September 4, 2014 - Animal Spirits
Behavioral finance encompasses research on how investors fall short of a rational ideal in decision-making, and how markets are thereby somewhat inefficient. In his August 2014 paper entitled “Behavioral Finance”, David Hirshleifer examines sources of investor biases and provides an overview of research tying these biases to research on how they affect trading and market prices. Based on theory and… Keep Reading
September 3, 2014 - Momentum Investing
Can individual investors reliably extract excess returns from long-only stock momentum? In their April 2014 paper entitled “Profitable Momentum Trading Strategies for Individual Investors”, Bryan Foltice and Thomas Langer examine whether a long-only stock momentum portfolio holding the top one to 50 stocks outperforms the stock market on a net basis. Their approach avoids issues of shorting costs/feasibility and explores trade-offs between gross… Keep Reading
August 29, 2014 - Momentum Investing
As a follow-up to “Mutual Fund Hot Hand Performance Robustness Test”, a subscriber suggested testing a portfolio that each year holds the top two Fidelity diversified equity funds plus the top two Vanguard diversified equity funds from “Mutual Fund Hot Hand Performance” (four funds total). Such a portfolio should suppress volatility, particularly the effects of any… Keep Reading
August 28, 2014 - Big Ideas, Investing Expertise
How should investors assess systematic trading programs? In his August 2014 paper entitled “Evaluation of Systematic Trading Programs”, Mikhail Munenzon offers a non-technical overview of issues involved in evaluating systematic trading programs. He defines such programs as automated processes that generate signals, manage positions and execute orders for exchange-listed instruments or spot currency rates with little or no human intervention. He states that the… Keep Reading
August 27, 2014 - Fundamental Valuation
Which firm accounting measures best predict future stock returns? In the August 2014 version of their paper entitled “Are Cash Flows Better Stock Return Predictors than Profits?”, Stephen Foerster, John Tsagarelis and Grant Wang investigate the power of enhanced cash flow measures to predict stock returns. They first devise procedures for transforming indirect cash flow and income… Keep Reading
August 25, 2014 - Currency Trading
In his August 2014 paper entitled “Bitcoin Myths and Facts”, Campbell Harvey examines eight claims about bitcoin. One of these claims is that bitcoin is currently too volatile to serve as a store of value. Using daily data for the dollar-bitcoin exchange rate during mid-July 2010 through mid-August 2014, he finds that:
August 25, 2014 - Economic Indicators, Equity Premium, Fundamental Valuation
Is the U.S. stock market in a Federal Reserve-driven bubble that is about to burst? In his August 2014 paper entitled “Fed by the Fed: A New Bubble Grows on Wall St.”, Oliver Dettmann examines how shifts away from quantitative easing by central banks, and the introduction of rising interest rates, may affect current valuation levels of the U.S. stock market. He focuses on a discounted real earnings… Keep Reading
August 22, 2014 - Animal Spirits, Volatility Effects
What is the best way to harvest asset mispricings derived from aggregate overreaction/underreaction by naive investors? In his July 2014 presentation package entitled “Betting On ‘Dumb Volatility’ with ‘Smart Beta’”, Claude Erb examines strategies for exploiting the “dumb volatility” arguably generated by naive investors who buy high and sell low, temporarily driving prices materially above and below fair values. These… Keep Reading
August 21, 2014 - Value Premium
What is the best way to capture the slowly realized and variable value premium? In his August 2014 paper entitled “Value Investing: Smart Beta vs. Style Indices”, Jason Hsu compares exploitation of the value premium by traditional style indexes and recent smart beta strategies. Traditional value indexes pick stocks with low price‐to‐book ratios (P/B) and weight them by market capitalization…. Keep Reading
August 19, 2014 - Big Ideas
How can researchers account for the snooping bias derived from testing of multiple strategy alternatives on the same set of data? In the July 2014 version of their paper entitled “Evaluating Trading Strategies”, Campbell Harvey and Yan Liu describe tools that adjust strategy evaluation for multiple testing. They note that conventional thresholds for statistical significance assume an independent… Keep Reading