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The Political Campaign Contribution Effect

Do companies that “grease the wheels” of our political system via campaign contributions benefit from such participation? In other words, is there a significant positive correlation between company campaign contributions and stock returns? In their October 2006 paper entitled “Corporate Political Contributions and Stock Returns”, Michael Cooper, Huseyin Gulen and Alexei Ovtchinnikov construct a measure of the breadth of company campaign contribution activity and investigate whether this measure relates systematically to returns for shareholders. Combining data from the Federal Election Commission on political action committee (PAC) contributions of publicly traded firms for the period 1979-2004 (over 800,000 contributions by 1,930 firms) with associated stock price and financial data, they conclude that: Keep Reading

Classic Papers: Returns from Pattern-Based Technical Analysis?

Are trades based on complex technical patterns, such as head-and-shoulders, rational speculations or noise? In other words, do such patterns reliably indicate opportunities to capture excess returns? In her July 1998 paper entitled “Identifying Noise Traders: The Head-And-Shoulders Pattern in U.S. Equities”, Carol Osler investigates whether head-and-shoulders trading is significant and whether it is profitable. In their August 2000 paper entitled “Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation”, Andrew Lo, Harry Mamaysky and Jiang Wang apply advanced empirical methods (compare with fingerprint identification or face recognition) to evaluate technical analysis patterns such as head-and-shoulders and double-bottoms. These papers conclude that: Keep Reading

Trade Against Overnight Moves?

Does an opening stock price above or below the prior session close indicate price movement for the rest of the trading day? If so, is the indication tradable. In their September 2006 paper entitled “The Overnight Return: One More Anomaly”, Ben Branch and Aixin Ma investigate the relationships between overnight and adjacent intraday returns for individual stocks. Using NYSE, AMEX and NASDAQ data over the period 1994-2005, they find that: Keep Reading

Classic Paper: Any Excess Returns from Investment Newsletters?

Are newsletters good sources of stock picks? Specifically, do their recommendations persistently generate excess returns? In their October 1998 paper entitled “The Performance of Investment Newsletters”, Jeffrey Jaffe and James Mahoney tackle these questions. Using the investment newsletter archive of the Hulbert Financial Digest for 1980-1996, they determine that: Keep Reading

Combining Value Indicators with Stock Repurchasing

Can investors/traders amplify excess returns by combining value investing with stock repurchase activities? In other words, do companies with low price-fundamentals ratios that buy back stock outperform value companies in general? In their recent paper entitled “Corporate Financing Activities and Contrarian Investment”, Turan Bali, Ozgur Demirtas and Armen Hovakimian examine returns for investing strategies that combine value indicators and stock repurchase/issuance activities. Using monthly return data and company financial statements for the period May 1972 to April 2002, they find that: Keep Reading

Reclama from Jack Schannep

Jack Schannep, editor of The DowTheory.com, has several times requested that we reconsider parts of our assessment of his specific stock market forecasts, as follows: Keep Reading

Emergent Size-Value Patterns of Noise?

Are there investing/trading strategies that can turn stock price noise into alpha? More specifically, are there types of stocks for which the noise has a systematic effect on price? In the October 2006 draft of their paper entitled “Does Noise Create the Size and Value Effects?”, Robert Arnott, Jason Hsu, Jun Liu and Harry Markowitz model the cross-sectional effects of mean-reverting noise on randomly walking stock values. Noise (for example, from overreacting, informationally challenged and/or liquidity-driven investors/traders) introduces random transients of inefficiency. Based on this model, they conclude that: Keep Reading

Good Deals in Broad Market Index Options?

Are investors on average overly fearful/greedy regarding overall stock market volatility, and therefore willing to overpay for insurance/leverage in the form of broad market index options? If so, what reliable strategies could a trader use to exploit this fear and capture the overpayments? In their January 2006 paper entitled “Option Strategies: Good Deals and Margin Calls”, Pedro Santa-Clara and Alessio Saretto investigate potential mispricings of S&P 500 index options and a range of trading strategies that might exploit those mispricings. Using daily S&P 500 index options data from the Chicago Mercantile Exchange for January 1985-May 2001 and from the Chicago Board Options Exchange for January 1996-May 2004, they conclude that: Keep Reading

Making Money with Options Based on Superior Volatility Forecasts

Are there systematic errors in market expectations about the future volatilities of individual stock prices? If so, what reliable strategy could a trader use to exploit these errors? In their August 2006 paper entitled “Option Returns and the Cross-Sectional Predictability of Implied Volatility”, Amit Goyal and Alessio Saretto examine the complete range of implied stock price volatilities for all U.S. equity options to devise an volatility forecasting model more efficient than that inherent in the market. They then test the model’s ability (out of sample) to identify outperforming options trading strategies that exploit this market inefficiency. Using daily data for all U.S. equity options over the period January 1996 to May 2005, they conclude that: Keep Reading

The Options Trading Landscape

How do individuals really trade in equity options? Do they mostly just buy speculative calls and protective puts? In their May 2006 paper entitled “Option Market Activity”, Josef Lakonishok, Inmoo Lee, Neil Pearson and Allen Poteshman examine actual option trading behaviors of firm proprietary traders (most sophisticated), customers of full-service brokers (including hedge funds?) and customers of discount brokers (least sophisticated). Using a unique dataset with detailed purchase-write and open-close transaction information for each equity option series listed by the Chicago Board Options Exchange (CBOE) from 1990 through 2001, they conclude that: Keep Reading

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