Investing Research Articles

When does a cointegration test, which looks for a connection between two apparently wandering price paths, work for pairs trading? In their May 2016 paper entitled “Cointegration and Relative Value Arbitrage”, Binh Do and Robert Faff investigate the conditions under which cointegration successfully identifies stocks for pairs trading. Their basic pairs trading strategy is to each month: Identify cointegrated pairs… Keep Reading

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… Keep Reading

Are prominent stock market bloggers in aggregate able to predict the market’s direction? The Ticker Sense Blogger Sentiment Poll “is a survey of the web’s most prominent investment bloggers, asking ‘What is your outlook on the U.S. stock market for the next 30 days?’” (bullish, bearish or neutral) on a weekly basis. The site currently… Keep Reading

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… Keep Reading

A reader asked whether the gold-gold miner stocks arbitrage-like argument in Jay Kaeppel’s February 2010 article “Don’t Give Up On Gold Stocks Just Yet” (for which his September 2004 article “Gold Stock and Gold Bullion” is a more robust antecedent) supports frequent timing of these assets. For example, if SPDR Gold Shares (GLD) and Market Vectors Gold… Keep Reading

How good can factor investing get? In his May 2016 paper entitled “Quantitative Style Investing”, Mike Dickson examines strategies that: Aggregate return forecasting power of four or six theoretically-motivated stock factors (or characteristics) via monthly multivariate regressions. Use inception-to-date simple averages of regression coefficients, starting after the first 60 months and updating annually, to suppress estimation and sampling error. Create… Keep Reading

How hard is it to beat equal weighting in constructing a portfolio of attractive common stocks? In his May 2016 paper entitled “Naive Diversification Isn’t so Naive after All”, Mike Dickson compares performances of 15 portfolio construction methods applied to eight portfolios of stocks with high expected returns. Construction methods include equal weighting, two versions of minimum volatility,… Keep Reading

…evidence from several tests offers mixed support for a belief that the intermediate-term strength/weakness of “risky” stock indexes relative to a “conservative” index generates reliably profitable trading signals. Strength/weakness of the NASDAQ Composite Index relative to the S&P 500 Index may have merit for market timing.

Are any trading strategy backtest performance statistics predictive of out-of-sample results? In their March 2016 paper entitled “All that Glitters Is Not Gold: Comparing Backtest and Out-of-Sample Performance on a Large Cohort of Trading Algorithms”, Thomas Wiecki, Andrew Campbell, Justin Lent and Jessica Stauth compare backtest and out-of-sample performance statistics for 888 algorithmic trading strategies. They first screen a… Keep Reading

How does stock pairs trading performance interact with lagged pair correlation and volatility? In her May 2016 paper entitled “Demystifying Pairs Trading: The Role of Volatility and Correlation”, Stephanie Riedinger investigates how stock pair correlation and summed volatilities influence pair selection, pair return and portfolio return. Her baseline is a conventional pairs trading method that each month: (1)… Keep Reading