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Investing Research Articles

Regulation FD is Working?

The Securities and Exchange Commission (SEC) adopted Regulation FD (Fair Disclosure) effective October 2000. “The regulation provides that when an issuer, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the issuer’s securities who may well trade on the basis of the information), it must make public disclosure of that information.” In their June 2005 paper entitled “Who is Afraid of Reg FD? The Behavior and Performance of Sell-Side Analysts Following the SEC’s Fair Disclosure Rules”, Anup Agrawal, Sahiba Chadha and Mark Chen assess the impact of Regulation FD on the accuracy and dispersion of sell-side analyst earnings forecasts. By examining earnings forecasts from March 1995 to June 2004, they determine that: Keep Reading

Unbalanced Attention?

Given the vast amount of information available, investors must filter source data ruthlessly. In their May 2005 paper entitled “Investor Attention, Overconfidence and Category Learning”, Lin Peng and Wei Xiong model investor allocation of attention to markets/sectors and stocks and examine how attention allocation process affects asset prices. Emphasizing that attention is a scarce cognitive resource, they find that: Keep Reading

Investing Like an Optimist

In the May 2005 update of their paper entitled “Optimism and Economic Choice”, Manju Puri and David Robinson use data from the Survey of Consumer Finances (conducted every three years since 1989) to investigate the economic decisions of optimists, including financial portfolio construction. Defining optimism based on the mismatches between the life expectancies estimated by respondents for themselves and those indicated independently by actuarial tables (optimists expect to live longer than indicated actuarially), they find that: Keep Reading

Outing the (Negative) Alpha

In his June 2005 paper entitled “Measuring the True Cost of Active Management by Mutual Funds”, Ross Miller decomposes mutual fund performance into two components: (1) a passive, index-tracking or “closet index” component; and, (2) an actively managed component that generates abnormal returns. What if, he asks, one assigns an index-like portion of annual mutual fund fees (such as the 0.18% expense ratio for Vanguard’s S&P 500 Index Fund) to the passive component and the balance of the fees to the actively managed component? How expensive would active management be, say, in comparison to hedge fund fees? In tackling these questions using the Morningstar database, he finds that: Keep Reading

Use the “Cone of Silence” When Buying Stocks?

In the June 2005 update of their paper entitled “All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors”, Brad Barber and Terrance Odean examine the behaviors of individuals and institutions regarding attention-grabbing stocks. Using four datasets spanning 1991-1999 and focus on three measures associated with attention grabbing events (news, unusual trading volume and extreme returns), they find that: Keep Reading

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

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