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In Academic Circles…

 Salomons Judgement

Which investment issues concern students in the current academic world? Market anomalies, but also machine learning, algorithms, and big data. All equally interesting, however if you have to judge them, only one can win a thesis prize.

In 2015 I was appointed as Professor of Investment Theory and Asset Management in the Faculty of Economics and Business of the University of Groningen. One of the last actions of my predecessor was the creation of a thesis prize, which is awarded every two years. The prize goes to the best thesis on our field: institutional asset management. The theses have subjects from which I learn a lot myself; it’s the ideal combination of theory and practice.

Despite the specific subject, a pre-selection was necessary as a lot is written in two years. Only theses valued with at least an 8 out of 10 were taken into consideration. I don’t know how many of them made the cut, but last week I received nine. The other two jurors received the same number, so every thesis has been assessed twice. Some of them included progressive research, of which we will hear more in practice. It’s too bad only three theses could go to the finals.

A different view on asset-pricing

What subjects does the academic world deal with? Sustainability, governance, and the pension sector are hot topics. Two papers deal with asset-pricing issues: can money be made by better analysing the accounting data of companies? The fact that the answer is ‘yes’ is no surprise to investors. A large part of what is described in the theses is used in both the lecture hall and in practice. Due to the strong emphasis on accounting data, however, the topic is approached slightly different than value investors such as Graham & Dodd, Buffett, and Greenwald do.

Another studied anomaly is low volatility. Why does investing in low-volatility stocks yield more than expected? And is this also the case in Europe? The answer to that was ‘no’. The connection isn’t made with the interest for a change, but with the small-cap effect. That resonates, as a large part of the low-vol effect can be explained by the avoidance of certain parts of the market, especially small and fast-growing companies that invest a lot, but are not profitable. American economy scholar Robert Novy-Marx has written about this effect in the United States. So, in Europe we see the same thing happening.

Fear of computers

I learned a lot from the paper about options, where a neural network is used to determine option prices. This includes digital developments such as machine learning, algorithms, and big data. I picked up two good messages from the thesis: 1)neural networks are well able to determine option prices, but not as well as the classic Black Scholes formula yet. 2)The fear that computers will soon take over our work can be frozen for a while.

Curious about the final judgement on which thesis won the prize? Please wait for a little while. The winner will be the first to know.

The author

Roelof Salomons

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