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Investing Research Articles

Any Holes in SOX?

ave accounting scandals (e.g., Enron, WorldCom and Global Crossing) and the 2002 Sarbanes-Oxley Act (SOX) changed management-analyst earnings dynamics? In their December 2006 paper entitled “Mechanisms to Meet/Beat Analyst Earnings Expectations in the Pre- and Post-Sarbanes-Oxley Eras”, Eli Bartov and Daniel Cohen examine whether companies have changed behaviors post-SOX with respect to accrual earnings management, real (transaction-based) earnings management and earnings expectations management. Using earnings forecast and financial data for thousands of companies during 1987-2005, they conclude that: Keep Reading

Aggregate Earnings and Stock Market Returns

Do aggregate earnings guidance and actual aggregate earnings predict overall stock market returns? In his September 2006 paper entitled “Aggregate Earnings, Stock Market Returns and Macroeconomic Activity”, Lakshmanan Shivakumar discusses the relationships among aggregate earnings, stock market returns and the economy. He frames his discussion as commentary on prior research on earnings guidance, earnings news and stock returns. Using earnings, inflation and gross domestic product (GDP) data for 1972-2004, he finds and suggests that: Keep Reading

Follow the Leaders to Capture Short-term Abnormal Returns

Do investors/traders taking cues from the trades of top performers produce the momentum effect? In his December 2006 paper entitled “Follow the Leader: Peer Effects in Mutual Fund Portfolio Decisions”, Lukasz Pomorski investigates whether actively managed equity mutual funds tend to follow the stock trading leads of outperforming peers as the picks become known via the media and quarterly filings. He defines outperforming (leader) funds in two ways: (1) funds with alphas in the top 5% over the past two years, and (2) funds on the Forbes Honor Roll (high media exposure). He calculates overall leader activity in a stock based only on trades by leader funds with a position in the stock. Using mutual fund holdings and performance data for 1980-2003 (96 quarters), he finds that: Keep Reading

The Sharpe Ratio: Blunted by Noise?

Many investors and analysts use the Sharpe ratio (mean excess return per unit of risk) as a field-leveling measure of investment performance. Does this variable reliably indicate the best portfolio? In his brief January 2007 summary paper entitled “Beware the Sharpe Ratio”, Steve Christie applies the Generalized Method of Moments to test the portfolio discrimination power of the Sharpe ratio. Using two monthly data sets spanning 24 years for a set of multi-asset class portfolios created from index series and 18 years for a large group of mutual funds, he concludes that: Keep Reading

Quantifying and Exploiting Long (Bull and Bear) Trends

Attempting to follow long stock market trends is a common investment approach, with much guru attention focused on calling long-term tops and bottoms. Is this approach meaningful for investors as an avenue to improve upon buy-and-hold performance? In the December 2006 version of his paper entitled “Analyzing Regime Switching in Stock Returns: An Investment Perspective”, Jun Tu investigates the potential importance to investors of exploiting differences between bull and bear markets within a Bayesian framework that accommodates considerable uncertainty. Using monthly value-weighted stock return and volatility data for July 1963 to February 2006 (512 observations), he finds that: Keep Reading

More Information is Better?

Is more investment information always better? Are there unintended consequences for individual investors/traders acquiring investment information? Specifically, do individual investors/traders systematically acquire information to support rational future decision-making, or do they focus on information that confirms (and builds overconfidence in) decisions already made? The following two recent studies examine these questions, with results as follows: Keep Reading

Screening for Fear When Portfolio Building

Implied idiosyncratic volatility is the “investor fear gauge” or perceived risk for an individual stock based on the pricing of its associated options, as contrasted with: (1) overall stock market volatility as measured by variables such as the CBOE Volatility Index (VIX); and, (2) realized idiosyncratic volatility based on variation of the stock’s historical price. Can investors use the return due this perceived risk in an individual stock as a building block in constructing outperforming portfolios? In their December 2006 paper entitled “Idiosyncratic Implied Volatility and the Cross-Section of Stock Returns”, Dean Diavatopoulos, James Doran and David Peterson examine the relationship between idiosyncratic implied volatility and 30-day, 60-day and 91-day future returns for different kinds of equities. Using daily data on 240 stocks with actively traded options for the period January 1996 to June 2005, they find that: Keep Reading

The Professor’s Forecast for the Indefinite Future…

…looks something like this: Keep Reading

Can Real Estate Experts Provide Reliable Advice for Commercial Property Investing?

While we normally do not stray far from the stock market, an article on the forecasting ability of commercial real estate gurus relates strongly to our ongoing investigation of investing expertise. Do these experts add value for investors in the relatively illiquid real estate market? In his 2005 paper entitled “A Random Walk Down Main Street: Can Experts Predict Returns on Commercial Real Estate?” David Ling examines the ability of institutional owners and managers to predict commercial real estate investment performance for various property types across major metropolitan markets. Using (1) predicted relative property returns (desirability rankings) for nine property types and 16 metropolitan markets from the Real Estate Research Corporation’s (RERC) quarterly Real Estate Investment Survey over a thirteen-year period and (2) corresponding National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index returns, he concludes that: Keep Reading

The (Dynamic) Meanings of Buy, Hold and Sell

Do broker stock recommendations predict future returns? Are analysts at independent brokers more accurate than those associated with investment banking firms? Did the changes in research rules after the Internet bubble affect analyst behavior? In his November 2006 paper entitled “Do Affiliated Analysts Mean What They Say?”, Michael Cliff compares the performance of stock recommendations made by analysts employed by lead underwriters to that of recommendations made by analysts working at independent brokers. Using data for the period 1994-2005 (13,794 recommendations from lead underwriters and 10,216 from independent brokers), he finds that: Keep Reading

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