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Investing Research Articles

Does Consumer Confidence Predict Stock Market Returns?

Should we pay attention whenever pollsters issue new consumer confidence numbers? In their October 2002 paper entitled “Consumer Confidence and Stock Returns”, Ken Fisher and Meir Statman examine whether consumer confidence, as defined and measured by the Conference Board and the University of Michigan, predict the stock market? They determine that: Keep Reading

Classic Paper: Piotroski’s Efficient Value Investing

We occasionally select for retrospective review an all-time “best selling” research paper of the past few years from the General Financial Markets category of the Social Science Research Network (SSRN). In his January 2002 paper entitled “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers”, Joseph Piotroski applies a simple accounting-based fundamental analysis strategy to a broad portfolio of high (top 20%) book-to-market firms to enhance returns. His stock scoring system (FSCORE) consists of nine binary signals based on profitability and value-specific financial measures (see the list below). Using stock returns and fundamentals for a broad sample of U.S. stocks during 1976 through 1996, he finds that: Keep Reading

Fed Model: Predictive or Not?

Many investors monitor the Fed Model, based on the relationship between the earnings yield of stocks and the bond yield, for long-term stock market timing signals. Does this model really work? Notable contrary arguments are found in the December 2002 paper entitled “Fight the Fed Model: The Relationship Between Stock Market Yields, Bond Market Yields, and Future Returns” by Clifford S. Asness and the 2004 paper entitled “A Tactical Implication of Predictability: Fighting the Fed Model” by Roelof Salomons. These two papers present similar analyses and conclusions, as follows: Keep Reading

Is Irrational Exuberance Over Yet?

In the early 2001 update of their 1998 paper entitled “Valuation Ratios and the Long-Run Stock Market Outlook: An Update”, John Campbell and Robert Shiller focus on mean reversion of two valuation ratios, price-earnings and dividend-price, as key predictors of future stock market performance. The authors determine that mean reversions of these ratios occurs through stock price changes, not earnings or dividend changes. At the time of the update, they note that “these ratios imply a stronger case for a poor stock market outlook than has ever been seen before.” Keep Reading

Overview of Investor Herding

Investor herding is convergence of behavior based only on observation of what others are doing (such as buying or selling). Examples in the stock market are trend-following, “don’t fight the tape” and momentum investing. Herding is distinct from investors acting at the same time but independently in response to news related to investment fundamentals (such as the latest jobs report from the Bureau of Labor Statistics or a company earnings release). In their December 2001 paper entitled Herd Behavior and Cascading in Capital Markets: A Review and Synthesis, David Hirshleifer and Siew Hong Teoh provide an overview of financial herding. Keep Reading

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