Big Ideas

A reader commented and asked: “I frequently read that stock prices are not normally distributed, and that by assuming they are, an investor will tend to underestimate market risk. One paper I read says their distribution is leptokurtic, a distribution that has a more acute peak around the mean (that is, a higher probability than More…

…evidence of stock market reversion to a valuation benchmark, and the speed of any reversion detected, derive substantially from the choice of sample period.

In the opening paragraphs of his April 2010 article entitled “Traditional vs. Behavioral Finance”, Robert Bloomfield handicaps his subject contest as follows: “The traditional finance researcher sees financial settings populated not by the error-prone and emotional Homo sapiens, but by the awesome Homo economicus. The latter makes perfectly rational decisions, applies unlimited processing power to More…

…trading frictions for large-capitalization U.S. stocks are much higher for most of the 20th century than they have been over the past 20 years. These frictions may be material in deriving exploitable trends or anomalies from long-run series.

…evidence indicates that many (but not all) well-known stock return anomalies derive their profitability from short positions in firms with low credit ratings during deteriorating credit conditions, with shorting constraints and illiquidity limiting exploitation.

…investors may be able to streamline the search for anomalous returns by focusing on two factors: (1) firm size, representing the rational risk of failure; and, (2) a seasonal factor related to operating profit and buybacks-secondaries, representing irrational mispricing.

The best way to find other combinations on the site is probably to scan the summary conclusions by category via the links in the header.

…demographic projections suggest a reasonably stable long run real U.S. stock market return over the next 40 years.

…evidence indicates that a trader who periodically switches to the hottest known anomaly based on a rolling window of past performance may be able to beat the market. Anomalies appear to have their own kind of momentum.

…evidence from nearly six decades of data indicates that diversifying across stock return anomalies consistently beats individual anomalies and the broad stock market.

…identifying and addressing appropriately the range of uncertainties found in financial markets is essential to investing success.

…evidence from 1950-2008 indicates that global diversification, while providing little protection on average from local market crashes, offers considerable risk mitigation over the long run.

…experimental evidence indicates that people, whether expert in finance or not, can quickly learn to distinguish financial markets time series from randomized data with high reliability via simple inference.

…any long-only timer of the U.S. stock market who did not beat the market during 2000-2009 has some explaining to do.

…evidence indicates that U.S. stock market returns may be significantly predictable during economic and political crises, but not during market bubbles and crashes. Investor misreaction to crises, not economic fundamentals, appear to drive stock return predictability.