August 3, 2011 - Fundamental Valuation
A reader commented and asked: “One of the most read investing books in the U.S. is Joel Greenblatt’s The Little Book that Beats the Market, which reveals the ‘magic formula’. What do you think of it?” In response, rather than review the book, we examine the U.S. Value Direct Composite returns at Formula Investing. These returns… Keep Reading
August 2, 2011 - Equity Premium
…while mid-single digits may be a reasonable rough estimate for the equity risk premium, there is not a generally accepted value for it or method of estimating it.
July 27, 2011 - Sentiment Indicators
“With Thomson Reuters News Analytics, computers can not only read the news – they can interpret it too. The results can enhance your investment and trading strategies, helping you to spot new opportunities and generate alpha. And for the humans among us, news sentiment analysis offers meaningful insight to drive trading and investment decisions.” Is… Keep Reading
July 26, 2011 - Volatility Effects
“Overview of Financial Market Regime Change” states that researchers often use return volatility to discriminate financial market regimes (intervals of persistent behavior). Investors often use some variation of simple moving average (SMA) crossovers to determine market regime. Do these perspectives intersect? To investigate, we examine realized volatility (standard deviation of daily returns) and frequency of… Keep Reading
July 25, 2011 - Big Ideas
Financial markets sometimes switch states (regimes), with key investment decision statistics (such as average return and volatility of returns) shifting dramatically for extended intervals. A simple example of financial market regimes is the designation of bull and bear stock market states, estimated (for example) by a broad index being above or below its long-interval simple… Keep Reading
July 22, 2011 - Technical Trading
A reader inquired about the complex strategy for trading stock index proxies and futures described in the March 2010 paper “MR Swing: A quantitative System for Mean‐reversion and Swing Trading in Market Regimes” by David Abrams and Scott Walker. This strategy posits that: The stock market switches between bull and bear states, with the bull or bear state in effect when current… Keep Reading
July 21, 2011 - Individual Gurus, Investing Expertise
Do individual experts whose U.S. stock market forecasting records are good (bad) gain (lose) attention? The “pro” argument is that investors (and online intermediaries) eventually flock to good forecasters and ignore bad ones in search of a market timing edge. The “con” arguments are that loud noise (for example, marketing-related or entertainment-driven) swamps information, and/or… Keep Reading
July 19, 2011 - Volatility Effects
Does the Chicago Board Options Exchange Market Volatility Index (VIX), a measure of investor expectations for stock market volatility (and arguably of current level of fearfulness), exploitably predict stock market direction? In their April 2007 paper entitled “Can the VIX Signal Market’s Direction? An Asymmetric Dynamic Strategy”, flagged by a reader, Alessandro Cipollini and Antonio Manzini investigate… Keep Reading
July 15, 2011 - Real Estate
Do Real Estate Investment Trusts (REIT) act effectively as a proxy for the real estate asset class? In their June 2011 paper entitled “REITs and Underlying Real Estate Markets: Is There a Link?”, Andrey Pavlov and Susan Wachter estimate the strength of the relationship between REIT and underlying real estate returns. Specifically, they relate REIT… Keep Reading
July 14, 2011 - Investing Expertise
There is a decades-long stream of academic research on equity analysts as sophisticated users of financial data, focusing on the usefulness of sell-side analyst earnings forecasts and stock recommendations. What is the gist of this stream? In his June 2011 paper entitled “Analysts’ Forecasts: What Do We Know After Decades of Work?”, Mark Bradshaw surveys… Keep Reading