Investing Research Articles

Can investors avoid strategy flame-outs associated with overly enthusiastic backtesting (overfitting)? In his July 2016 paper entitled “Limitations of Quantitative Claims About Trading Strategy Evaluation”, Michael Harris presents two examples that demonstrate a key limitation of trading strategy backtesting: U.S. stock market trend following. U.S. stock market mean reversion. Specifically, he compares performances of such strategies before… Keep Reading

Do stock returns during extended market hours (4:00PM-8:00PM and 4:00AM-9:30AM) reliably predict subsequent returns during normal market hours? In their July 2016 paper entitled “Are Extended Hours Prices Predictive of Subsequent Stock Returns?”, Shai Levi, Joshua Livnat, Li Zhang and Xiao-Jun Zhang investigate whether extended hours stock returns predict returns the next day and over subsequent longer drift intervals. They… Keep Reading

Extended stock market index winning and losing streaks elicit speculation about pending reversals. Does evidence support the what-goes-up-must-come-down view that likelihood of reversal grows with streak duration and magnitude? To check, we examine the “modern” (since 1990) behaviors of the S&P 500 Index and NASDAQ Composite Index during the one and two trading days after… Keep Reading

What is the best way to combine styles (smart betas) in one portfolio? In their June 2016 paper entitled “Long-Only Style Investing: Don’t Just Mix, Integrate”, Shaun Fitzgibbons, Jacques Friedman, Lukasz Pomorski and Laura Serban compare two approaches to long-only combined equity style investing: Mixed portfolio – simply picks stocks from single-style portfolios. Integrated portfolio – first combines single-style rankings into an… Keep Reading

How should investors think about investing in crude oil? In their June 2016 paper entitled “Understanding Oil Investing”, Ludwig Chincarini, John Love and Robert Nguyen examine oil investing, with emphasis on differences in behaviors between non-investable spot oil and investable crude oil futures. They consider several approaches to futures, all fully collateralized by cash (one-month U.S. Treasury bills):… Keep Reading

Do equity trade recommendations from technical analysis experts beat the market? In his February 2016 paper entitled “Are Chartists Artists? The Determinants and Profitability of Recommendations Based on Technical Analysis”, Dirk Gerritsen evaluates technically based buy and sell recommendations for individual Dutch stocks and the AEX index. Specifically, he measures abnormal performance from 10 trading days… Keep Reading

Does trading of out-of-the-money (OTM) equity options expose exploitable private information? In their July 2016 paper entitled “Stock Return Predictability of Out-of-the-Money Option Trading”, Chang Mo Kang, Donghyun Kim and Geul Lee investigate relationships between OTM option trading volume and future returns of underlying stocks. They define OTM based on a range of option deltas and normalize OTM volume by dividing… Keep Reading

What variables best predict U.S. stock market returns? In his June 2016 paper entitled “Which Variables Predict and Forecast Stock Market Returns?”, David McMillan examines the power of 25 variables to predict excess return (relative to the 3-month U.S. Treasury bill yield) of Shiller’s S&P Composite Index both in-sample and out-of-sample. He chooses variables based on connectedness to expected… Keep Reading

Does trading in stock index options exploitably predict the behavior of the stock market? In their June 2016 paper entitled “The Informational Role of Index Option Trading”, Tarun Chordia, Alexander Kurov and Avanidhar Subrahmanyam examine the relationship between U.S. equity index option net order imbalance and future S&P 500 Index returns. They calculate net order imbalance as the… Keep Reading

Does timing of factor premiums work? In his June 2016 paper entitled “My Factor Philippic”, Clifford Asness addresses three critiques of the exploitability of stock factor premiums: Most factors are currently very overvalued (expected premiums are small), perhaps because of crowded bets on them. Factor portfolios may therefore crash. In fact, increasing factor valuations account for most… Keep Reading