Investing Research Articles

Does purifying stock returns (by using only the parts of returns unexplained by the Fama-French market, size and value factors) improve momentum strategy performance? Does avoiding extreme losers that may sharply reverse further enhance performance? In their November 2012 paper entitled “Some Simple Tricks to Boost Price Momentum Performance”, Andrew Lapthorne, Rui Antunes, John Carson, Georgios… Keep Reading

Are diamonds useful as investment portfolio diversifiers? In their draft papers entitled “An Examination of Diamonds as an Alternative Asset Class: Do They Have What it Takes to Make a Portfolio Sparkle?” of June 2012 and “The Return Characteristics of Diamonds” of July 2012, Kenneth Small, Jeff Smith and Erika Small investigate diamonds as an asset class (returns and correlations… Keep Reading

Does the tendency of stock market volatility measures to persist offer an exploitable short-term reversion to mean? In other words, can traders win on average by speculating that market volatility spikes will soon reverse? To check, we first test for short-term reversion of the implied volatility of the S&P 500 Index (VIX) over its available… Keep Reading

How special is the Fama-French three-factor model (market, size, book-to-market ratio) compared to other possible three-factor models? In their November 2012 paper entitled “Firm Characteristics and Empirical Factor Models: a Data-Mining Experiment”, Leonid Kogan and Mary Tian systematically compare explanatory breadth for all 351 three-factor and 2,925 four-factor (linear) models for predicting stock returns that… Keep Reading

Does combining different portfolio performance enhancement concepts actually improve outcome? In their December 2012 paper entitled “Generalized Momentum and Flexible Asset Allocation (FAA): An Heuristic Approach”, Wouter Keller and Hugo van Putten investigate the effects of combining momentum, volatility and correlation selection criteria to form an equally weighted portfolio of the three best funds from… Keep Reading

James Weatherall, physicist, mathematician and philosopher, introduces his 2012 book, The Physics of Wall Street: A Brief History of Predicting the Unpredictable, by stating: “This book tells the story of physicists in finance. …It is about how the quants came to be, and about how to understand the ‘complex mathematical models’ that have become central to modern finance.”… Keep Reading

Can investors systematically earn a premium by holding relatively illiquid assets? In their December 2012 paper entitled “The Illiquidity Premium: International Evidence”, Yakov Amihud, Allaudeen Hameed, Wenjin Kang and Huiping Zhang examine the illiquidity premium in 26 developed and 19 emerging equity markets. They measure illiquidity as the average ratio of absolute daily stock return to… Keep Reading

Prior research indicates that individual stocks with high short interest relative to shares outstanding (short interest ratio) tend to underperform. Do this finding hold for exchange-traded funds (ETF)? In their December 2012 paper entitled “Why Does ETF Short Selling Provide a Different Signal?”, Christopher Hughen and Xiaoyu Ma investigate whether short interest ratio metrics predict future returns for… Keep Reading

What causes asset price momentum? In his May 2012 paper entitled “Is Momentum a Self-fulfilling Prophecy?”, Steven Jordan presents a simple, abstract model explaining the pervasiveness and robustness of evidence for intermediate-term momentum and long-term reversal. The essential assumptions of his model are: (1) demand for an asset is noisy and flat or downward sloping… Keep Reading

Andrew Abraham, founder of Abraham Investment Management, introduces his 2012 book, The Trend Following Bible: How Professional Traders Compound Wealth and Manage Risk, by stating: “I want to teach you to think like a successful trend follower. I am giving you exactly the methodologies I have used on a daily basis for the last 18 years. They… Keep Reading