Investing Research Articles

Are the widely used stock characteristic/factor sorting practices of ranked fifth (quintile) or ranked tenth (decile) portfolios optimal in terms of interpretative power? In their August 2016 paper entitled “Characteristic-Sorted Portfolios: Estimation and Inference”, Matias Cattaneo, Richard Crump, Max Farrell and Ernst Schaumburg formalize the portfolio sorting process. Specifically, they describe how to choose the number of quantile portfolios best… Keep Reading

Where should investors look for methodological edges in 21st century financial markets? In his brief August 2016 paper entitled “Mathematics and Economics: A Reality Check”, Marcos Lopez de Prado advises finance students (and practitioners) what mathematical/analytical expertise to acquire for successful 21st century investing and trading. Based on his experience with what kinds of analysts and mathematics are most successful in… Keep Reading

A subscriber proposed adding an equity style momentum underlay to the Best Value version of the “Simple Asset Class ETF Value Strategy” (SACEVS). SACEVS each month allocates all capital to the one of the following asset class exchange-traded funds (ETF) corresponding to the most undervalued of the term, credit and equity risk premiums at prior month end, or to… Keep Reading

Are overnight option returns consistently different from intraday returns? In their July 2016 paper entitled “Why Do Option Returns Change Sign from Day to Night?”, Dmitriy Muravyev and Xuechuan Ni decompose the negative risk premium of S&P 500 Index options into intraday (open-to-close) and overnight (close-to-open) components. They apply delta hedging to distinguish the options premium from movement in… Keep Reading

How should investors approach commodity futures trading? In her August 2016 paper entitled “An Introduction to U.S. Commodity Futures Markets: a Historical Perspective Along with Commodity Trading Principles”, Hilary Till summarizes success factors for designing and managing a commodity futures portfolio, including: identifying potential trades; constructing trades; constructing a portfolio of trades; risk management; payoff expectations; level of… Keep Reading

Do measures of investor attention to specific firms/stocks indicate how the stocks react to earnings surprises? In their July 2016 paper entitled “Yahoo Finance Search and Earnings Announcements”, Alastair Lawrence, James Ryans,  Estelle Sun and Nikolay Laptev investigate the interaction of investor attention and earnings surprises. They focus on abnormal Yahoo Finance search activity as the measure of attention…. Keep Reading

How does pairs trading of relatively diversified exchange-traded funds (ETF) compare with pairs trading of individual stocks? In his July 2016 paper entitled “Does Pairs Trading with ETFs Work?”, Philipp Doering tests a common pairs trading process on the universe of ETFs. Specifically, he: Each month, scales all ETF prices to $1 and computes the sum of squared price… Keep Reading

How can investors integrate global asset class diversification, pre-eminent factor premiums and crash protection? In his July 2016 paper entitled “The Trinity Portfolio: A Long-Term Investing Framework Engineered for Simplicity, Safety, and Outperformance”, Mebane Faber summarizes a portfolio combining these three principles, as follows: Global diversification: Include U.S. stocks, non-U.S. developed markets stocks, emerging markets stocks, corporate bonds, 30-year U.S…. Keep Reading

Is there some stock value metric that is markedly superior to the conventional book-to-market ratio (BM) for identifying undervalued and overvalued stocks? In his July 2016 paper entitled “Value Investing with Dividend-to-Market Ratio”, Yiqing Dai tests the effectiveness of maximum payable dividend ratio (DM) ) as an alternative to book-to-market ratio for value investing. He specifies DM as… Keep Reading

“Central Bank Gold Reserves, Gold Lending and Gold Price” finds some conditional relationships between aggregate world central bank gold reserves and gold price. Can investors exploit these relationships? To check, we relate recent quarterly estimates of central bank gold reserves and quarterly spot gold price, noting that there is roughly a one quarter delay in… Keep Reading