April 15, 2012 - Big Ideas
Is there a “correct” (or at least most correct) view of how financial markets work? If so, why do the beliefs of market participants, sophisticated and naive, never converge narrowly to that view? Why do investors disagree so much all the time? The following items offer some ideas, from a generally behavioral perspective, on the… Keep Reading
April 13, 2012 - Big Ideas
How can low-frequency traders save their microscalps from high-frequency traders? In the March 2012 version of their paper entitled “The Volume Clock: Insights into the High Frequency Paradigm”, David Easley, Marcos Lopez de Prado and Maureen O’Hara explore high-frequency trading (HFT) as volume-metered or transaction-metered (rather than time-metered) exploitation of market order processing rules and trading behaviors of others… Keep Reading
April 12, 2012 - Short Selling
What are typical magnitude and duration of short squeezes? In their March 2012 paper entitled “Short Squeeze”, Wei Xu and Baixiao Liu investigate the dynamics and determinants of short squeezes. They cite the SEC definition: “The term ‘short squeeze’ refers to the pressure on short sellers to cover their positions as a result of sharp price increases… Keep Reading
April 11, 2012 - Animal Spirits, Currency Trading, Individual Investing
How do relevant electronic social networks affect individual investing? In their March 2012 paper entitled “Facebook Finance: How Social Interaction Propagates Active Investing”, Rawley Heimer and David Simon investigate the propagation of active investing strategies within a Facebook-like social network of retail foreign exchange traders. Registered users of this free network (who must have a qualified foreign exchange broker… Keep Reading
April 10, 2012 - Big Ideas
Michael Dever (founder of Brandywine Asset Management) introduces his 2011 book, Jackass Investing: Don’t Do It, Profit from It, by stating: “…this book is designed to comfortably provide novice investors with a plan to follow to manage their money – one that they are unlikely to encounter if they are only exposed to the conventional financial wisdom…. Keep Reading
April 6, 2012 - Investing Expertise
Where can investors find the best stock market forecasters: academia, banks, government? In the March 2012 draft of his paper entitled “On the Forecasting Quality of Professionals”, Aron Veress compares the stock market forecasting accuracies of different professional groups (academics, commercial bankers, investment bankers, government employees and non-financial professionals) who participate in the semi-annual Livingston Survey, both to… Keep Reading
April 5, 2012 - Big Ideas
Are low trading frictions, high trading speed and proliferation of trading strategies elevating market efficiency and thereby extinguishing U.S. stock anomalies? In their March 2012 paper entitled “Trends in the Cross-Section of Expected Stock Returns”, Tarun Chordia, Avanidhar Subrahmanyam and Qing Tong examine the evolution of individual U.S. stock return predictability based on stock/firm characteristics found… Keep Reading
April 3, 2012 - Strategic Allocation, Volatility Effects
Should investors diversify U.S. equity holdings with S&P 500 volatility index (VIX) futures or exchange-traded notes (ETN) constructed from these futures? In the March 2012 version of their paper entitled “Diversification of Equity with VIX Futures: Personal Views and Skewness Preference”, Carol Alexander and Dimitris Korovilas examine the performance and equity diversification power of VIX futures…. Keep Reading
April 2, 2012 - Momentum Investing
Do “new” momentum stocks outperform “old” ones? In the March 2012 version of their paper entitled “Limited Attention, Salience, and Stock Returns” [apparently removed from SSRN, casting doubt on findings], Avanidhar Subrahmanyam, Jason Wei and Hsin-Yi Yu analyze whether stocks newly entering and exiting extreme momentum deciles exhibit unusual future returns because of heightened investor attention. Their benchmark (6-6) strategy… Keep Reading
March 30, 2012 - Commodity Futures, Volatility Effects
In general, when the U.S. stock market goes down, the S&P 500 volatility index (VIX) goes up. VIX is not investable, but VIX futures are available. Are short-term VIX futures a good way to hedge equity market declines and guard against market blow-ups? To investigate we focus on returns from holding the contract nearest to… Keep Reading