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Using Insider Trading to Find Informed Short Sellers

Conventional wisdom says that both short sellers and corporate insiders are typically better informed than most traders. However, much short selling comes from programmed (uninformed) hedging, and much insider trading is pre-planned diversification of concentrated positions by firm executives. Is there a way to overlay the activities of these two groups to isolate truly informed trading? In their July 2007 draft paper entitled “Shorts and Insiders”, Amiyatosh Purnanandam and Nejat Seyhun investigate the combined power of unusual levels of short interest and unusual insider trading to predict stock returns. They test for “unusual” short interest and insider trading by subtracting the historical mean from the current value and dividing this difference by the historical standard deviation on a firm-by-firm basis. Using monthly short interest, insider trading and stock return data for all NYSE/AMEX-listed firms during 9/91-12/03, they find that: Keep Reading

Trading Friction as a Momentum Killer

Are momentum trading strategies profitable after accounting for trading costs? In their August 2007 draft paper entitled “Low-Cost Momentum Strategies”, Xiafei Li, Chris Brooks and Joelle Miffre analyze the impact of transaction costs on the profitability of momentum strategies for UK stocks. They consider all combinations of 3-month, 6-month and 12 month ranking and holding periods. Using stock price data for 3,520 UK companies and separately for the constituents of the FTSE 100 index (large capitalization stock sample) and the Alternative Investment Market (AIM – small capitalization stock sample) over the period 1986-2005, they conclude that: Keep Reading

Do Finance Professors Believe in Market Efficiency?

Do the experts who arguably should have the most informed opinions, finance professors, believe that the U.S. stock market is efficient? Do they invest in accordance with their beliefs? In their August 2007 paper entitled “Market Efficiency and Its Importance to Individual Investors – Surveying the Experts”, James Doran, David Peterson and Colby Wright seek to answer these questions via an email-initiated electronic survey of over 4,000 finance professors at accredited U.S. universities and colleges. Using data provided by 642 qualified respondents, they conclude that: Keep Reading

Do Some Individual Investors Consistently Outperform?

Is individual investing an inevitable series of randomly spaced ups and downs, or do some investors persistently enjoy more success than others? In their August 2007 paper entitled “Performance Persistence of Individual Investors”, Limei Che, Øyvind Norli and Richard Priestley investigate performance persistence among individual stock market investors/traders. Using monthly stock portfolio data for all individual investors who traded at least six times every 24 months on the Oslo Stock Exchange during January 1993 through June 2003 (65,848 investors), they find that: Keep Reading

Buy at the Close and Sell at the Open?

What part of the day offers the best stock returns? Does this sweet spot vary by day of the week, time of the month or calendar month? In their July 2007 paper entitled “Return Differences between Trading and Non-trading Hours: Like Night and Day”, Michael Cliff, Michael Cooper and Huseyin Gulen use transaction-level data to decompose returns for individual stocks and exchange-traded funds (ETF) into four time intervals: Night (4:00 PM to 9:30 AM), AM (9:30 AM to 10:30 AM), Mid-day (10:30 AM to 3:00 PM), and PM (3:00 PM – 4:00 PM). Using intraday price data for the period 1993-2006, they conclude that: Keep Reading

Caught in Cash for an Entire Bull Market

But the market is just unsafe at any speed… Keep Reading

Caught in the Too Fast Lane

But other people were forecasting even higher… Keep Reading

Today’s Risk Analysis

Predicting Risk analyzing stormy weather… Keep Reading

Does Technical Trading Work with Commodity Futures?

Do relatively low transaction costs and ease of short selling enable profitable technical trading in commodity futures markets? In their recent paper entitled “Can Commodity Futures be Profitably Traded with Quantitative Market Timing Strategies?”, Ben Marshall, Rochester Cahan and Jared Cahan investigate the effectiveness of 7,846 quantitative trading rules from five rule families (Filter, Moving Average, Support and Resistance, Channel Breakouts, and On-Balance Volume) for 15 kinds of commodity futures contracts. They test these rules for cocoa, coffee, cotton, crude oil, feeder cattle, gold, heating oil, live cattle, oats, platinum, silver, soy beans, soy oil, sugar and wheat futures. Their testing includes two bootstrapping methodologies, adjustment for data snooping bias and evaluations over different time periods. Using daily price and volume data for 1984-2005, they conclude that: Keep Reading

Trader of the Week

Taking a break… Keep Reading

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