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Investing Research Articles

Bad News is Good News, Except When…

In the August 2004 update of their paper entitled “Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets”, Torben Andersen, Tim Bollerslev, Francis Diebold and Clara Vega investigate the real-time response of U.S., German and British stock, bond and foreign exchange markets to 25 types of U.S. macroeconomic news (such as GDP, PPI, CPI and unemployment rate). They employ actively traded futures as proxies for each of these markets. They measure the degree of surprise in macroeconomic announcements based on the survey-based expectations of market players. Using data from various starting points in the 1990s through the end of 2002, they find that: Keep Reading

Market Orders Versus Limit Orders: Informed Traders Prefer…

In the October 2004 version of their working paper entitled “So What Orders Do Informed Traders Use?”, Ron Kaniel and Hong Liu apply the “probability of informed trading” measure to trading in 144 stocks around the end of 1990 to determine the trading habits of informed traders (those with private information related to asset valuation) regarding the use of market orders versus limit orders. They show that: Keep Reading

Pricing Corporate News

In their May 2005 draft paper entitled “The Market Impact of Corporate News Stories”, Werner Antweiler and Murray Frank apply computational linguistics to 245,429 Wall Street Journal news stories published during 1973 to 2001 to examine how, and how quickly, stock prices fully reflect 43 different kinds of news. They find that: Keep Reading

The Adaptive Markets Hypothesis

In his March 2005 paper entitled “Reconciling Efficient Markets with Behavioral Finance: The Adaptive Markets Hypothesis”, Andrew Lo presents a framework for unifying the Efficient Markets Hypothesis (EMH) and Behavioral Finance. The paper is thoughtful and thought-provoking. Some key points are: Keep Reading

4% Solution: Equity Risk Premium Update

In their May 2005 paper entitled “The Market Equity Risk Premium”, Brian McCulloch and Dasha Leonova present a comprehensive review of equity risk premium research to support decision-making regarding the annual capital contribution to New Zealand Superannuation Fund, a government-managed pension fund. They seek the best estimate of the future annual premium of nominal long-term equity returns over nominal long-term bond returns. Based on international experiences and forecasts over many decades, they conclude that: Keep Reading

Predicting the Past with Investor Sentiment

Jeff Walker invites visitors to the “Current Investor Sentiment” page at Lowrisk.com to express their market sentiment by predicting the direction of the Dow Jones Industrial Average (DJIA) over the next few weeks. He also generously offers weekly historical results of this ongoing poll back to May 1997. How well does this measure of investor sentiment predict the actual behavior of the DJIA? Keep Reading

Short Sellers Not So Smart?

In their May 2005 draft paper entitled “Do Short Sale Transactions Precede Bad News Events?”, Holger Daske, Scott Richardson and Irem Tuna challenge prior research that found short sellers are especially sophisticated and beat bad news to the market. By studying very recent short sale transactions for 3,651 securities on the New York Stock Exchange from April 2004 through February 2005, they find that: Keep Reading

Dumb Individual Investors and Smart Companies?

In their April 2005 paper entitled “Dumb money: Mutual Fund Flows and the Cross-section of Stock Returns”, Andrea Frazzini and Owen Lamont tackle a range of analyses tied to mutual fund inflows and outflows to determine whether or not these flows represent rational behavior on the part of individual investors. Do the flows predict abnormal returns for the underlying stocks? What do they mean for the wealth of the individuals causing them? By studying flows associated with domestic mutual funds from 1980 to 2003, they find that: Keep Reading

Going with the Flows

In their May 2005 paper entitled “Asset Fire Sales (and Purchases) in Equity Markets”, Joshua Coval and Erik Stafford examine the effects on stock prices of mutual funds forced to sell (buy) because of predictable outflows (inflows) of funds based on their past performance. Does such forced selling and buying present predictable opportunities for front-running? By studying mutual fund transactions caused by capital flows from 1980 to 2003, they conclude that: Keep Reading

Detecting Wisdom in a Crowded Market

In The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, James Surowiecki identifies and discusses the three conditions necessary for a crowd to make good group decisions. Applied to the stock market, good decisions means stock prices that reflect the true values of underlying assets. As depicted in the figure below, the three conditions are: Keep Reading

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