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Investing Research Articles

99 Cents Is Not a Sale Price

Do round numbers have a special meaning for stock traders? If so, is there a way to exploit any associated trading tendencies? In their 2007 paper entitled “Round Numbers and Security Returns”, Edward Johnson, Nicole Johnson and Devin Shanthikumar examine returns (calculated based on midpoints of subsequent closing bid and ask prices) after closing prices that are just above or just below round numbers. Using closing price and closing bid-ask data and firm characteristics for a broad sample of U.S. stocks during the post-decimalization period of 5/01-12/06, they conclude that: Keep Reading

Slim Pickings Among Stock Picks of Columnists?

Are the stocks recommended by columnists in major business magazines good short-term and/or long-term picks? Can one trade these stocks around the publication event? In their 2006 working paper entitled “The Value of Columnists’ Stock Recommendations”, Dan Palmon, Ephraim Sudit and Ari Yezegel assess the short-term and long-term performance of buy recommendations made by columnists in Business Week (BW), Forbes and Fortune. Sensitive to the fact that magazine availability dates differ from nominal publication dates, they use a range of benchmarks and risk adjustments to measure the abnormal returns of these picks. Using 2,503 buy recommendations from the three magazines made during 2000-2003 along with associated price, fundamentals and benchmarking data, they conclude that: Keep Reading

Consistently Expensive Types of Equity Options

Are some types of equity options consistently overpriced compared to others? If so, are there ways to exploit the pricing differences? In the December 2006 update of their paper entitled “Systematic Variance Risk and Firm Characteristics in the Equity Options Market”, Vadim di Pietro and Gregory Vainberg investigate differences in options pricing between individual stocks and indexes and between different types of stocks (small versus large capitalization and value versus growth). Specifically, they examine mismatches between implied and realized (actual) asset volatilities as measured by returns from synthetic variance swaps, which are constructed from combinations of options and futures on underlying assets. Using stock and option prices and associated firm fundamental data for 1,402 firms over the period 1/96-12/04, they conclude that: Keep Reading

Concentrating the Superior Knowledge of Short Sellers

Why does high short interest indicate future underperformance of stocks? Does the reason suggest a way to refine the short interest signal? In their October 2007 paper entitled “Why Do Short Interest Levels Predict Stock Returns?”, Ekkehart Boehmer, Bilal Erturk and Sorin Sorescu employ two distinct methods to determine which of two hypotheses drives the underperformance of heavily shorted stocks: (1) constraints on short selling, or (2) superior private information of short sellers. These methods combine the level of short interest with the level of institutional holdings (supply of shares available for lending) and with earnings surprises. Using return, short interest, institutional ownership, earnings and related fundamental data for a broad sample of stocks over the period 1988-2005, they find that: Keep Reading

Are Monthly Non-farm Employment Announcements Tradable Events?

Does the stock market react reliably and exploitably to the monthly announcements of the change in non-farm employment based on Bureau of Labor Statistics surveys of employers? To check, we examine the typical behavior of stocks during the five trading days before and the five trading days after release dates. Using the unrevised non-farm employment releases and contemporaneous daily S&P 500 index data for the period 2/94-9/07 (164 announcements), we find that… Keep Reading

Jim Cramer Offers You His Protection?

Because of the uncertainties involved in choosing stocks, investors/traders are constantly seeking affirmation of their picks. One place they go for affirmation is Jim Cramer’s Mad Money on CNBC. When you get Jim Cramer’s blessing, you’ve got an edge. Your returns will be better than those of your too-good-for-Cramer peers. Or will they? We construct a sample of Mr. Cramer’s “buys” and “sells” using: Keep Reading

A Different Factor Model for Each Group of Stocks?

Are factor models universal, or does each group of related stocks have a unique set of factors for predicting differences in future returns? In their September 2007 paper entitled “How Common Are Common Return Factors Across NYSE/AMEX and Nasdaq?”, Amit Goyal, Christophe Perignon and Christophe Villa propose a general procedure to identify pervasive risk factors and apply the methodology to identify similarities and differences between the return structures of the specialist-controlled NYSE/AMEX and the computer-driven Nasdaq. Using monthly return data for large samples of NYSE/AMEX and Nasdaq stocks over the period 1978-2002 (25 years), divided into five 60-month subperiods, they find that: Keep Reading

Strategies for Investing in Options of Individual Stocks

Are there ways that individual investors can systematically use options for individual stocks to enhance portfolio returns? In their September 2007 paper entitled “Firm Specific Option Risk and Implications for Asset Pricing”, James Doran and Andy Fodor examine the benefits and costs of 12 basic strategies for augmenting an initial investment in a group of stocks with systematic investments in the associated options. Options positions are initially 75-90 days to expiration and held to maturity. For each strategy, the authors test sensitivity to the size and moneyness (at the money, in of the money and out of the money) of options investments. Using stock and option prices and associated firm fundamental data for the 213 companies over the period 1/96-7/06, they conclude that: Keep Reading

Jim Cramer’s Gaps and Reversals

Are Jim Cramer’s stock recommendations on CNBC’s Mad Money most meaningful for small-capitalization stocks, for which prices are most susceptible to influence by the concerted behavior of a group of individual investors? In their September 2007 working paper entitled “The Performance and Impact of Stock Picks Mentioned on Mad Money, Bryan Lim and Joao Rosario evaluate the show’s ability to move markets over the short term and to forecast winners and losers over the long term. Using a sample of 10,589 Mad Money buy and sell recommendations representing 2,074 distinct firms, either initiated by Jim Cramer or provided by him in response to callers, from shows aired between June 28, 2005 and December 22, 2006, they conclude that: Keep Reading

Total Bob Doll

We evaluate here the weekly commentary of Merrill Lynch’s Bob Doll from January 2003 (the earliest available) through September 2006. Bob Doll was President and CIO of Merrill Lynch Investment Managers, the firm’s asset management arm. With the October 2006 merger of this group with Blackrock Inc., Mr. Doll’s commentary for Merrill Lynch is discontinued. The table below quotes forecast highlights from the cited source and shows the performance of the S&P 500 Index over various numbers of trading days after the publication date for each item. Grading takes into account more detailed market behavior when appropriate. Red plus (minus) signs to the right of specific forecasts indicate those graded right (wrong) based on subsequent market behavior, while red zeros denote any complex forecasts graded both right and wrong. We conclude that: Keep Reading

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