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Investing Research Articles

Information-Based Trading

Anyone attempting or contemplating day-trading should take a look at “Information-based Trading, Price Impact of Trades, and Trade Autocorrelation” of May 2004 by Kee Chung, Mingsheng Li and Thomas McInish. The authors examine how the price impact of trades and the persistence of trading direction relate to the probability of information-based trading, as opposed to liquidity trading (for example, by market makers) or noise trading (by the uninformed). Here’s what they find: Keep Reading

Short Selling Shocks Stocks

In their February 2005 paper entitled “The Link Between Short Sale Constraints and Stock Prices”, Lauren Cohen, Karl Diether and Christopher Malloy isolate supply and demand shifts in equity lending to examine shorting demand as an indicator, and cause, of future stock returns. Using actual share loan prices and quantities from a large institutional investor during August 1999 to July 2003, they find that: Keep Reading

Explaining Summer Doldrums

In the December 2004 draft of their paper on “Gone Fishin’: Seasonality in Speculative Trading and Asset Prices” Harrison Hong and Jialin Yu examine the effect of vacation periods (summer in the U.S. and January-February in China) on speculative stocks during 1992-2003. They find that: Keep Reading

Your Attention, Please! (You Are About to Lose Money)

In their January 2005 paper on “Profiting from Predictability: Smart Traders, Daily Price Limits, and Investor Attention”, Mark Seasholes and Guojun Wu examine the counterplay between active individual investors and rational speculators (smart traders) after attention-grabbing events. Exploiting special access to detailed trading data for the Shanghai Stock Exchange during January 2001 through July 2003, they show that: Keep Reading

Returns for Investors (Rather Than Markets)

In his June 2004 paper on “What Are Stock Investors’ Actual Historical Returns”, Ilia Dichev examines stock market capital inflows and outflows to determine how well investors really perform compared to buy-and-hold returns. He concludes that: Keep Reading

Investment Managers: Randomly Walking the Plank?

In the February 2005 issue of The Financial Review, Burton Malkiel offers “Reflections on the Efficient Market Hypothesis: 30 Years Later” as a pudding-based proof of his famous proposition. He pits the performance of professional investment managers against that of market indices and finds that: Keep Reading

Triumph of the Optimists (Chapter-by-Chapter Review)

Triumph of the Optimists: 101 Years of Global Investment Returns by Dimson, Marsh and Staunton (2002) is thorough, logical and concise. With scores of illustrative graphs and figures, its statistics are accessible and its style straightforward. Its message, however, is somewhat at odds with the title. Below is a chapter-by-chapter review of the insights in this book: Keep Reading

Buffering Exuberance

In their December 2003 paper on “Aggregate Short Interest and Market Valuations” Owen Lamont and Jeremy Stein examine the countercyclical nature of aggregate short interest and the aggregate put/call option ratio. They note that, for individual stocks, demand for shorting correlates with abnormally low future returns. However, for stocks in aggregate, they conclude that: Keep Reading

Smart Mutual Fund Investing?

In a recent article for the Journal of Finance, Travis Sapp and Ashish Tawari investigate the “smart money” effect. Mutual funds with positive money flow perform better in the short term than do funds with negative money flow, suggesting good fund selection ability on the part of investors. The authors conclude that: Keep Reading

The Media: All Frenzy All the Time?

In his July 2003 draft paper “Meta-Communication and Market Dynamics. Reflexive Interactions of Financial Markets and the Mass Media”, Thomas Schuster explores the role of the media in feeding investor irrationality. He concludes that: Keep Reading

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