Cointegration
Business Strategy and Performance
DFA’s business strategy relies on a few basic principles. First, and most importantly, markets are efficient. This is the pillar on which the firm is based and is supported by the fact that the fund does not use technical analysis to execute trades. Second, the firm believes in sound academic research. This research (from Fama, French, and Bonz) has directed the firm to invest in stocks below the 20th percentile in market cap and those with high book-to-market value (“Value Stocks”). Third, although the firm’s views lead to inherently passive money management, they believe in the value of traders and block trading to obtain discounts on otherwise illiquid large blocks of stock. After all, if the market correctly prices stocks, any discount one receives when purchasing a stock should translate into profit. DFA also sticks to a comprehensive trading strategy. These rules are put in place to mitigate risk and include:
Do not execute trades on stocks that are posting earnings or giving other announcements in the next few days
Do not trade on stock that are likely to have “negative surprises” in the near future
Do not trade on stocks that have recently reported sales by insiders
Require steeper discounts when dealing with unfamiliar brokers
When subsequent data or literature reveals a broker did not fully disclose information to DFA, put them in the “penalty box” for an appropriate amount of time
Require full disclosure of a companies position and only buy a companies entire position
Equipped with these rules, traders negotiate the largest discount possible on block trades. We argue that DFA does not believe in a true efficient market but rather believes in a semi-strong efficient market. The reluctance to trade when insiders trade as well as the penalty box implies that DFA believes, at least in certain cases, that there is information known by some that is not completely priced into the market. DFA has relied on
DFA’s business strategy relies on a few basic principles. First, and most importantly, markets are efficient. This is the pillar on which the firm is based and is supported by the fact that the fund does not use technical analysis to execute trades. Second, the firm believes in sound academic research. This research (from Fama, French, and Bonz) has directed the firm to invest in stocks below the 20th percentile in market cap and those with high book-to-market value (“Value Stocks”). Third, although the firm’s views lead to inherently passive money management, they believe in the value of traders and block trading to obtain discounts on otherwise illiquid large blocks of stock. After all, if the market correctly prices stocks, any discount one receives when purchasing a stock should translate into profit. DFA also sticks to a comprehensive trading strategy. These rules are put in place to mitigate risk and include:
Do not execute trades on stocks that are posting earnings or giving other announcements in the next few days
Do not trade on stock that are likely to have “negative surprises” in the near future
Do not trade on stocks that have recently reported sales by insiders
Require steeper discounts when dealing with unfamiliar brokers
When subsequent data or literature reveals a broker did not fully disclose information to DFA, put them in the “penalty box” for an appropriate amount of time
Require full disclosure of a companies position and only buy a companies entire position
Equipped with these rules, traders negotiate the largest discount possible on block trades. We argue that DFA does not believe in a true efficient market but rather believes in a semi-strong efficient market. The reluctance to trade when insiders trade as well as the penalty box implies that DFA believes, at least in certain cases, that there is information known by some that is not completely priced into the market. DFA has relied on