Weekly Top 5 Papers – December 11th, 2017

1. The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation by Reuven S. Avi-Yonah (University of Michigan Law School), Lily L. Batchelder (New York University School of Law), J. Clifton Fleming Jr. (Brigham Young University – J. Reuben Clark Law School), David Gamage (Indiana University Maurer School of Law), Ari D. Glogower (Ohio State University (OSU) – Michael E. Moritz College of Law), Daniel Jacob Hemel (University of Chicago – Law School), David Kamin (New York University School of Law), Mitchell Kane (New York University (NYU)), Rebecca M. Kysar (Brooklyn Law School; Fordham University School of Law), David S. Miller (Proskauer Rose LLP), Darien Shanske (University of California, Davis – School of Law), Daniel Shaviro (New York University School of Law) and Manoj Viswanathan (University of California Hastings College of the Law)

We wrote this report as a reaction to the tax overhaul legislation now under consideration by Congress. The report identifies some of the key weaknesses in the Senate and House tax legislation. Specifically, the complex rules proposed in the House and Senate bills will allow new tax games and planning opportunities for well-advised taxpayers, which will result in unanticipated consequences and costs. These costs may not currently be fully reflected in official estimates already showing the bills adding over $1 trillion to the deficit in the coming decade. Other proposed changes will encounter legal roadblocks, like WTO violations, that will jeopardize critical elements of the legislation. Finally, in other cases, technical glitches in the legislation may improperly and haphazardly penalize or benefit individual and corporate taxpayers.  The report does not address the large concerns a number of us have with regard to the broad policy motives behind this legislation (and which a number of us have written about elsewhere).  Instead, it’s focused on the rushed and poor execution so far.
There are thirteen authors on this report, and it represents a joint effort among tax experts from across the country warning of the very real dangers to the integrity of the tax system if Congress does not slow down and address major flaws in its current approach. – David Kamin

2. Deep Value  by Clifford S. Asness (AQR Capital Management, LLC), John M. Liew (AQR Capital Management, LLC), Lasse Heje Pedersen (AQR Capital Management, LLC; Copenhagen Business School – Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)) and Ashwin K. Thapar (AQR Capital Management, LLC)

We have experienced first-hand how ‘deep value’ trading can be deeply painful initially, even if the strategy works out in the end. When we launched our firm in the late 1990s, value strategies lost money as already expensive internet stocks became wildly expensive relative to cheaper value stocks. Over the years, we have seen many similar episodes across markets and time periods – most notably during the global financial crisis. Such instances where the price spread between cheap and expensive widens (sometimes to extremes) made us wonder whether such events may result in elevated expected forward looking returns to value.  These extreme events contain a lot of information about how markets really work and how dislocations can occur both during booms and busts.
In our new paper “Deep Value,” we complement the literature on contrarian investing by taking a global approach – we study value spreads and episodes of deep value across markets and geographies – and by looking at a lot of interesting data sets to study what really happens during these events. We find a strong deep value factor, particularly when we increase the number of comparisons past what’s normally studied in other work on “factor timing,” diversified globally and across asset classes, and study how and why it works. We look at data ranging from risk and fundamentals to measures of sentiment (i.e., demand pressures, news stories) to limits of arbitrage (i.e., volatility, t-costs) to arbitrageur activity (i.e., buybacks, M&A), which provides some really interesting new insights into competing risk-based and behavioral theories for the value premium in general,and what happens when things blow out. Without giving it all away, we find a healthy amount of support for both the rational theory and, perhaps especially, the behavioral theory of investor over-extrapolation, and satisfyingly, we can utterly reject the idea that market price moves are pure noise. – Lasse Pedersen

3. Implementing Momentum: What Have We Learned? by Adrienne Ross (AQR Capital Management, LLC), Ronen Israel (AQR Capital Management, LLC), Tobias J. Moskowitz (Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)) and Laura Serban (AQR Capital Management)

This paper examines the real world applicability of systematic momentum investing. Momentum is one of the strongest, if not the strongest, of the major market “anomalies” documented in financial literature; it relates to the tendency for securities that have performed relatively well (poorly) tend to continue to outperform (underperform). Most academic studies ignore real world costs when examining market anomalies, which is likely a larger issue for momentum due to its higher turnover. The concern, therefore, is that momentum is so costly to trade that its return premium is diminished in the real world.
We address these concerns by looking at live momentum portfolios across large, small, and international markets, and show that these portfolios are capable of capturing the momentum premium, even after accounting for expenses, trading costs, taxes, and other frictions associated with real-life portfolios. Effectively, we show that systematic momentum investing is an implementable strategy.
More generally, when it comes to investing, it’s important that theory meets practical application. We hope that future research into implementation will benefit from the examination of real-world portfolios. – Adrienne Ross

4. What is Program Evaluation? A Beginners Guide (Presentation Slides) by Gene Shackman (The Global Social Change Research Project)

I am hoping this guide may be useful to anyone who wants to know about the very basic ideas and methods of evaluation. Evaluation can be useful, but only if people understand it. I am hoping this will help clients, potential clients, funders, stakeholders, and the public better understand evaluation and a little of how it works. That way, people can have a realistic idea of how it can be used, and how it cannot be used. – Gene Shackman

5. The Premature Demonization of Stock Repurchases by Clifford S. Asness (AQR Capital Management, LLC), Todd M. Hazelkorn (AQR Capital Management, LLC) and Scott A. Richardson (AQR Capital Management, LLC; London Business School)