By KENNETH R. FRENCH

Returns for FAANG stocks over the last decade were extraordinary. Professor Ken French explores whether the strong performance tells us much about what to expect next.

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By Eugene F. Fama and Kenneth R. French

We test the hypothesis that inverted yield curves predict negative equity premiums. Using monthly observations for the U.S. and 11 other developed markets, we examine whether shifting from equities to Treasury bills following a recent term structure inversion increases expected returns relative to a passive strategy of simply holding the value weight market. We find no evidence that inverted yield curves predict stocks will underperform bills.

By Eugene F. Fama and Kenneth R. French

The high volatility of stock returns is common knowledge, but many investors may not fully appreciate the implications of return volatility. Investors cannot draw strong inferences about expected returns from three, five, or even ten years of realized returns. Those who act on such noisy evidence should reconsider their approach.

By KENNETH R. FRENCH

Bayes rule is a way to update your model of the world when you have new information. Suppose we are interested in assessing the probability that a specific hypothesis is true. We start with an initial assessment, called our prior, which is based on all the data we have observed, books we have read, and our other life experiences. This post explains how we should update our initial assessment when we observe new data.

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Long/Short (LS) strategies buy one equity portfolio and short another. They are often sold as a way to add a premium with special diversification benefits that arise because the premium is not highly correlated with the rest of an investor’s equity portfolio. We provide examples to show how to evaluate these claims.

Portable alpha is the return from an active investment strategy that has no exposure to some index, such as the S&P 500 or the Russell 2000. It is often sold as a way to get the benefits of active management at lower cost. For the moment we leave aside whether there are benefits to active management and focus on the claim about costs.

KRF: Gene Fama has taught us a lot over the last 50 years. In this essay, I describe some of the things Gene has taught me about doing research, writing papers, and life in general.

EFF: I have a new paper, "Does the Fed Control Interest Rates?". In it, I find that The Federal funds rate, FF, moves strongly toward the Fed's target, TF, but other rates show little day-to-day convergence to TF. When the Fed changes TF, it moves toward existing short rates. This suggests a passive Fed that follows the market, but it is also consistent with an active Fed that controls rates and rates adjust to reflect predictable changes in TF. When TF changes, short rates move toward the new TF. This is consistent with a Fed that controls short rates or a Fed that has no control but is an informed investor whose signals affect rates.

By Eugene F. Fama and Kenneth R. French

Understanding volatility is crucial for informed investment decisions. Our paper explores the volatility of the market, size, and value premiums of the Fama-French three-factor model for US equity returns.

Volatility and Premiums in US Equity Returns (PDF)

By Eugene F. Fama 

Foreword

I was invited by the editors to contribute a professional autobiography for the Annual Review of Financial Economics.  I focus on what I think is my best stuff.  Readers interested in the rest can download my vita from the website of the University of Chicago, Booth School of Business.  I only briefly discuss ideas and their origins, to give the flavor of context and motivation.  I do not attempt to review the contributions of others, which is likely to raise feathers.  Mea culpa in advance.

Professor Fama was invited by the editors of the Annual Review of Financial Economics to contribute a professional autobiography. In this essay, he highlights some of the key ideas and their origins that mark his distinguished career to give the flavor of context and motivation. 

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By Eugene F. Fama and Kenneth R. French

Our paper, "Luck versus Skill in the Cross Section of Mutual Fund Returns," examines the performance during 1984-2006 of actively managed US mutual funds that invest primarily in US equities.  It is an academic paper with lots of technical detail.  The purpose of this white paper is to provide a summary of the results that are relevant for investors.  We begin by examining the overall α for aggregate wealth invested in actively managed mutual funds.  We then turn to the performance of individual funds.

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By Eugene F. Fama and Kenneth R. French

William F. Sharpe has a great article in the January/February 1991 issue of The Financial Analysts Journal (Vol. 47, No.1, pages 7-9). The title is "The Arithmetic of Active Management." It should be required reading for academics and investment professionals alike.

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By Eugene F. Fama and Kenneth R. French

The cap-weighted market portfolio of NYSE-Amex-Nasdaq stocks delivered a 
-38.31% return for 2008. The experience was painful, but was it out of bounds? The volatility of returns also increased a lot during 2008. Was the observed volatility consistent with prior experience? These are the questions addressed here.

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By EUGENE F. FAMA

In his NY Times blog Paul Krugman attacks my piece on the stimulus plan.

Again, here is my argument in three sentences.

1. Bailouts and stimulus plans must be financed.

2. If the financing takes the form of additional government debt, the added debt displaces other uses of the same funds.

3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.

Are any of these statements incorrect?

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By EUGENE F. FAMA

There has been lots of response to my little essay on bailouts and stimulus plans. I will only comment on the negative ones that I think have merit and are overlooked in my original paper.

First, however, I want to restate my argument in simple terms.

1. Bailouts and stimulus plans must be financed.

2. If the financing takes the form of additional government debt, the added debt displaces other uses of the funds.

3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.

Are any of these statements incorrect?

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By EUGENE F. FAMA

There is an identity in macroeconomics. It says that in any given year private investment must equal the sum of private savings, corporate savings (retained earnings), and government savings (the government surplus, which is more likely negative, that is, a deficit),

In a global economy the quantities in the equation are global. This means the equation need not hold in a particular country, but it must hold in the world as a whole. For example, in recent years private investment in the US has been greater than the sum of private, corporate, and government savings in the US. This means the US has been importing savings from the rest of the world (by selling US securities to the rest of the world). But the equation always holds for the world as whole.

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By EUGENE F. FAMA

The financial sector provides the grease that makes the transfer of savings to productive investments more efficient. This role is critical for the health of the economy.

Government injections of equity capital into financial institutions can make sense if the whole financial system is in danger. But it is important that injections are at minimum cost to taxpayers, that is, without unnecessary subsidies. Problems on this score arise when the funds go primarily to prop up the value of a financial institution's existing debt. In this case the true amount of new equity capital is less than the injection of funds by the government, and the subsidy to debt holders is a loss to taxpayers with no clear offsetting benefits. My purpose here is to describe how this problem arises and how it can be avoided.

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