Tuesday, January 08, 2013

Bob Haugen RIP

Bob Haugen passed away last Sunday. My favorite Haugen articles are really two.  In Commonalities in  the Determinants of Expected Stock Returns (1995, with Nardin Baker), he basically showed that there's lots of stange things going on in the stock market. He looked at 40 or so specific metrics related to liquidity, price ratios, prior returns, growth, and risk, and found many of them significantly related to future returns in the US, Germany, France, and the UK.

The paper was important because at that time Fama and French came out with their influential paper showing the value and size anomalies, and reconciled this within a risk model that they said must have some orthogonal value and size related factors.  Lakonishok, Shliefer, and Vishny, meanwhile were arguing these were due to inefficiencies, investor over and under-reactions. Haugen favored the inefficiency explanation, and more importantly highlighted there were a lot more than the value and size anomalies.

Most importantly to me, in my dissertation I remember highlighting his The efficient market inefficiency of capitalization-weighted stock portfolios (1991, with Nardin Baker). This paper highlighted that a very fundamental portfolio, the Minimum Variance Portfolio that is at the extreme left of a convex hull created via Markowitzian diversification in mean-variance space, actually had a slightly higher than average return.  Haugen focused on the inefficiency of the market portfolio, but I used it to support my contention that low volatility stocks actually had slightly higher than average returns.  Most low volatility funds reference this paper in presentations of their approach, as it was the first paper to highlight the dominance of this special portfolio.

He was an independent spirit, and will be greatly missed.


Anonymous said...

Nice to pay tribute to an original thinker, but please quite his paper correctly: "Commonality In The Determinants Of Expected Stock Returns"

Anonymous said...

Good paper. Are there any other favorite papers you would recommend on the topic?