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Calendar Effects

The time of year affects human activities and moods, both through natural variations in the environment and through artificial customs and laws. Do such calendar effects systematically and significantly influence investor/trader attention and mood, and thereby equity prices? These blog entries relate to calendar effects in the stock market.

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Equity Option Returns by Monthly Expiration Interval

Do retail investors tend to underprice equity options in monthly series when the interval between expirations from third Friday to third Friday is five weeks instead of the more frequent (65% versus 35%) four weeks? In their November 2016 paper entitled “Inattention in the Options Market”, Assaf Eisdorfer, Ronnie Sadka and Alexei Zhdanov examine differences in U.S. equity option return behaviors for “months” with five weeks versus four weeks. They focus on stocks and exchange-traded funds (ETFs) with liquid options (relatively large size and high institutional ownership) and exclude options not expiring on the third Friday. Specifically, they each month on the third Friday form equally weighted portfolios of one-month-to-expiration, at-the-money long straddles (call and put with same strike price), delta-hedged calls and delta-hedged puts (both short the underlying stocks) and hold to maturity on the third Friday of the next month. They also run regressions of average weekly returns for these portfolios versus expiration interval and several control variables found in prior research to affect option returns (index option return, gap between implied and historical volatilities, return skewness and kurtosis, firm size, firm book-to-market ratio, past stock return and idiosyncratic volatility. Using daily returns (from closing bid-ask midpoints for options) for the specified options and underlying stocks/ETFs during 1996 through 2014, they find that: Keep Reading

Seasonal Effects in Government Bonds Worldwide?

Do government bond returns worldwide exhibit seasonal effects analogous to those of stock market returns? In their August 2016 draft paper entitled “Seasonality in Government Bond Returns and Factor Premia”, Adam Zaremba and Tomasz Schabek investigate seasonal patterns in government bond returns across countries, focusing on regression tests of January and sell-in-May (May-October versus November-April) effects. They also examine whether four bond risk premiums (volatility, credit risk, value and momentum), each specified in multiple ways and measured via long-short portfolios formed from monthly sorts, exhibit these two seasonal effects. Using monthly total return bond indexes hedged against the U.S. dollar spanning 25 countries and allocated to five term ranges (1-3 years, 3-5 years, 5-7 years, 7-10 years and 10+ years) during January 1992 through June 2016, they find that: Keep Reading

Hold Stocks Only during FOMC “Even” Weeks?

Does cyclic information flow from the Federal Open Market Committee (FOMC) drive equity market returns? In the June 2016 update of their paper entitled “Stock Returns Over the FOMC Cycle”, flagged by a subscriber, Anna Cieslak, Adair Morse and Annette Vissing-Jorgensen investigate interaction of the FOMC six-week meeting cycle with excess U.S. and worldwide stock market (relative to the U.S. Treasury bill). Within the FOMC meeting cycle, they look at:

  • Meetings of the Federal Reserve Board of Governors and public releases of Federal Reserve book updates, statements and meeting minutes.
  • Other potentially influential economic news cycles, including reserve maintenance period, macroeconomic news releases and corporate earnings announcements.
  • Evidence on leaks from the Federal Reserve via media and private newsletters (with focus on Wall Street Journal articles on monetary policy).
  • Public statements of Federal Reserve officials and conversations with current and former officials.

Using these data, FOMC meeting dates  and daily U.S. and global (overall, developed and emerging) stock market returns, returns for individual U.S. stocks, U.S. Treasury bill (T-bill) yield and 10-year U.S. Treasury note yield during 1994 through 2015, they find that: Keep Reading

Long-term SMA and TOTM Combination Strategy

“Turn-of-the-Month Effect Persistence and Robustness” indicates that average absolute returns during the turn-of-the-month (TOTM) are strong for both bull and bear markets. Does a strategy of capturing all bull market returns and TOTM returns only during bear markets perform well? To investigate, we apply four strategies to S&P Depository Receipts (SPY) as a tradable proxy for the stock market: (1) buy and hold SPY; (2) invest in SPY (cash) when SPY closes above (below) its 200-day simple moving average (SMA200); (3) invest in SPY from the close five trading days before through the close four trading days after the last trading day of each month and cash at all other times (TOTM); and, (4) invest in SPY when SPY closes above its 200-day SMA and otherwise use the TOTM strategy (SMA200 + TOTM). We explore sensitivities of these strategies to a range of one-way SPY-cash switching frictions, with baseline 0.1%. Using daily dividend-adjusted closing levels of SPY from inception (January 1993) through early June 2016 and contemporaneous 3-month Treasury bill (T-bill) yields, we find that: Keep Reading

Pervasive 12-Month (and 5-Day) Relative Strength Cycles?

Do asset returns exhibit cyclic relative strength? In the December 2015 revision of their paper entitled “Return Seasonalities”, Matti Keloharju, Juhani Linnainmaa and Peter Nyberg examine 12-month relative strength cycles via a strategy that is each month long (short) assets with the highest (lowest) returns during the same calendar month over the past 20 years. They apply this strategy to individual U.S. stocks, factor and anomaly portfolios of U.S. stocks, industry portfolios of U.S. stocks, developed country stock indexes and commodity futures contract series. They also test a 5-day relative strength cycle across individual U.S. stocks. They perform ancillary tests to investigate sources and interactions of relative strength cycles. Using monthly and daily data for a broad sample of U.S. common stocks, industry portfolios and factor/anomaly portfolios mostly since July 1963 and monthly data for 24 commodity futures series and 15 country stock indexes since January 1970, all through December 2011, they find that: Keep Reading

Turn-of-the-Year Effects on Country Stock Market Value and Momentum

Does the January (turn-of-the-year) stock return anomaly affect value and momentum strategies applied at the country stock market level? In his June 2015 paper entitled “The January Seasonality and the Performance of Country-Level Value and Momentum Strategies”, Adam Zaremba investigates this question using four value and two momentum firm/stock metrics. The four value metrics, each measured over four prior quarters with a one-quarter lag and weighted by company according to the methodology of the associated stock index, are:

  1. Earnings-to-price ratio (EP).
  2. Earnings before interest, taxes, depreciation and amortization (EBITDA)-to-enterprise value (EV) ratio (EBEV).
  3. EBITDA-to-price ratio (EBP).
  4. Sales-to-EV ratio (SEV).

The two momentum metrics are:

  1. Stock index return from 12 months ago to one month ago (LtMom).
  2. Stock index return from 12 months ago to six months ago (IntMom).

He assesses strategy performance via returns in U.S. dollars in excess of one-month U.S. Treasury bill yield from hedge portfolios that are each month long (short) the equally weighted fifth of country stock indexes with the highest (lowest) expected returns based on each metric. He first reviews performances for all months and then focuses on turn-of-the-year (December and January) performances. Using monthly data for 78 existing and discontinued country stock market indexes during June 1995 through May 2015, he finds that: Keep Reading

Exploiting Multiple Stock Factors for Stock Selection

How good can factor investing get? In his May 2016 paper entitled “Quantitative Style Investing”, Mike Dickson examines strategies that:

  1. Aggregate return forecasting power of four or six theoretically-motivated stock factors (or characteristics) via monthly multivariate regressions.
  2. Use inception-to-date simple averages of regression coefficients, starting after the first 60 months and updating annually, to suppress estimation and sampling error.
  3. Create equally weighted portfolios that are long (short) the 50%, 20%, 10%, 4%, 2% or 1% of stocks with the highest (lowest) expected returns.

The six stock characteristics are: (1) market capitalization; (2), book-to-market ratio; (3) gross profit-to-asset ratio; (4) investment (annual total asset growth); (5) last-month return; and, (6) momentum (return from 12 months ago to two months ago). He considers strategies employing all six characteristics (Model 1) or just the first four, slow-moving ones (Model 2). He considers samples with or without microcaps (capitalizations less than the 20% percentile for NYSE stocks). He estimates trading frictions as 1% of the value traded each month in rebalancing to equal weight. Using monthly data for a broad sample of U.S. common stocks during July 1963 through December 2013 (with evaluated returns commencing July 1968), he finds that: Keep Reading

Any Seasonality for Gold or Gold Miners?

Do gold and gold mining stocks exhibit distinct seasonality? Using monthly closes for the spot price of gold in dollars per ounce and the S&P 500 Index since January 1979, PHLX Gold/Silver Sector (XAU) since December 1983, AMEX Gold Bugs Index (HUI) since June 1996 and SPDR Gold Shares (GLD) since November 2004, all through March 2016, we find that: Keep Reading

Equity Factor Returns Across the Chinese Zodiac

Do the 12 yearly signs of the Chinese Zodiac cycle (Rabbit, Dragon, Snake, Horse, Goat, Monkey, Rooster, Dog, Pig, Rat, Ox, Tiger) relate individually to stock market behavior? In their January 2016 paper entitled “The Zodiac Calendar and Equity Factor Returns”, Janice Phoeng and Laurens Swinkels calculate four annual equity factor returns for each of the Zodiac signs: (1) market minus the risk-free rate; (2) small capitalization minus big capitalization; (3) value minus growth; and, (4) high momentum versus low momentum. They start each year on the first day of the Zodiac New Year and end at the last day of the same Zodiac year. Using daily U.S. equity factor returns from Kenneth French’s data library during early February 1927 through mid-February 2015, they find that: Keep Reading

Anomalies by Day of the Week

Are moody investors prone to avoid risk on Monday and accept it on Friday? In his January 2016 paper entitled “Day of the Week and the Cross-Section of Returns”, Justin Birru examines how long-short U.S. stock anomaly portfolio returns vary by day of the week. His hypothesis is that pessimistic (optimistic) mood on Monday (Friday) leads to relatively low (high) returns for speculative stocks. His analysis focuses on 14 anomalies arguably tied to investor sentiment, with one side (short or long) speculative and the other side non-speculative, based on idiosyncratic volatility, lottery-like, firm age, distress, profitability, payouts, size or illiquidity. He also tests anomalies arguably unrelated to investor sentiment based on momentum, book-to-market, and asset growth. Using anomaly variable and return data for a broad sample of U.S. common stocks during July 1963 through December 2013, he finds that: Keep Reading

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