis … with no hands

I am an avid player of table tennis.  Have you every wondered how you would play table tennis if you had only one hand?  What if you had no hands? How would you serve? Well, Egyptian table tennis star Ibrahim Hamato shows in a BBC interview how this can be accomplished. Nothing is impossible!

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Investing in firm-specific characteristics

Characteristics are variables that can be computed using individual-firm data; for example, the size of a firm or the volatility of its stock return. Hundreds of characteristics have been proposed to explain the cross-section of stock returns; these are described in the comprehensive analysis undertaken in “Replicating Anomalies” by Kewei Hou, Chen Xue, and Lu Zhang. John Cochrane in his presidential address and Amit Goyal in his paper “Empirical Cross-Sectional Asset Pricing: A Survey” ask whether we actually need all these characteristics to explain stock returns or whether a small set of characteristics subsume the rest.

In the paper “A Transaction-Cost Perspective on the Multitude of Firm Characteristics” Alberto Martin-Utrera, Victor DeMiguel, Javier Nogales, and I examine how transaction costs influence the number of significant characteristics. Counter to what intuition would suggest, we find that transaction costs increase the number of significant characteristics from 6 to 15. This is because combining characteristics reduces transaction costs, and hence increases the investor’s utility. The reduction in transaction cost happens because the rebalancing trades in the stocks underlying different characteristics often cancel out.

We also find that the portfolios we design based on optimally selected characteristics perform well in terms of out-of-sample Sharpe ratio. Moreover, none of the three prominent factor models in the literature (Fama-French-Carhart model, Fama-French 5-factor model, and the Hou-Xue-Zhang 4-factor model) can fully explain the returns of our portfolio strategies, which achieve an economically and statistically significant abnormal average monthly return of about 1% relative to these three models. This work suggests that when investing in characteristics, it is important to account for transaction costs. And, the number of significant characteristics may be greater than what one may have thought.

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Human beings are remarkable

The remarkable strength and resilience of human beings never ceases to amaze me. Setbacks seem only to spur human beings to achieve amazing things. The BBC ran an amazing story (a few years ago) of double amputee James Simpson competing in the Spartan Race. Hope you enjoy reading this as much as I did.

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Women in 2018: The change makers

I have a daughter.  And, a wife.  And, also a mother.  So, it should not come as a surprise that I have a vested interest in promoting women.  The FT has an  inspirational article describing the women who have been “change makers” in 2018 (subscription to FT may be required to read this article).

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Why does household finance matter?

In this post, I would like to highlight the importance of Household Finance.  There is substantial empirical evidence that a majority of households are not very good at making financial decisions.  For instance, they have trouble deciding on which mortgage to take, how much to save for retirement, how to allocate their investments across various assets, etc.  In the academic literature, the view has been that helping individual households will have benefits only for that household, and very often, the gains to the individual household are small.  But, what Harjoat Bhamra and I show in a recent article, “Does Household Finance Matter? Small Financial Errors with Large Social Costs”, is that improving the financial decisions of households can have substantial benefits not just for households also for society. Vox.eu has also published a piece based on this article as has the IB Knowledge website of Imperial College Business School. 

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