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Investing Research Articles

Momentum Investing: Surfing Waves in the Economy?

In their June 2005 paper entitled “Momentum Profits and Macroeconomic Risk”, Laura Liu, Jerold Warner and Lu Zhang examine the connection between momentum returns and the overall economy, using the growth rate of industrial production as a proxy for the economic trend. They use monthly data for a large selection of common stocks listed on the NYSE, AMEX, and NASDAQ from January 1960 to December 2001 to construct ten equally weighted momentum portfolios, ranking on past six-month returns and holding for six subsequent months. They find that: Keep Reading

Uncertainty and Analyst Underreaction

In his recent paper entitled “Information Uncertainty and Analyst Forecast Behavior”, Frank Zhang explores the effects of an increase in information uncertainty (from either volatility of underlying fundamentals or poor information) on the behavior of sell-side stock analysts. He hypothesizes that if behavioral biases cause analysts to underreact to new information when revising their forecasts, they underreact even more as information uncertainty increases. Using dispersion in analysts’ earnings forecasts as a proxy for information uncertainty over the period 1983-2001, he determines that: Keep Reading

Why Momentum Investing Works?

In their July 2005 paper entitled “Momentum Profits and Non-Normality Risks”, Ana-Maria Fuertes, Joelle Miffre and Wooi Hou Tan examine the distributions of returns for nine momentum investing strategies as they attempt to explain why the resultant portfolios outperform. These nine strategies consist of overlapping portfolios formed monthly that are long (short) the equally weighted tenth of stocks with the highest (lowest) return over the past 3, 6 or 12 months and held for the next 3, 6 or 12 months. Using monthly data for all NYSE, AMEX and NASDAQ stocks priced over $5 during February 1973 through August 2004, they find that: Keep Reading

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

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