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Investing Research Articles

Thrill Factor: The Stock Market as Amusement Park?

Has disintermediation of trading, enabled by the Internet, changed the level of risk that individual investors/traders routinely assume? In his 2005 paper entitled “Where the Action is: Internet Stock Trading as Edgework”, Detlev Zwick argues that the transition of stock trading from pre-Internet communication modes (telephone, fax and in-person) to the computer screen creates new types of individual experiences and practices that existing economic and finance theories do not predict or understand. Using in-depth oral interviews extended by email follow-ups with 25 experienced online investors in Germany, Denmark, and the United States during 2000-2002, he concludes that: Keep Reading

Does the Bullish Percent Index Predict Market Direction?

Is the Bullish Percent Index a useful indicator of overall stock market or sector direction by reliably identifying overbought/oversold conditions from which stock prices are likely to revert? In a study published in the 2005 Journal of Technical Analysis, Andrew Hyer relates the simple average Bullish Percent across 40 stock market sectors (BPAVG) to future broad stock market returns. Using weekly levels of BPAVG as calculated by Dorsey, Wright & Associates and overall stock market returns over the next 100 calendar days based on the Value Line Geometric Index for a total sample period of 1/6/98-1/24/05 (about 368 weeks or 26 intervals of 100 calendar days), he concludes that: Keep Reading

Finding the Sources and Methods of Financial Expertise in a Haystack

What evidence is there that economically significant financial expertise exists? How can research best discover where such expertise comes from and how it works? In the September 2005 draft of their paper entitled “The Enigma of Financial Expertise: Superior and Reproducible Investment Performance in Efficient Markets”, Anders Ericsson, Patric Andersson and Edward Cokely tackle these questions. Based on review of prior research in the context of a broad perspective on expertise across many fields, they conclude that: Keep Reading

The Logic of Valuation-motivated Short Sellers

Can analysis of firm financial data reliably identify future underperformers? Reader Mike Long of Short ALERT suggested for review a “paper that reverse engineers the short recommendations of an independent research firm into a model for selecting good short candidates” (disclosing that the research firm is Short ALERT). In the April 2007 draft of their paper entitled “The Role of Fundamental Analysis in Information Arbitrage: Evidence from Short Seller Recommendations”, Hemang Desai, Srinivasan Krishnamurthy and Kumar Venkataraman investigate whether analysis of company financial data reveals good shorting candidates. They first create a model of shorting demand by correlating company financial data for 1997-2004 with 54 valuation-motivated short sale recommendations from 67 reports issued by an independent research firm during 1998-2005. They then test the model out-of-sample (1990-1996) for a larger set of companies. Using the 67 reports, company financial data for 1990-2004 and monthly stock return data for 1990-2006, they conclude that: Keep Reading

An International Test of Share Buyback and Secondary Offering Effects on Stock Returns

Are share buybacks/secondary offerings consistently predictive of good/poor future stock returns around the globe? In their August 2007 draft paper entitled “Share Issuance and Cross-Sectional Returns: International Evidence”, David McLean, Jeffrey Pontiff and Akiko Watanabe look at the predictive power in international markets of firm-level net share issuance over the past one and five years for stock returns over future periods ranging from the next month to the next three years. Using share issuance data, firm fundamental data and monthly stock returns over the period July 1981 through June 2006 for a large sample of non-U.S. companies in 41 countries, they conclude that: Keep Reading

Stock Returns After T-bill Yield Shocks

During a crisis, do investors overreact in reallocating funds from risky assets (stocks) to safe 13-week Treasury bills (T-bill), with stock prices and T-bill yields consequently falling together? Once the crisis abates, do investors cthen orrect their overreaction by moving funds back from T-bills to stocks, with stock prices and T-bill yields then rising together? To test this model of investor behavior, we examine relationships between overall stock market returns and T-bill yield changes during and after dramatic declines in the T-bill yield for past and future intervals of 10, 21 and 63 trading days. Using daily closes for the S&P 500 index and T-bill yield from 1/4/60 through 8/20/07 (11,864 days when both traded), we find that: Keep Reading

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

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