Does the Memorial Day holiday signal any unusual return effects? By its definition, this holiday brings with it any effects from three-day weekends and sometimes the turn of the month. Prior to 1971, the U.S. celebrated Memorial Day on May 30. Effective in 1971, Memorial Day became the last Monday in May. To investigate the possibility of short-term effects on stock market returns around Memorial Day, we analyze the historical behavior of the stock market during the three trading days before and the three trading days after the holiday. Using daily closing levels of the S&P 500 Index for 1950 through 2012 (63 observations), we find that: More…
Investing Research Articles
Stock Returns Around Memorial Day
May 21, 2013 - Calendar Effects
Optimal Quality and Value Combination?
May 21, 2013 - Fundamental Valuation, Momentum Investing, Value Premium
Does adding fundamental firm quality metrics to refine stock sorts based on traditional value ratios, book-to-market ratio (B/M) and earnings-to-price ratio (E/P), improve portfolio performance? In his 2013 paper entitled “The Quality Dimension of Value Investing”, Robert Novy-Marx tests combination strategies to determine which commonly used quality measures most enhance the performance of value ratios. He considers such quality metrics as Piotroski’s FSCORE, earnings accruals, gross profitability (GP) and return on invested capital (ROIC). His general test approach is to reform capitalization-weighted portfolios annually from stocks sorted at the end of each June according to value ratios and quality metrics for the previous calendar year. He uses the 1000 largest (2000 next largest) stocks by market capitalization to represent large (small) stocks. He considers both long-only (long the top 30%) and long-short (long the top 30% and short the bottom 30%) portfolios. He also considers the incremental benefit of incorporating stock price momentum based on return over the previous 11 months with a skip-month (11-1) into stock selection. He estimates trading frictions based on calculated turnover and effective bid-ask spreads. Using stock prices and associated firm fundamentals during July 1963 through December 2011, he finds that: More…
Buying and Holding Exchange-Traded Products Based on VIX Futures
May 20, 2013 - Volatility Effects
Should investors regard any of the exchange-traded products (ETP) based on S&P 500 Index option-implied volatility (VIX) futures as long-term holdings? In the May 2013 draft of his paper entitled “Trading Volatility: At What Cost?”, Robert Whaley describes these ETPs and evaluates them as buy-and-hold investments. VIX ETPs are based on VIX futures indexes with daily rebalancing, subject to management fees and expenses including commissions and trading fees, licensing fees and (for some ETPs) foregone interest income. Many of the ETPs are exchange-traded notes (ETN), secured not by underlying assets but rather only by the good faith and collateral of the issuer. Using daily price and trading data for VIX futures (starting March 2004) and options (starting February 2006) and for 30 ETPs based on VIX futures (starting January 2009) through March 2012, he finds that: More…
Practitioner’s Perspective on Portfolio Risk Management Research
May 17, 2013 - Strategic Allocation
How should investors think about alternative asset allocation strategies for risk management? In his May 2013 paper entitled “Advances in Portfolio Risk Control. Risk! Parity?”, Winfried Hallerbach offers a practitioner’s review of new and revived portfolio allocation strategies, including: Equal Weight, Maximum Diversification, Minimum Variance; Equal Risk Contribution (Risk Parity); Inverse Volatility; Maximum Sharpe Ratio; and, Volatility Targeting. He addresses their pluses and minuses and compares them to each other. He observes that the large contribution of equities to (downside) risk within portfolios that lean only moderately toward stocks provides the impetus for risk management research. Based on key studies of portfolio risk management and examples using monthly data for four U.S. asset classes (risk-free rate, stocks, aggregate Treasuries, corporate investment grade bonds, and corporate high-yield bonds) during June 2002 through May 2012, he finds that: More…
Inflation Forecast Update
May 16, 2013 - Economic Indicators
The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for April 2013. The actual total (core) inflation rate for April is lower (lower) than forecasted.
The new actual and forecasted inflation rates will flow into Real Earnings Yield Model projections about the end of May.
Predicting Returns on Real Estate
May 16, 2013 - Real Estate
Are returns on real estate usefully predictable? In the June 2012 version of their book chapter entitled “Forecasting Real Estate Prices”, Eric Ghysels, Alberto Plazzi, Walter Torous and Rossen Valkanov examine the evidence of predictability in U.S. residential and commercial real estate markets. They review methodologies used in constructing widely used real estate price indexes. They then survey the key empirical findings from academic studies of short-run momentum and long-run reversals in real estate returns. Finally, they test the ability of different variables (past stock market return, stock market dividend yield, 3-month Treasury bill (T-bill) yield relative to its 12-month moving average, inflation rate, term spread between 5-year and 3-month maturities, combination of forward interest rates and industrial production growth) to predict real estate returns as calculated from several price indexes and a real estate investment trust (REIT) index. Using monthly and quarterly index levels for the real estate market proxies and values for the predictive variables as available, focusing on 1991 through 2010, they find that: More…
Blogger Sentiment Analysis
May 15, 2013 - Sentiment Indicators
Are prominent stock market bloggers in aggregate able to predict the market’s direction? The Ticker Sense Blogger Sentiment Poll “is a survey of the web’s most prominent investment bloggers, asking ‘What is your outlook on the U.S. stock market for the next 30 days?’” (bullish, bearish or neutral) on a weekly basis. The site currently lists 33 participating bloggers. Participation has varied over time. Because Ticker Sense collects data weekly, we look at weekly measurements and changes in weekly measurements. Because the poll question asks for a 30-day outlook, we test the forecasts against stock market behavior four weeks into the future. Because polling takes place Thursday-Sunday, we use the coincident Friday close to represent the state of the stock market for each poll (except for the poll of 10/13/08, which took place on Monday and therefore relates to the Monday close). We use [% Bullish] minus [% Bearish] as the net sentiment measure for each poll. Using poll results from inception on 7/10/06 through 5/6/13 (347 polls) and contemporaneous weekly closes of the S&P 500 Index as representative of the broad stock market, we find that: More…
Google Trends Predict the Stock Market?
May 14, 2013 - Sentiment Indicators
Does Google search activity anticipate stock market action? In their paper entitled “Quantifying Trading Behavior in Financial Markets Using Google Trends”, Tobias Preis, Helen Susannah Moat and Eugene Stanley analyze the power of changes in Google search intensity (term search volume relative to total Google search volume) for 98 terms to predict the behavior of the Dow Jones Industrial Average (DJIA). They apply Google Trends to measure each week the average search intensity for a term over the prior three weeks. They then measure changes in this weekly average search intensity relative to its average behavior over several weeks (with three weeks as baseline). They test a trading strategy that sells (buys) DJIA at the close on the first trading day of the next week if the change in weekly search term intensity is negative (positive) and exits the position at the close on the first trading day of the following week. They consider three benchmarks based on DJIA: (1) buy-and-hold; (2) random weekly timing; and, (3) an index reversion strategy with rules similar to the search intensity strategy. They ignore trading frictions, which involve a maximum of 104 one-way trades per year. Using weekly search intensity data for the specified search words and weekly DJIA closing levels as specified during January 2004 through most of February 2011, they find that: More…
Taming the Factor Zoo?
May 13, 2013 - Big Ideas
How should researchers address the issue of aggregate/cumulative data snooping bias, which derives from many researchers exploring approximately the same data over time? In their April 2013 draft paper entitled “. . . and the Cross-Section of Expected Returns”, Campbell Harvey, Yan Liu and Heqing Zhu examine this issue with respect to studies that discover factors explaining differences in future returns among U.S. stocks. They argue that aggregate/cumulative data snooping bias makes conventional statistical significance cutoffs (for example, a t-statistic of at least 2.0) too low. Researchers should view their respective analyses not as independent single tests, but rather as one of many within a multiple hypothesis testing framework. Such a framework raises the bar for significance according to the number of hypotheses tested, and the authors give guidance on how high the bar should be. They acknowledge that they do not (cannot) count past tests of factors falling short of conventional significance levels (and consequently not published). Using the body of published and near-published (working papers) research that discovers new factors explaining the cross-section of future U.S. stock returns from the mid-1960s through 2012, they find that: More…
A Few Notes on How to Buy Real Estate Overseas
May 10, 2013 - Individual Investing, Real Estate
Kathleen Peddicord, publisher of the Live and Invest Overseas group, opens her 2013 book, How to Buy Real Estate Overseas, by stating: “The idea of diversifying your investments, your assets, your life and your future overseas can seem frightening, intimidating, even paralyzing. Could you really do it? Yes, you could. I say that based on 30 years of experience at this.” The book takes the perspective of a U.S. citizen seeking to diversify assets via direct ownership of non-U.S. real estate. Using examples based on her experience investing in real estate in 20 countries and operating businesses in seven, she concludes that: More…
Blog Categories
Diamonds an Investor’s Friend?
May 7, 2013
Accounting for Illiquid Assets
April 16, 2013
Diamonds as an Alternative Investment
January 11, 2013
Investor Perception/Anticipation of Tail Events
March 22, 2013
Socially Amplified Trading?
April 11, 2012
Individual Investors in Bull and Bear Markets
January 13, 2012
Taming the Factor Zoo?
May 13, 2013
Index Investing Makes Stock Picking Harder?
April 5, 2013
One-factor Return Model for All Asset Classes?
March 15, 2013
Real-time Economic Data and Future T-note Returns
December 3, 2012
Bonds During the Off Season?
November 7, 2012
“Real” Assets and Inflation
October 18, 2012
Market Adapted to Buybacks and Secondaries?
February 25, 2013
Testing U.S. Equity Anomalies Worldwide
February 24, 2012
Buyback Size Effect?
February 1, 2012
Stock Returns Around Memorial Day
May 21, 2013
Recent Intraday U.S. Stock Market Behavior
May 2, 2013
Earnings Forecast, Models, Trading Calendar and Momentum Strategy Updates
April 30, 2013
Intrinsic Value and Momentum Across (Futures) Asset Classes
March 13, 2013
A Few Notes on A Trader’s First Book on Commodities
February 18, 2013
Crude Oil as Safe Haven During Wars
November 30, 2012
Technical or Fundamental Analysis for Currency Exchange Rates?
April 26, 2013
One-factor Return Model for All Asset Classes?
March 15, 2013
Intrinsic Value and Momentum Across (Futures) Asset Classes
March 13, 2013
Inflation Forecast Update
May 16, 2013
Should the “Anxious Index” Make Investors Anxious?
May 2, 2013
Stock Returns on Days of Unemployment Claims Reports
April 25, 2013
Predictive Power of Put-Call Ratios
February 27, 2013
Option Straddles Around Earnings Announcements
February 5, 2013
Simple Stock Index Option Strategies
November 20, 2012
The “Best” Equity Risk Premium
April 3, 2013
Country Stock Market Return-Risk Relationship
February 26, 2013
CFOs Project the Equity Risk Premium
January 31, 2013
Fed Model Respecified?
May 6, 2011
Testing the Fed Model
September 15, 2010
Predictive Power of the Gap Between Stock Earnings Yield and T-note Yield
April 2, 2009
Optimal Quality and Value Combination?
May 21, 2013
Earnings Forecast, Models, Trading Calendar and Momentum Strategy Updates
April 30, 2013
Equity Sector Selection Based on Credit Risk
April 29, 2013
Dollar-Euro Exchange Rate, U.S. Stocks and Gold
March 6, 2013
Future of the Price of Gold
February 1, 2013
DJIA-Gold Ratio as a Stock Market Indicator
January 30, 2013
Warren Buffett on Investing
March 12, 2013
Forbes Evaluates Ken Fisher’s Stock Picking
March 1, 2013
A Few Notes on How to Buy Real Estate Overseas
May 10, 2013
Individual Investor Learning
November 29, 2012
How Advisors Help Individual Investors?
September 21, 2012
Should the “Anxious Index” Make Investors Anxious?
May 2, 2013
Technical or Fundamental Analysis for Currency Exchange Rates?
April 26, 2013
Self-reported Success Factors for Stock Analysts
March 27, 2013
Optimal Quality and Value Combination?
May 21, 2013
Alternative Asset Class ETF Momentum Allocations
May 6, 2013
Simple Asset Class ETF Momentum Strategy Robustness/Sensitivity Tests
Hedge Fund Market Timing Proficiency
March 20, 2013
Technical Analysis as a Mutual Fund Discriminator
January 29, 2013
Managed Futures as Portfolio Diversifier
October 3, 2012
Hope for Stocks Around Inauguration Days?
January 15, 2013
A Few Notes on Trade the Congressional Effect
November 12, 2012
Monthly Returns During Presidential Election Years
November 6, 2012
Blogger Sentiment Analysis
May 15, 2013
Google Trends Predict the Stock Market?
May 14, 2013
Predictive Power of Put-Call Ratios
February 27, 2013
Short-term VXX Shorting Signals?
April 22, 2013
ETF Short Interest and Future Returns
December 27, 2012
Leveraged ETF Pair Shorting Strategies
December 26, 2012
Style Performance by Calendar Month
February 19, 2013
Doing Momentum with Style (ETFs) Robustness/Sensitivity Tests
January 17, 2013
Practitioner’s Perspective on Portfolio Risk Management Research
May 17, 2013
Using Multi-asset Correlations to Define Market Regimes
May 9, 2013
TransDow Trading System Test
May 8, 2013
Taking the Noise Out of Technical Trading
May 3, 2013
Technical or Fundamental Analysis for Currency Exchange Rates?
April 26, 2013
Optimal Quality and Value Combination?
May 21, 2013
Intrinsic Value and Momentum Across (Futures) Asset Classes
March 13, 2013
A Few Notes on Quantitative Value
March 12, 2013
Buying and Holding Exchange-Traded Products Based on VIX Futures
May 20, 2013
Volatility Trading Strategies
May 1, 2013
Short-term VXX Shorting Signals?
April 22, 2013

