Investing Research Articles

The Fed Model relates the aggregate earnings yield (E/P) of the stock market to Treasury bond or bill yields under the assumption that investors view equities and government bonds as competing ways to achieve yield. Might supply (company management), rather than demand (investors), more precisely drive the relationship between E/P and interest rates? In the… Keep Reading

When implemented via exchange-traded funds (ETF), does an equity sector momentum strategy beat an equity style momentum strategy? How do these approaches compare to a geographic equity momentum strategy? In his paper entitled “Optimal Momentum”, runner-up for the 2011 Wagner Award presented by the National Association of Active Investment Managers, Gary Antonacci uses ETFs to… Keep Reading

Trading rules that generate clustered signals present capital allocation problems. Sometimes unpredictable scarcity of signals idles capital, and other times unpredictable clustering of signals presents too many opportunities to exploit. Portfolio-level performance therefore falls considerably short of trade-level promise. Are there ways to optimize capital allocation for such trading rules? In his paper entitled “Buying… Keep Reading

Does the market compensate buyers of illiquid options? In their March 2011 paper entitled “Illiquidity Premia in the Equity Options Market”, Peter Christoffersen, Ruslan Goyenko, Kris Jacobs and Mehdi Karoui investigate the impact of illiquidity of equity options and underlying stocks on option returns. They consider two option expiration horizons, short-term (20 to 70 days)… Keep Reading

Eddie Kwong of TradingMarkets.com requested a review of Larry Connors’ Daily Battle Plan (Battle Plan). TradingMarkets.com presents the Battle Plan service as “a reliable guide for short term traders looking to take advantage of the surge in interest in exchange-traded funds (ETFs) with “a record of more than 80% correct trades. …Larry and his research… Keep Reading

Is there evidence of investor herding in the variation of return correlations for individual stocks? In their January 2011 paper entitled “Asymmetric Correlations”, Tarun Chordia, Amit Goyal and Qing Tong investigate when and why return correlations for individual stocks vary over time. At the end of each month, they calculate average pairwise correlations of stocks… Keep Reading

Hedge fund databases are prone to: (1) self-selection bias (only good performers report); (2) backfill bias (only funds with good recent past performance retroactively report it); (3) survivorship bias (exclusion of dead fund performance); and; (4) liquidation bias (poor performers stop reporting but continue to operate for some period). Do hedge fund indexes therefore inaccurately… Keep Reading

In his 2011 book Super Boom: Why the Dow Will Hit 38,820 and How You Can Profit from It, author Jeffrey Hirsch (editor-in-chief of the Stock Trader’s Almanac) states, regarding the book’s title and a target date of 2025: “…I believe it will happen” and more cautiously “the coming super boom is not only plausible,… Keep Reading

Does the earnings yield (inverse of price-to-earnings ratio, or E/P) usefully predict returns for individual stocks? In their April 2011 paper entitled “Reexamination of the Earnings-Price Anomaly by the Buy-Sell Strategy”, Hsin-Yi Yu and Li-Wen Chen test a long-only strategy that forms monthly value-weighted portfolios based on time-series sorting rather than cross-sectional sorting. Time-series sorting… Keep Reading

Can portfolios exhibit properties not evident from, or even contrary to, average properties of their component assets? In the April 2011 draft of their paper entitled “The Sources of Portfolio Returns: Underlying Stock Returns and the Excess Growth Rate”, Jason Greene and David Rakowski provide a framework for distinguishing two sources of portfolio return: (1)… Keep Reading