FROM THE FIELD: Robeco researchers publish many whitepapers based on their own empirical studies. But they also closely follow quantitative research done by others. Head of Quantitative Equities Research David Blitz comments on notable external papers.
From the field: Forensic accounting research
David Blitz, PhD
Macquarie applies Benford’s law to identify firms which may be manipulating their accounting data, or perhaps even engaging in outright fraud. According to this law, there is a natural frequency of 1 to 9 occurring as the first digit in a number, with the chance of 1 for instance being around 30%, and the chance of 9 less than 5%.
If the figures in the financial statements of a company show a large deviation from Benford’s law, this could be a reason for suspicion. They find a Sharpe ratio of about 0.5 for a sector neutral top-minus-bottom quintile strategy based on this idea. The correlation with traditional quantitative factors is found to be low, which suggests it could be a nice diversifier in multi-factor models.
Our main concern is whether it is really strong enough to improve upon a traditional multi-factor model. The robustness across different markets would also need to be investigated further.
* Macquarie, “Japan Dynamics: Quant Strategy – Red Flag Reporting”, 16 July 2014
Head Quantitative Equities Research
“Factor investing, aimed at systematically capturing the value, momentum, low-volatility and other premiums, holds the future.”