Investing Research Articles

Can investors systematically earn a premium by holding relatively illiquid assets? In their December 2012 paper entitled “The Illiquidity Premium: International Evidence”, Yakov Amihud, Allaudeen Hameed, Wenjin Kang and Huiping Zhang examine the illiquidity premium in 26 developed and 19 emerging equity markets. They measure illiquidity as the average ratio of absolute daily stock return to… Keep Reading

Prior research indicates that individual stocks with high short interest relative to shares outstanding (short interest ratio) tend to underperform. Do this finding hold for exchange-traded funds (ETF)? In their December 2012 paper entitled “Why Does ETF Short Selling Provide a Different Signal?”, Christopher Hughen and Xiaoyu Ma investigate whether short interest ratio metrics predict future returns for… Keep Reading

What causes asset price momentum? In his May 2012 paper entitled “Is Momentum a Self-fulfilling Prophecy?”, Steven Jordan presents a simple, abstract model explaining the pervasiveness and robustness of evidence for intermediate-term momentum and long-term reversal. The essential assumptions of his model are: (1) demand for an asset is noisy and flat or downward sloping… Keep Reading

Andrew Abraham, founder of Abraham Investment Management, introduces his 2012 book, The Trend Following Bible: How Professional Traders Compound Wealth and Manage Risk, by stating: “I want to teach you to think like a successful trend follower. I am giving you exactly the methodologies I have used on a daily basis for the last 18 years. They… Keep Reading

Does hedging a currency carry trade (long currencies with high interest rates and short currencies with low interest rates) to suppress its volatility enhance performance? In their December 2012 working paper entitled “Carry Trade and Systemic Risk: Why are FX Options So Cheap?”, Ricardo Caballero and Joseph Doyle investigate the profitability of an equally weighted… Keep Reading

Does mean-variance optimization enhance the performance of currency carry trades (long currencies with high interest rates and short currencies with low interest rates)? In their November 2012 paper entitled “On the Risk and Return of the Carry Trade”, Fabian Ackermann, Walt Pohl and Karl Schmedders compare a dynamic mean-variance optimal carry trade strategy to naive… Keep Reading

Is there a useful way to measure the combined effects of information push (published supply) and pull (search demand) on investor attention to specific stocks? In his November 2012 paper entitled “The Impact of Information Supply and Demand on Stock Returns”, Yanbo Wang examines the effect of a shift in firm/stock information supply-demand metrics on stock returns…. Keep Reading

When should an investor favor picking individual stocks over holding a stock index fund? In their November 2012 paper entitled “On Diversification”, Ben Jacobsen and Frans de Roon derive from Modern Portfolio Theory simple rules to compare concentrated investment in a portfolio of one or a few stocks to a broad, diversified (value-weighted) benchmark portfolio. The… Keep Reading

A subscriber suggested review of Empiritrage’s Volatility-Based Allocation (VBA). This strategy applies two monthly signals to an equally weighted portfolio of asset class total return proxies to determine whether to be in each proxy or cash, as follows: Step 1: If the 10-day simple moving average (SMA) of the S&P 500 Volatility Index (VIX) is above its 30-day… Keep Reading

“Trend Factor and Stock Returns” describes a method of extracting information from stock price simple moving averages (SMA) that is more complicated than that used by most traders. Instead of using current price above or below an SMA as a signal, this method employs offset regressions (normalized SMAs lagged one month behind returns) to project next month’s… Keep Reading