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Investing Research Articles

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Exploitability of Stock Anomalies Worldwide

Are published stock return anomalies exploitable worldwide? In their January 2018 paper entitled “Does it Pay to Follow Anomalies Research? International Evidence”, Ondrej Tobek and Martin Hronec investigate out-of-sample and post-publication performances of 153 cross-sectional stock return anomalies documented in the academic literature, mostly in the top three finance and top three accounting journals. Of the 153 anomalies, 93 involve firm fundamentals, 11 involve firm earnings estimates and 49 involve market frictions. They calculate returns for each anomaly via a hedge portfolio that is long (short) the value-weighted fifth, or quintile, of stocks with the highest (lowest) expected returns for that anomaly. To ensure capacity, they focus on the universe of stocks in the top 90% of NYSE capitalizations. They first examine out-of-sample (after the sample used for discovery but before publication) and post-publication performances of anomalies among U.S. stocks for evidence of performance decay. They then look at anomaly performance outside the U.S. They further test whether strategies that work most widely should be of greatest interest to investors. Finally, they consider a multi-anomaly strategy that each year invests equally in all anomalies that are significant in the U.S. through June, starting in July 1990 for developed country markets and July 2000 for emerging country markets. Using required firm/stock data since July 1963 for the U.S., since January 1987 for Europe, Japan and developed Asia-Pacific and since January 2000 for China and emerging Asia-Pacific, all through December 2016, they find that: Keep Reading

Bonds Lead Stocks?

Are bond market investors generally shrewder than their stock market counterparts, such that bond yield tops (bottoms) anticipate stock market bottoms (tops)? To investigate, we employ both a monthly lead-lag analysis and a comparison of bond yield and stock market tops and bottoms. We define “top” and “bottom” as the highest (lowest) value in a rolling window that extends from 30 months in the past to 30 months in the future (a total window of five years). Using monthly levels of Moody’s yield on seasoned Aaa corporate bonds and the Dow Jones Industrial Average (DJIA) during October 1928 through February 2018 (about 90 years) and monthly levels of the 10-year government bond interest rate and the stock market from Robert Shiller during January 1871 through February 2018 (about 148 years), we find that: Keep Reading

Bitcoin, Sustainable or Transitional?

Does Bitcoin have a bright future, or is it only a transitional proof of concept? In their March 2018 paper entitled “Bitcoin: A Revolution?”, Guillaume Haeringer and Hanna Halaburda review incentive mechanisms that make Bitcoin work and discuss current and potential uses of Bitcoin and related technologies. They view Bitcoin as the first successful digital medium of exchange without a trusted third party based on combining cryptographic tools and incentive systems that prevent double-spending. They define a Bitcoin user as any entity holding or receiving Bitcoins and a Bitcoin miner as any entity recording and validating transactions. From the perspective of users, the Bitcoin system is similar to an online banking system that supports only deposits and transfers. From the perspective of miners, the Bitcoin system is a source of rewards from adding new blocks to the blockchain (the only source of new Bitcoins) and from transaction validation fees within their blocks. Based on the body of information about Bitcoin, they conclude that: Keep Reading

“Pulling the Goalie” Metaphor for Investors

Can sacrificing little goals satisfy bigger ones? In the March 2018 draft of their paper entitled “Pulling the Goalie: Hockey and Investment Implications”, Clifford Asness and Aaron Brown ponder when a losing hockey coach should pull the goalie as a metaphor for focusing on portfolio-level return and portfolio-level risk management. Based on statistical analysis of hockey scenarios and broad examples from investing, they conclude that: Keep Reading

Weekly Summary of Research Findings: 3/26/18 – 3/29/18

Below is a weekly summary of our research findings for 3/26/18 through 3/29/18. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs.

Subscribers: To receive these weekly digests via email, click here to sign up for our mailing list. Keep Reading

Measuring the Value Premium with Value and Growth ETFs

Do popular style-based exchange-traded funds (ETF) offer a reliable way to exploit the value premium? To investigate, we compare differences in returns (value-minus-growth, or V – G) for each of the following three matched pairs of value-growth ETFs:

  • iShares Russell 2000 (Smallcap) Growth Index (IWO)
  • iShares Russell 2000 (Smallcap) Value Index (IWN)
  • iShares Russell Midcap Growth Index (IWP)
  • iShares Russell Midcap Value Index (IWS)
  • iShares Russell 1000 (Largecap) Growth Index (IWF)
  • iShares Russell 1000 (Largecap) Value Index (IWD)

To aggregate, we define monthly value return as the equally weighted average monthly return of IWN, IWS and IWD and monthly growth return as the equally weighted average monthly return of IWO, IWP and IWF. Using monthly dividend-adjusted closing prices for these ETFs during August 2001 (limited by IWP and IWS) through February 2018 (199 months), we find that: Keep Reading

Measuring the Size Effect with Capitalization-based ETFs

Do popular capitalization-based exchange-traded funds (ETF) offer a reliable way to exploit an equity size effect? To investigate, we compare the difference in returns (small minus big) between:

  • iShares Russell 2000 Index (Smallcap) Index (IWM), and
  • SPDR S&P 500 (SPY)

Using monthly dividend-adjusted closing prices for these ETFs during May 2000 (limited by data for IWM) through February 2018 (214 months), we find that: Keep Reading

Stock Market Performance Perspectives

How different are stock market performance metrics for:

  • Capital gains only, capital gains plus dividends accrued as cash (spent or saved), and capital gains plus dividends reinvested in the stock market?
  • Nominal versus real returns?
  • Simple return-to-risk calculations versus Sharpe ratio?

Using quarterly S&P 500 Index levels and dividends, quarterly U.S. Consumer Price Index (CPI) data (all items) and monthly 3-month U.S. Treasury bill (T-bill) yield as the risk-free rate/return on cash during the first quarter of 1988 through the fourth quarter of 2017, we find that: Keep Reading

Stock Returns Around Easter

Does the seasonal shift marked by the Easter holiday, with the U.S. stock market closed on the preceding Good Friday, tend to produce anomalous returns? To investigate, we analyze the historical behavior of the S&P 500 Index before and after the holiday. Using daily closing levels of the S&P 500 index for 1950-2017 (68 events), we find that: Keep Reading

Weekly Summary of Research Findings: 3/19/18 – 3/23/18

Below is a weekly summary of our research findings for 3/19/18 through 3/23/18. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs.

Subscribers: To receive these weekly digests via email, click here to sign up for our mailing list. Keep Reading

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