January 5, 2015 - Investing Expertise, Mutual/Hedge Funds
Should investors expect mutual fund managers to generate value via timely trades? In their November 2014 paper entitled “Do Funds Make More When They Trade More?”, Lubos Pastor, Robert Stambaugh and Lucian Taylor investigate the relationship between mutual fund turnover and performance. They measure mutual fund performance at a monthly frequency as gross fund return minus the return… Keep Reading
December 30, 2014 - Mutual/Hedge Funds
Does the expanding set of exchange-traded funds (ETF) support reliable replication (cloning) of future returns for some hedge funds? In their December 2014 paper entitled “Smart Beta ETF Portfolios: Cloning Beta Active Hedge Funds”, Jun Duanmu, Yongjia Li and Alexey Malakhov test replication of top risk factor-driven (beta-active) hedge funds using portfolios of ETFs. The selected hedge funds perform… Keep Reading
December 29, 2014 - Fundamental Valuation
A subscriber suggested evaluation of average investor allocation to stocks as “The Single Greatest Predictor of Future Stock Market Returns”. For this evaluation, we test simple ways to time the broad U.S. stock market using the quarterly time series for average U.S. investor allocation to stocks as provided in the article. We assume that the… Keep Reading
December 26, 2014 - Volatility Effects
Are stock betas calculated with price jumps (arguably derived from informed trading) more useful than those calculated conventionally (arguably dominated by noise trading)? In the December 2014 version of their paper entitled “Roughing Up Beta: Continuous vs. Discontinuous Betas, and the Cross-Section of Expected Stock Returns”, Tim Bollerslev, Sophia Zhengzi Li and Viktor Todorov compare the powers of standard or “smooth” stock betas and… Keep Reading
December 23, 2014 - Equity Premium
How big is the stock liquidity premium and does it subsume other variables widely used to estimate future returns? In their December 2014 paper entitled “A Comparative Analysis of Liquidity Measures”, Yuping Huang and Vasilios Sogiakas investigate the relationships of excess (relative to the risk-free rate) stock returns to three pairs of monthly liquidity metrics: Transaction cost: (1)… Keep Reading
December 19, 2014 - Fundamental Valuation, Investing Expertise
Do changes in consensus analyst earnings forecasts that disagree with contemporaneous stock returns signal exploitable mispricings? In their November 2014 paper entitled “To Follow or Not to Follow – An Analysis of the Profitability of Portfolio Strategies Based on Analyst Consensus EPS Forecasts”, Rainer Baule and Hannes Wilke investigate the power of a variable that relates consensus earnings forecast momentum to… Keep Reading
December 17, 2014 - Strategic Allocation
Is equal weighting (1/n) of portfolio components a good choice? In their November 2014 paper entitled “Is 1/n Really Better Than Optimal Mean-Variance Portfolio?”, Woo Chang Kim, Yongjae Lee and William Ziemba assess 1/n weighting by comparing its performance to the performances of all feasible mean-variance optimal portfolios for different asset universes. By “all feasible,” they mean many long-only mean-variance optimal portfolios… Keep Reading
December 15, 2014 - Animal Spirits, Investing Expertise
Does a need to attract attention distort the information offered by online stock bloggers? Does competition among them suppress or amplify this distortion? In their November 2014 paper entitled “Guru Dreams and Competition: An Anatomy of the Economics of Blogs”, Yi Dong, Massimo Massa and Hong Zhang investigate whether: (1) stock bloggers are informative; and, (2) competition among them enhances the quality of information… Keep Reading
December 12, 2014 - Calendar Effects, Mutual/Hedge Funds
Do predictable monthly outflows from and inflows to mutual funds drive the Turn-of-the-Month (TOTM) effect, a concentration of positive stock market returns around the turns of calendar months? In their November 2014 paper entitled “Dash for Cash: Month-End Liquidity Needs and the Predictability of Stock Returns”, Kalle Rinne, Matti Suominen and Lauri Vaittinen explore TOTM with focus on the… Keep Reading
December 10, 2014 - Economic Indicators
Referring to “Leading Economic Index and the Stock Market”, a subscriber inquired about using the Conference Board’s Leading Economic Index (LEI) for the U.S. to generate long-term U.S. stock market timing signals, as follows: “How about using the LEI in the following fashion? Buy when the LEI rises by 1.0 % from its lowest point in… Keep Reading