Investing Research Articles

Is the capitalization-weighted market portfolio a lame benchmark? In his August 2014 paper entitled “It’s Easy to Beat the Market”, Moshe Levy tests the perception that it is hard to beat a capitalization-weighted portfolio and therefore that an index so weighted is a challenging benchmark. Specifically, he compares the gross risk-adjusted performance of a capitalization-weighted buy-and-hold portfolio to those of 1,000… Keep Reading

What is the best estimate of the Equity Risk Premium (ERP), the return in excess of the risk-free rate required as compensation for the risk of holding equity? In his August 2014 paper entitled “A History of the Equity Risk Premium and its Estimation”, Basil Copeland summarizes recent ERP estimates and explains how the historical equity return can overstate… Keep Reading

Do financial markets adapt to widespread use of an indicator, such as Bollinger Bands, thereby extinguishing its informativeness? In the August 2014 version of their paper entitled “Popularity versus Profitability: Evidence from Bollinger Bands”, Jiali Fang, Ben Jacobsen and Yafeng Qin investigate the effectiveness of Bollinger Bands as a stock market trading signal before and after its introduction in 1983. They focus… Keep Reading

How much performance improvement comes from rebalancing a stocks-bonds portfolio, and what specific rebalancing approach works best? In their August 2014 paper entitled “Testing Rebalancing Strategies for Stock-Bond Portfolios Across Different Asset Allocations”, Hubert Dichtl, Wolfgang Drobetz and Martin Wambach investigate the net performance implications of different rebalancing approaches and different rebalancing frequencies on portfolios of stocks and government bonds… Keep Reading

Does focus on nearest-expiration contracts in commodity futures momentum strategies leave money on the table? In their May 2014 paper entitled “Exploiting Commodity Momentum Along the Futures Curves”, Wilma De Groot, Dennis Karstanje and Weili Zhou investigate commodities futures momentum strategies that consider all available contract expirations. They hypothesize that a broadened contract universe could increase roll yield, reduce volatility and lower… Keep Reading

Should investors view financial experts as individuals who, through years of study and experience, overcome behavioral biases and reliably add value to investment decisions? In his May 2014 essay entitled “Are You Trying Too Hard?”, Wesley Gray summarizes research that compares the decision-making of experts to the performance of mechanical models across many fields. He highlights the relevance to of this research to… Keep Reading

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

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

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

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