Objective research and reviews to aid investing decisions
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We intend that the entries in this blog convey ideas and research results of lasting value. Here is a listing of past entries that offer some big ideas relevant to investing and trading:
Institutional Trading, Returns and Strength of Anomalies ...evidence suggests that stocks with low institutional trading activity (distinct from institutional ownership) tend to be overpriced, with amplified return anomalies.
Beat the Market with Hot-Anomaly Switching? ...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.
Fama and French Dissect Anomalies ...some anomalies are stronger and more consistent than others. Momentum appears to be the strongest and most consistent.
Gaming the Earnings/Accruals Gamers? ...investors may be able to generate substantial abnormal returns by combining the effects of earnings and accruals surprises, qualified by overall firm operating performance.
Modernizing Equity Return Benchmarks ..."expect more dynamic strategies [such as 130% long/30% short] to become passive benchmarks as the investor base becomes more sophisticated and demanding."
The (Worldwide) Futility of Market Timing? ...a few outlier trading days have a massive impact on long-term stock returns, and attempting to forecast which days is a fool's errand.
Recent Speculations on Prediction Markets ...Some eminent economists and political scientists believe that prediction-information-decision markets offer significant benefits to society through efficient extraction and consolidation of the knowledge of individuals. They may also offer some insights into the workings of traditional financial markets that have evolved from trading.
A Tradable Accruals Anomaly ...firm accruals may be a good indicator of future stock returns when combined with a broader measure of firm financial health, or when defined as a fraction of earnings rather than assets.
Asset Growth Rate as a Return Indicator ...consistent with the interpretation that investors over-extrapolate past trends, last-year change in firm assets is among the most economically and statistically significant predictors of next-year returns for individual U.S. stocks. On average, stocks of companies with low growth last year consistently outperform stocks of companies with high growth last year.
A Different Factor Model for Each Group of Stocks? ...while dominant factors may common, different groups of stocks require different factor models to explain the variation in returns among individual stocks within them.
A Five-Factor Model of Differences in Stock Returns ...a five-factor model effectively explains differences among individual stock returns, with volatility of past returns at least as important as size, value and momentum factors.
When the Going Gets Tough, the Predictive Power Gets Going? ...because the most informed players have the latitude to delay showing their hands during business expansions, the power of widely used indicators of future stock returns emerges predominantly during recessions.
Calibrating Ancient History ...a dynamic and flexible model of long-term equity returns that accommodates structural breaks improves predictive power, at the cost of considerable complexity.
Organizing Financial Markets Research ...the uses of empirical research on financial markets derive in large measure from sampling frequency (supporting either short-term or long-term prediction) and sample duration (supporting either reliable or unreliable inference).
Some Notes on Financial Econometrics ...financial econometrics does not yet have its Hari Seldon.
Evolution of the Efficient Markets Hypothesis ...the Efficient Markets Hypothesis is arguably evolving to incorporate genetic material from the theories of psychology, games, learning and biological evolution.
A Survey of the Factor Landscape ...there is considerable redundancy and invalidity among the many factors used to explain differences in returns among individual stocks. Three factors may be necessary and sufficient, with liquidity the most influential.
Investors as Social (Relative Wealth) Climbers ...status may be more powerful than wealth as a motivator, with significant implications for investor/trader behavior.
The Ignored-by-the-MSM (Information Risk) Premium? ...there is an "information risk premium" such that stocks not covered by the news media yield significantly higher future returns than stocks heavily covered, even after accounting for other widely used risk factors.
A New Era of Financial Markets Forecasting Confusion? ...the power of empirical regressions to predict stock market behavior may vary sensitively and drastically with the interval of historical observation for the selected indicator.
Empirical Overview of Commodity Futures ...commodity futures in aggregate offer a long-term return comparable to that of stocks, with less downside risk and a substantial diversification benefit for a stock/bond portfolio.
The Sharpe Ratio: Blunted by Noise? ...the Sharpe ratio has such a high level of intrinsic variability that it is not a very reliable portfolio comparison tool.
Quantifying and Exploiting Long (Bull and Bear) Trends ...portfolio management based on statistically reliable characterization of the long-term trend of the stock market offers an economically significant advantage over approaches that ignore the long-term trend.
Gold as Hedge and Safe Haven ...gold has offered some downside protection for stocks over the past decade, at the cost of some raw return.
Technical Analysis as Folk Medicine ...the incorporation of folk medicine by pharmacology offers a model for bringing technical analysis into the financial economics fold.
Global Diversification: By Country or Industry? ...global integration is rapidly shifting the balance of diversification power from countries to industries (for investors who adhere to modern portfolio theory).
Eight Simple Rules from Financial Market Research ...we offer here a few rules upon which one can depend...
Where Has All the News Gone? ...a simple information processing view of the stock market offers an interesting explanatory framework, but little predictive power.
The Entropic Markets Hypothesis ...this synthesis of the theories of physical entropy, information processing and evolution offers an interesting perspective on investor psychology and financial market behavior.
Collective2: A Marketplace of Trading Systems ...the aggregate performance of the stock trading systems active on Collective2 is not inconsistent with the Efficient Market Hypothesis.
Explaining Large Stock Market Fluctuations ...the power law distribution of sizes of large investors, along with the optimal trading behavior of those investors, explains the excess volatility observed in asset markets.
Dow Theory Long Dead? Not So Fast, My Friend ...the Dow Theory has generated excess risk-adjusted (but not raw) returns when compared to buy-and-hold over some significant periods by following large trends.
Demography and the Stock Market ...demographic trends suggest a headwind for U.S. equities over the next 15 years. Baby Boomers may drive P/Es down as they sell to fund retirement.
Fooled by Consciousness ...We cannot completely trust what we tell ourselves, let alone what others tell us.
Survival of the Richest: The Adaptive Markets Hypothesis ...competition, mutation, reproduction, and natural selection...determine the level of market efficiency and drive the evolution of the financial industry...
The (Stock Market) Modeling Life ...If your crystal ball has not been working so well...
Returns for Investors (Rather Than Markets) ...the actual aggregate (timing) experience of equity investors is inferior to passive buy-and-hold stock market returns. An active approach of buying after pronounced capital outflows from the market and selling after pronounced capital inflows to the market is likely to be successful.
One Up on the Fed Model? ...individual investors may be able to outperform through determined reinvestment of dividends and exploitation of capital gains mean diversion and reversion.
Reversion to Something ...stock market returns fluctuate away from, and revert to, a running mean on a roughly annual basis.
Randomly Walking in Circles? ...the stock market is inexploitably efficient.
