Creating novel databases for out-of-sample testing adds real value as people seldom take the time to perform such a task. We discuss this and other topics with quant investment specialist Bart van Vliet.
“The main goal was to test for equity factors using an out-of-sample dataset that covered a period that no one had looked at before. More specifically, we were curious to see if the documented factor patterns in the post-1926 era also held up in the preceding 61 years. At the onset and throughout the duration of the project, we expected to face a number of data problems given the nature of the exercise and this turned out to be the case. That is why the research1 paper took us over five years to wrap up.”
“To give you some context, even before I got involved in the project during my internship, two students from Erasmus University were working on the data. Luckily for me, they did a lot of the heavy lifting. So by the time I looked at it, I already knew which stock exchanges to ignore and which stocks to exclude from our sample data. But the most difficult aspect in my opinion was accounting for liquidity.”
We manually captured company market cap data that we sourced from digitized old newspapers
“For example, we had to think about how to consider stocks with small market capitalizations that traded infrequently. If we took the equally-weighted sorting approach, then a bank with market cap of USD 1 million would have the same weight as a railroad business with a market cap of USD 500 million. To solve for this bias, we manually captured company market cap data that we sourced from digitized old newspapers. Overall, our biggest challenge was making sense of the data and this definitely brought about a few surprises along the way.”
“Myself and the two students from Erasmus University clocked up countless hours on the project. They were instrumental in creating the dataset and ensuring that it was clean, which made my task of adding market cap data a lot easier. I remember spending weeks just looking at newspapers and capturing values in numerous Excel sheets. At some points, I really felt like throwing my keyboard away given how time-consuming the task was.”
“The FRASER digital library has an archive of all the Commercial & Financial Chronicle newspapers from the 1860s to the 1960s, which I became very familiar with. Our research starts from 1866 as we located the first market cap datapoints in December 1865. These newspapers contain historical market data such as stock outstanding and par values. So as a part of my role in the project, I manually captured over 60 years’ worth of data. And this effort really adds value because no one takes the time to collect data manually.”
“The key takeaway was that the results validate the research that has been done over the 1926 to 2020 period. There is a lot of evidence in the academic literature that attributes the existence of established equity factors to behavioral biases. In our analysis, we found similar patterns relating to factor premiums in the pre-1926 era. In our view, it was not strange to come across these results as human behavior does not change overnight. In fact, it probably doesn’t over decades or even centuries.”
“Another interesting observation was that markets were quite efficient back in the 19th century. Based on our own analysis and other academic studies, we saw that the transaction costs were not as high as we initially expected. It is normal to assume that markets are much more efficient nowadays given that we have daily trading and market makers. But in reality, this was not necessarily the case, at least not to the extent that is assumed. On a lighthearted sidenote, I wasn’t really fond of history while I was in high school. But I soon found out that 30% of this project was based on history and the other 70% on economics. That being said, I really enjoyed the whole process — even the history. In fact, I found myself speaking about 19th century railroad companies in conversations with my friends.”
“To begin with, we took into account the nature of our database to determine which equity factors we could actually test for given the information on hand. Thereafter, we set out to limit our degrees of freedom. We therefore refined our list by only focusing on established academic factors and this led us to our final selection. For value, we used dividend yield as a proxy as there are no book-to-market values for that era. This is because companies were not obligated to report on such information before the 1930s. While a few did in the 1920s, there are not enough cross-sectional observations for testing purposes.”
“The common element with all the factors we tested is that they are return driven. So you can assess them by just looking at either total returns, price returns or dividend yields. If you look at quality, for instance, the data related to the characteristics that define it are only readily available from 1963 onwards, let alone the pre-1926 period. So, a combination of focusing on key established factors as well as taking into account certain constraints led us to our choice of factors.”
Behavioral biases are largely behind the existence and persistence of established equity factors
“For one, it reaffirms our existing beliefs as long-term quant investors. In our view, behavioral biases are largely behind the existence and persistence of established equity factors. Therefore, seeing the same patterns in the 19th century suggests there is strong evidence of this. The results also underline that factor premiums are not very dependent on specific market regimes, nor specific market structures. Moreover, the era is not as different as we think. It was characterized by technological disruptions and the stock market played an important role in financing the innovation. This is somewhat similar to what we have seen in recent times.”
“Machine learning techniques are typically used on broad datasets with lots of variables. A prominent academic paper2 on machine learning demonstrates that they can take into account 100 or so predictive variables to construct portfolios with good risk-return characteristics. But what we also see is that when we apply these techniques to our pre-1926 database, which has a smaller cross-section than what we have become accustomed to nowadays, they also produce good results.”
“This outcome is interesting given that it is based on out-of-sample data that was not available beforehand. This really signals the potential these methods have. Another interesting observation was that these techniques picked the same predictive variables for the pre-1926 era as they did for the 1926 to 2020 period. Indeed, the same academic study2 shows that the random forest technique allocates the highest weighting to dividend yields, while the neural network approach doesn’t. And this is the same result we got when we analyzed our dataset. This is quite remarkable in our view.”
“The most important takeaway is that aside from creating a high quality dataset, we wanted to ensure that it was of high economic quality. We achieved this by adding market cap data and applying liquidity screens as there are a lot of small companies that trade infrequently. One of the key objectives was to put together a dataset that resembles an investable universe from a practical sense. So when we applied these filters, we saw that some factor premiums became smaller, more specifically for the size factor. This is intuitive as our screening process excludes a lot of small companies from our dataset.”
“Although this shrinks our sample, we believe it is important to take this approach as the results also consider the typical liquidity constraints that investors face. We think this is even more appropriate to take into account for the pre-1926 era, given that there were other limitations affecting trading activity back then. So, our results are based on stocks that had a fair amount of liquidity, which makes the outcomes more meaningful in our opinion.”
1 Baltussen, G., Van Vliet, B. P., and Van Vliet, P., November 2021, “The cross-section of stock returns before 1926 (and beyond)”, working paper.
2 Gu, S., Kelly, B., and Xiu, D., February 2020, “Empirical asset pricing via machine learning”, Review of Financial Studies.
This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation.
The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license.
An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.
Warning/Important note: This website contains information which is only available to qualified investors as defined below. If you are not a qualified investor, please click “I Disagree” to leave the website.
By clicking on "I agree", I declare that:
1 - This website may only be accessed directly or indirectly by the following persons in Singapore:
1) “institutional investor” under section 304 of the Securities and Futures Act (Cap.289)(“SFA”), which means:
(i) the Government; (ii) a statutory board as may be prescribed by regulations made under section 341 of the SFA; (iii) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is (A) to manage its own funds; (B) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or (C) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country; (iv) any entity (A) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and (B) whose funds are managed by an entity mentioned in sub-paragraph (iii); (v) a central bank in a jurisdiction other than Singapore; (vi) a central government in a country other than Singapore; (vii) an agency (of a central government in a country other than Singapore) that is incorporated or established in a country other than Singapore; (viii) a multilateral agency, international organisation or supranational agency as may be prescribed by regulations made under section 341 of the SFA; (ix) a bank that is licensed under the Banking Act (Cap.19); (x) a merchant bank that is approved as a financial institution under section 28 of the Monetary Authority of Singapore Act (Cap.186); (xi) a finance company that is licensed under the Finance Companies Act (Cap.108); (xii) a company or co-operative society that is licensed under the Insurance Act (Cap.142) to carry on insurance business in Singapore; (xiii) a company licensed under the Trust Companies Act (Cap.336); (xiv) a holder of a capital markets services licence; (xv) an approved exchange; (xvi) a recognised market operator; (xvii) an approved clearing house; (xviii) a recognised clearing house; (xix) a licensed trade repository; (xx) a licensed foreign trade repository; (xxi) an approved holding company; (xxii) a Depository as defined in section 81SF of the SFA; (xxiii) an entity or a trust formed or incorporated in a jurisdiction other than Singapore, which is regulated for the carrying on of any financial activity in that jurisdiction by a public authority of that jurisdiction that exercises a function that corresponds to a regulatory function of the Authority under this Act, the Banking Act (Cap.19), the Finance Companies Act (Cap.108), the Monetary Authority of Singapore Act (Cap.186), the Insurance Act (Cap.142), the Trust Companies Act (Cap.336) or such other Act as may be prescribed by regulations made under section 341 of the SFA; (xxiv) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere; (xxv) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors; (xxvi) the trustee of such trust as the Authority may prescribe, when acting in that capacity; or; (xxvii) such other person as the Authority may prescribe.
2) “relevant person” under section 305(1) of the SFA, which means:
(i) An accredited investor; (ii) a corporation the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; (iii) a trustee of a trust the sole purpose of which is to hold investments and each beneficiary of which is an individual who is an accredited investor; (iv) an officer or equivalent person of the person making the offer (such person being an entity) or a spouse, parent, brother, sister, son or daughter of that officer or equivalent person; or (v) a spouse, parent, brother, sister, son or daughter of the person making the offer (such person being an individual).
3) any person who acquires the units [in a collective investment scheme] as principal if the offer is on terms that the units may only be required at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of units in a collective investment scheme, securities, securities-based derivatives contracts or other assets, and if the following condition is satisfied: (i) the offer is not accompanied by an advertisement making an offer or calling attention to the offer or intended offer; (ii) no selling or promotional expenses are paid or incurred in connection with the offer other than those incurred for administrative or professional services, or by way of commission or fee for services rendered by any of the persons specified in section 302B(1)(d)(i) to (vi) of the SFA; and (iii) no prospectus in respect of the offer has been registered by the Authority or, where a prospectus has been registered (A) the prospectus has eAccxpired pursuant to section 299 of the SFA; or (B) the person making the offer has before making the offer 1. informed the Authority by notice in writing of its intent to make the offer in reliance on the exemption under this subsection; and 2. taken reasonable steps to inform in writing the person to whom the offer is made that the offer is made in reliance on the exemption under this subsection.
4) Or otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
If you are not any of the types of persons described above, you are not authorized to enter this website and you should leave this website immediately.
2 Terms and Conditions
You acknowledge that you have read these Terms and Conditions (“Terms”) prior to accessing the website located at www.robeco.com/sg (“Website”) and you agree to be bound by the Terms. If you do not agree to all of the Terms, you are not an authorised user and you should not use the Website. The Website is owned by Robeco Singapore Private Limited (company registration number: UEN. 201541306Z), which is licensed by the Monetary Authority of Singapore (“MAS”) pursuant to the Securities and Futures Act (Cap.289) (“SFA”) of Singapore, and is managed by Robeco Singapore Private Limited and/or its affiliates (collectively, as “Robeco”). The Website is intended for and should be accessed by institutional investors or accredited investors (as defined under Section 4A of the SFA) of Singapore. The Website is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the Robeco to any registration or licensing requirement within such jurisdiction. It is your responsibility to observe all applicable laws, rules and regulations of any relevant jurisdiction. The content contained in the Website is owned by Robeco and/or its information providers and is protected by applicable copyrights, trademarks, service marks, and/or other intellectual property rights. You may not copy, distribute, modify, post, frame or link the Website, including any text, graphics, video, audio, software code, user interface, design or logos. You may not distribute, modify, transmit, reuse, repost, or use the content of the Website for public or commercial use, including all text, images, audio and/or video. Robeco may terminate your access to the Website for any reason, without prior notice. Neither Robeco, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from the access of the Website. You agree to indemnity and hold Robeco, its associates, directors, officers or employees harmless against any and all claims, losses, liability, costs and expenses arising from your use of the Website due to violation of the Terms. Robeco reserves the right to change, modify, add or remove any parts of the Terms at any time and for any reason. The Terms shall deemed to be effective immediately upon posting. The Terms shall be governed by, and shall be construed in accordance with, the law of Singapore.
The Website has not been reviewed by the MAS. Accordingly, the Website may not be accessed directly or indirectly to persons in Singapore other than (i) to an institutional investor under Section 304 of the SFA, (ii) to a relevant person pursuant to Section 305(1), or any person pursuant to Section 305(2), and in accordance with the conditions specified in Section 305, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Nothing in the Website constitutes tax, accounting, regulatory, legal or investment advice. The Website is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation or for the purpose of soliciting any action in relation to Robeco’s businesses, or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such an offer and solicitation. Any reproduction or distribution of information from the Website, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accessing to the Website, you agree to the foregoing.
The funds referred to in the Website are for information only. It is not a recommendation or investment advice, nor does it mean the funds is suitable for all investors. The contents of the website is not reviewed by the MAS. Any decision to participate in the funds should be made only after reviewing the sections regarding investment considerations, conflicts of interest, risk factors and the relevant Singapore selling restrictions. You should consult your professional adviser if you are in doubt about the stringent restrictions applicable to the use of the Website, regulatory status of the funds, applicable regulatory protection, associated risks and suitability of the funds to your objectives.
Any decisions made based on the information contained in the Website are the sole responsibility of yours. Any investments made or to be made shall be with your independent analyses based on your financial situation and objectives. The investments and strategies contained in the Website may not be suitable for all investors and are not guaranteed by Robeco.
Investment involves risks and may lose value. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance. The Website may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies and such projection or forecast is not indicative of the future. The information contained in the Website, including any data, projections and underlying assumptions are based upon certain assumptions, management forecasts and analysis of information available on an “as is” basis and without warranties of any kind, whether express or implied, and reflects prevailing conditions and Robeco’s views as of the date published or indicated, and maybe superseded by subsequent events or for other reasons. The information contained in the Website are accordingly subject to change at any time without notice and Robeco are under no obligation to notify you of any of these changes. Robeco expressly disclaims all liability for errors and omissions in the information presented in the Website and for the use or interpretation by others of information contained in the Website.
Robeco Singapore Private Limited holds a capital markets services licence for fund management issued by the MAS and is subject to certain clientele restrictions under such licence. An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.