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Investing Research Articles

Unexplained Volume as a Critical Indicator

Researchers have recently focused on divergence of investor opinion as an indicator of future stock returns, but measuring this divergence using publicly available data has been problematic. In his April 2005 paper entitled “Measuring Investors’ Opinion Divergence”, Jon Garfinkel uses a non-public indicator of the stock valuations of investors to validate four public indicators: bid-ask spread, unexplained volume, forecast variability among analysts and stock return volatility. His non-public indicator is the standard deviation of the differences between all limit order prices and the most recent trade price, capturing actual investor price targets. Using data from 1995-1996 for the one non-public and four public indicators and focusing on activities before and after 150 selected NYSE trading halts, he concludes that: Keep Reading

Classic Research: Stock Returns in the Long Run

We have selected for retrospective review a few all-time “best selling” research papers of the past few years from the General Financial Markets category of the Social Science Research Network (SSRN). Here we summarize the March 2002 paper entitled “Stock Market Returns in the Long Run: Participating in the Real Economy” (download count over 3,400) by Roger Ibbotson and Peng Chen. The authors examine the relationships during 1926-2000 between historical equity returns and key supply side factors such as inflation, earnings, dividends, price-to-earnings ratio (P/E), dividend payout ratio, book value, return on equity and GDP per capita. They extrapolate these supply side connections with the real economy to estimate the future long-term equity risk premium. They conclude that: Keep Reading

January Effect Alive and Well?

In their October 2005 paper entitled “The January Effect”, Mark Haug and Mark Hirschey examine the persistence of the January effect (abnormally high rates of return during the month of January). Using broad samples of value-weighted and equally-weighted returns spanning 1802-2004 for large-capitalization stocks and 1927-2004 for small-capitalization stocks, they conclude that: Keep Reading

Classic Research: Dow Theory Long Dead?

We have selected for retrospective review a few all-time “best selling” research papers of the past few years from the General Financial Markets category of the Social Science Research Network (SSRN). Here we summarize the March 1998 paper entitled “The Dow Theory: William Peter Hamilton’s Track Record Re-Considered” (download count nearly 5,900) by Stephen Brown, William Goetzmann and Alok Kumar. This research applies risk adjustment and out-of-sample testing to re-examine Alfred Cowles’ 1934 debunking of the Dow Theory (as defined by the 255 editorials of William Peter Hamilton in The Wall Street Journal during 1902-1929). They conclude that: Keep Reading

Classic Research: Can Individual Investors Consistently Excel?

We have selected for retrospective review a few all-time “best selling” research papers of the past few years from the General Financial Markets category of the Social Science Research Network (SSRN). Here we summarize the December 2002 paper entitled “Can Individual Investors Beat the Market?” (download count over 4,000) by Joshua Coval, David Hirshleifer and Tyler Shumway. This research investigates the persistence of outperformance and underperformance among individual investors/traders in stocks. Using data from a large discount broker on trades in 115,856 accounts during 1/90 through 11/96, they conclude that: Keep Reading

Classic Paper: Emergence of Behavioral Finance

We have selected for retrospective review a few all-time “best selling” research papers of the past few years from the General Financial Markets category of the Social Science Research Network (SSRN). Here we summarize the October 2002 paper entitled “From Efficient Markets Theory to Behavioral Finance” (download count over 4,100) by Robert Shiller, author of the book Irrational Exuberance. This paper traces the recent history of financial market research, from an erosion of faith in the efficient markets theory to a growing collaboration between the social sciences and finance. Shiller’s key points are: Keep Reading

Classic Research: Demography and the Stock Market

We have selected for retrospective review a few all-time “best selling” research papers of the past few years from the General Financial Markets category of the Social Science Research Network. Here we summarize the August 2002 paper entitled “Demography and the Long-Run Predictability of the Stock Market” by John Geanakoplos, Michael Magill and Martine Quinzii (download count over 4,400). In this paper, the authors link cyclic demographic behavior (borrowing when young, investing for retirement in middle age and disinvesting in retirement) with stock market price-earnings ratio (P/E) cycles. Using the overlapping generations model, they conclude that: Keep Reading

Benchmarking Returns for Hedge Funds

In a set of April 2005 charts entitled “The Topography of Hedge Fund Returns”, Craig French and David Abuaf of Corbin Capital Partners, L.P. map the annual returns of a range of hedge fund strategies over the past 15 years. Using data for all hedge funds that existed for all 12 months of each calendar year in the HFR database over 1990-2004, they find that: Keep Reading

Recognition: Is That a Good Thing?

In the September 2005 version of their paper entitled “Investor Recognition and Stock Returns”, Reuven LeHavy and Richard Sloan analyze the relation between how widely a stock is recognized and its returns (past and future). They use change in the proportion of quarterly SEC Form 13-F filers (institutional investment managers who exercise investment discretion over $100 million) holding a stock to represent the change in investor recognition of that stock. Using Form 13-F and stock price data over the period 1982-2004, they find that: Keep Reading

Comprehensive Analysis of Calendar Effects

In the January 2005 version of their working paper entitled “Testing the Significance of Calendar Effects”, Peter Reinhard Hansen, Asger Lunde and James Nason test a broad range of possible calendar effects in multiple equity markets. They examine the following effects: day-of-the-week, month-of-the-year, day-of-the-month, week-of-the-month, semi-month, turn-of-the-month, end-of-the-year and holiday. Calendar effects could be a result of data mining (finding anomalies of randomness), an especially plausible explanation when theoretical explanations are suggested only subsequent to empirical “discovery.” Applying robust tests to daily closing prices of stock indices from Denmark, France, Germany, Hong Kong, Italy, Japan, Norway, Sweden, the United Kingdom and the United States through early May 2002, they find that: Keep Reading

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