Alpha Letters

Paper
Type:
Working Papers
Date:
2015-05-03
Categor
y:
Operating profitability, accruals, cash flows, anomalies, asset pricing
Title:
Accruals, Cash Flows, and Operating Profitability in the Cross Section of Stock
Returns
Authors
:
Ray Ball, Joseph Gerakos, Juhani T. Linnainmaa and Valeri V. Nikolaev
Source: SSRN Papers

Link:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2587199
Summa
ry:
A cash-based operating profitability measure (i.e., excludes accruals)

outperforms other measures of profitability. A long-short strategy can yield a
monthly three-factor alpha of 0.9%
Intuition
Profitable firms earn higher average returns
However, increases in profitability solely due to accruals have no
relation with the cross section of expected returns
Therefore, purging accruals from operating profitability should generate
a stronger predictor of future stock performance
Variables definitions
Cash-based operating profitability = sales - cost of goods sold SG&A accruals
Or, Cash-based operating profitability = Revenue (REVT) Cost of
goods sold (COGS) Reported sales, general, and administrative
expenses (XSGAXRD) (Accounts receivable (RECT)) (Inventory
(INVT)) (Pre-paid expenses (XPP)) + (Deferred revenue
(DRC+DRLT)) + (Trade accounts payable (AP)) + (Accrued expenses
(XACC))
Portfolio formation
Each June, sort stocks into deciles based on their cash-based operating
profitability
Long stocks in the highest decile, short stocks in the lowest decile
Rebalance annually
Cash-based profitability measure outperforms operating profitability and
accruals
Monthly three-factor alphas
Cash-based
operating
Operating
Profitability
Accruals
profitability
1 (Low)
-0.556%
-0.469%
0.219%
10 (High)
0.347%
0.284%
-0.208%
High - Low
0.903%
0.752%
-42.700%
Source: The Paper

Cash-based profitability strategy generates higher Sharpe ratio:
Factors used to construct portfolio
Sharpe
ratio
Market premium, size, value,

momentum
1.07

momentum, accruals
1.13

momentum, operating profitability
1.40

momentum, cash-based operating
profitability
1.70
Source: The Paper

Adding accruals factor after cash-based profitability only increases
Sharpe ratio to 1.72 (Table 7)
Cash-based profitability generated significantly higher cumulative
returns:
Source: The Paper

Less effective after 2004: similar to trends in momentum, the returns
on the three profitability strategies have become less significant since
2004 (Figure 1)
Cash-based profitability explains expected returns as far as ten years
ahead (Figure 3)
Cash-based profitability measure subsumes the effect of accounting
accruals (Tables 2, 5)
The results are robust to using a balance sheet or a cash flow statement
for accruals calculation (Table 3)
Data
U.S. stock data from The Center for Research in Security Prices (CRSP)
U.S. firm fundamental data from Compustat
Data range: 1963 2013
Paper
Type:
Working Papers
Date:
2012-12-31
Catego
ry:
Quality measures, accruals, global evidence
Title:
Global Return Premiums on Earnings Quality, Value, and Size
Author
s:
Max Kozlov and Antti Petajisto
Source: SSRN Working Paper

Link:
Summa
ry:
Quality factor produces a higher Sharpe ratio than the market, size, or value
factors, and works in the period since 2005 despite its popularity. A composite
quality strategy yields even better performance and generates a monthly
three-factor alpha of 65 (64) bps in the global (U.S.) market
Background
Prior studies show that quality (e.g., accruals) works in US markets
This study serve as an out-of-sample test with almost a decade of new
data across all developed markets
Constructing quality portfolios
Define quality as the popular accruals measure
Construct earnings quality portfolio (cash-minus-earnings, CME) by

double sorting stocks on accruals and size
Quality factor has limited correlations with value and size factors (Table
III)
E.g., global CME has a negative correlation (-32%) with HML
Quality portfolio earns the highest Sharpe ratio
Highest Sharpe ratio (Table IV)
Annual
excess return
Annualized
volatility
Sharpe
ratio
Market
4.0%
16%
0.25
Value
4.9%
9%
0.56
Quality
2.8%
4%
0.69
Size
-0.1%
8%
-0.06
Combining value and quality greatly helps (Table IV)

A combined equal-weighted (risk-weighted) portfolio has a
Sharpe ratio of 0.91 (0.99), a significant improvement over the
Sharpe ratio of either factor alone
Decent performance in recent 5 years (Figure 1)
Suggesting that globally, quality hasnt been arbitraged away
despite its popularity
Industry-adjusted quality-, value-, and size-portfolios improve Sharpe

ratios (Table VI)
Sharpe ratio improved to 0.8 (0.97, 0.1) for CME (HML, SMB)
Mostly due to the reduced volatility, though it also slightly
reduces its average return
U.S. findings similar to results from global data (Figure 2 and Table VII)
U.S. market (value, quality, size) factor yields annual excess
return of 5.5% (4.9%, 3.4%, 2.6%), with annual Sharpe ratio of
0.35 (0.44, 0.58, 0.22)
Works in long-only and large cap stocks (Table IX and Figure 4)
Cap-weighted large-cap stocks and long-only
Combining value and quality earns the highest return, which
outperforms index by 3.9% (5.8%) per year among large(small-) cap stocks
Composite quality factors even better than individual quality factors
Alternative quality factors are:
Return on equity (ROE)
CF/A (cash flow to assets)
D/A (debt to assets)
Data
Composite quality metric by either (1) averaging raw score

(averaging), or (2) summing score ranking (mix)
Mix quality factor works best (Table VIII and Figure 3)
Mix factor earns a three-factor alpha of 65 bps per month
(t=9), higher than any of its components
By contrast, the average factor has an alpha (29 bps)
Similar results for U.S. stocks (Table VIII)
Mix (average) portfolios generate significant alphas of 64 (34)
bps with t = 9.1 (9.7)
The mix portfolio has similar negative loadings on market,
small size, and value
7/1988 - 6/2012 data for 23 developed markets (from four regions:
North America, Europe, Japan, and Asia Pacific) are from
Worldscope/Barra
7/1963 - 6/2012 U.S. stock data are from CRSP and Compustat
Paper Type:
Working papers
Date:
2010-07-19
Category:
Novel strategies, accruals
Title:
The Accrual Volatility Anomaly
Authors:
Sati P. Bandyopadhyay, Alan G. Huang, Tony S. Wirjanto
Source:
FMA conference paper
Link:
http://www.fma.org/NY/Papers/AA_4Jan10.pdf
Summary:
High accrual volatility predicts subsequent lower returns. In

other words, for firms whose accruals/sales ratio is consistent
historically, their future stock returns tend to be higher. A
corresponding strategy generates 10% annual returns
Definitions and intuition
Accrual volatility (AV) = the standard deviation of the
(accruals / sales) over the past 16 quarters
AV measures how consistent earnings deviate from cash
flows. That is, AV indicates a long-term earnings-cash
flow deviation
Intuition: investors on average are suspicious of and will
punish stocks that show varying deviation of earnings
from cash flows
Portfolio results
Data
Sort stocks based on their AV and form two hedged

portfolios:
D1-D10, i.e., low AV minus high AV, and
D1 to D5 minus D6 to D10
When value-weighting stocks, and adjust returns for
usual known factors: market, size, value, and momentum
The risk-adjusted return spread of D1-D10 is
0.75% per month, (~10% annually)
The risk-adjusted return spread of D1:5 - D6:10 is
0.36% a month (~5% annually)
Findings highly stable during 1980 - 2008 period: for the
value-weighted D1-D10 portfolio, only 7 out of 29 years
have negative return
Findings similar at various horizons (6-month, 1, 2 and
5-year)
Findings robust to transaction costs: after transaction
cost, for the value-weighted D1-D10 portfolio, the return
D1-D10 alpha spread degrades to 0.68% a month
1976 to 2008 quarterly data for NYSE/NASDAQ/AMEX
stocks are from CRSP/Compustat
Paper Type:
Working papers
Date:
2010-03-31
Category:
Novel strategy, accruals
Title:
Percent Accruals
Authors:
Nader Hafzalla, Russell J. Lundholm, Edmund Matthew Van

Winkle III
Source:
SSRN working papers
Link:
http://ssrn.com/abstract=1558464
Summary:
This paper proposes a new accrual measure (percent accruals)

which yields significantly higher returns than the conventional
accruals measure. The new measure scale accruals by earnings
(
the absolute value of net income
), instead of
total assets
. Such
percent accruals are not dependent on the presence or absence
of special items, and can differentiate loss firms as well as
profitable firms, and the improvement comes mostly from the
long position in low accrual stocks
Definition and intuition

Traditional Operating Accruals = (Net Income Cash from
Operations)/(Average Total Assets)
Percent Operating Accruals = (Net Income Cash from
Operations)/(absolute value of Net Income)
A percent accruals makes more sense since it directly
measures how distorted a reported earning is from actual
cash-based earnings
Specifically, stocks with extreme negative percent
accruals tend to have large positive cash from
operations, but then accrues cause net income to
go down to close to zero
By scaling the accrual by the level of net income,
percent accruals effectively pick out more
extreme combinations of cash flows and accruals
By contrast, the conventional accruals are scaled by
assets, and the resulting measure is essentially the
percentage change in operating assets
This paper uses income statement to construct accruals,
instead of balance sheet data
Backtest results
Better returns
An annually rebalanced portfolio based on percent
accruals yields an annual return of 11.7% (vs
6.9% based on conventional measure)
Returns more balanced
Percent accruals gives similar returns from long
and short leg: long (5.5%) and short (6.2%)
For the conventional accruals measure, most
profits are from the long leg (5.53%) than short
(1.27%, and in-significant)
Less size-bias
The bottom decile of stocks with lowest percent
accruals is larger in size ($1.5 billion ) than those
defined by asset-scaled accruals ($474 million)
Not sensitive to accruals definition
Return predictiveness of percent accruals exists,
independent of whether there are special items,
and whether earnings are positive or negative
More stable yearly returns, much better returns in recent
years
percent accruals outperforms conventional
accruals in 15 of 19 years during 1989-2007
Source: the paper
Not sensitive to firm negative/positive earnings
Data
Earlier study show that conventional accruals have no

significant returns for any decile in firms with negative
earnings
Yet 34% of the observations in the population have
negative earnings
By contrsast, the percent accruals can differentiate
stocks with negative earnings
In fact, it worked better in the loss subsample than in the
profitable subsample
1989 2008 stock prices and accounting data are from
Compustat and CRSP US databases. Total firm year
observations are 81,526 firm-years
Paper Type:
Working papers
Date:
2010-01-30
Category:
Accruals
Title:
Going, Going, Gone? The Demise of the Accruals Anomaly
Authors:
Jeremiah Green, John R.M. Hand, Mark T. Soliman
Source:
SSRN working paper
Link:
Summary:
The returns to the accruals anomaly have almost disappeared in

U.S. markets. The reason maybe 1) investors are no longer
mispricing accruals and 2) more quant managers are using this
signal
The returns to accruals have almost disappeared
Before 2004
, all but only one year during the 1989-2003
15-year span see positive accrual returns
S
ince 2004
, only 1 of the 5 year see positive
risk-adjusted annual returns
The t-statistic on the raw hedge return drops from 2.6
(1989-1996) to 1.4 (1996-2003) to -1.0(2003-2008)
Such findings are robust when adjusting for
book-to-market, size, alternative definitions of accruals,
alternative scalars (total assets, total shareholder equity,
and annual net income), etc
Reason1: in recent years investors are more aware of the

mispriced accruals
The proposed reason for accruals anomaly: investors
wrongly believe that earnings with large portions of
accruals will have similar level of persistency as earnings
with large portions cash flows
So to test this reason, one can measure the relative
persistence of cash flows and accruals in the extreme
accrual deciles
Per Fig. 3, there is a decline in the difference between the
persistence of accruals versus cash flows the persistence
of accruals versus cash flows
Reason2: more quant money are exploiting this signal
When more money are chasing any single strategy, its
profit will likely diminish and vanish
The authors use the trading volume in extreme accrual
firms to prove that quant hedge funds lead to the demise
of accruals
Data
1989 - 2008 stock data are from Compustat Point-in-Time
database
Paper
Type:
Working papers
Date:
2009-12-30
Catego
ry:
Portfolio optimization, novel strategy, accruals, asset growth
Title:
The Importance of Accounting Information in Portfolio Optimization
Author
s:
John R. M. Hand, Jeremiah Green
Source: UNC working paper

Link:
http://public.kenan-flagler.unc.edu/Faculty/handj/JH%20website/Hand%20Gre
en%20Importance%20of%20Acctg%20Info%20for%20PFOPT%2020091013.p
df
Summa
ry:
This paper proposes a new stock optimization framework that may help avoid
quant crowd-ness. Weighting stocks as a linear function of certain accounting
measures (e.g., change in earnings, asset growth) can yield a higher
information ratio compared with price-based measures (e.g., size,
book-to-market, and momentum)

Such weighting scheme also perform better during (1) the Quant Meltdown of
August 2007 and (2) the bear market in 2008 (it earns 12% compared during
2008 as compared to the -38% for the stock market index)
Background of the weighting scheme, Parametric Portfolio Policies (PPP)
An earlier paper, Parametric Portfolio Policies: Exploiting Characteristics
in the Cross Section of Equity Returns,
http://economics.ucr.edu/seminars/spring05/econometrics/RossenValka
nov.pdf
) proposes a simple parametric portfolio policy (PPP) technique,
where stocks weight is a linear function of firm characteristics
For example, stock weight = weight in benchmark + coefficients * rank
of asset growth
In PPP, the accounting measure may lead to higher stock weight in two
ways: (1) through generating alpha (2) through reducing portfolio risk
When weighting stocks using firm size/book-to-market/momentum, PPP
is shown to outperform value-weighted market index by 5.4% per year
Definitions
Price based portfolio (PBC): a portfolio that is optimized by weighting
stocks as a function of market capitalization (MV), book-to-market
(BTM), and momentum (MOM)
Accounting based portfolio (ABC): a portfolio that is optimized by
weighting stocks as a function of accruals(ACC), change in
earnings(UE), and asset growth(AGR)
Two steps to construct the optimal portfolio
Step1: The portfolio weight of each stock is set to be a function of the
firms accounting measures. E.g., weight = weight in benchmark +
coefficient * rank of asset growth
Step2: Estimate the coefficients in step1 by maximizing a utility function
(equation 11 in the paper). The investor is assumed to have constant
relative risk aversion (CRRA) preferences
Key findings (Table 2)
In both in-sample and out-of sample, weighting stocks using 4 factors
are shown to generate significant excess returns (BTM, MOM, UE and
AGR)
Accruals is not significant, suggesting that hedge returns to accruals
have disappeared in recent years due to wider use of such strategy
The PPP method yields reasonable mis-weights (maximum misweight
3.1% and minimum misweight -1%)
ABC has twice as much short-selling than do price-based characteristics
Out-of-sample PBC portfolio 106% turnover per month, while the ABC
portfolio generates more than double this at 216%
No significance when short-sale not allowed: The out-of-sample Sharpe
ratio of the ABC falls from a significant 1.71 to in-significant 0.48
When limiting the universe to the largest 500 stocks (Table 3)
All three price-based characteristics (market capitalization,
book-to-market, and momentum) are insignificant
Change in earnings (UE) and asset growth (AGR) are still significant
Accruals not significant

Considering transaction cost lowers returns and Sharpe Ratios(Table 5)
The Sharpe ratio for the PBC+ABC out-of-sample portfolio was 1.89
(before transactions costs), but only 1.12 in the presence of variable
transactions costs
ABC portfolio more sensitive to transaction cost (due to higher turnover)
Performance during 200707-200709 quant melt-down and 2008 crisis
Suggesting that PPP is a less used strategy and avoided quant crowding
effect
Paper Type:
Journal papers
Date:
2009-10-14
Category:
accruals, macro factors, market timing
Title:
Market timing with aggregate accruals
Authors:
Qiang Kang, Qiao Liu and Rong Qi
Source:
The Journal of Asset Management, Vol 10
Link:
http://www.palgrave-journals.com/jam/journal/v10/n3/abs/jam
20095a.html
Summary:
We propose a market-timing strategy that aims to

exploit
aggregate accruals return forecasting power
. Using several
performance measures of the aggregate accruals-based
market-timing strategy, such as excess portfolio return, Sharpe
ratio, and Jensens alpha, we find robust evidence that,
relative
to the passive investment strategy of buying and holding the
stock market, the market-timing strategy delivers superior
performance
that is both statistically and economically
significant. Specifically, on average, the market-timing strategy
beats the S&P500 index by 6 to 22 percentage points
(annualized) after controlling for transaction costs over the
19802004 period.
Paper Type:
Working papers
Date:
2009-10-14
Category:
Novel strategies, accruals anomaly, macro factors
Title:
Two Accrual Anomalies: A Dichotomy of Accrual-Return Relations
Authors:
Source:
FMA Conference 2009
Link:
http://www.fma.org/Reno/Papers/twoanomalies.pdf
Summary:
Thepaperdecomposesdiscretionaryaccrualsintoafirmspecificand
marketwidecomponent:
Firmspecificcomponentpredictsfuturestockreturnsnegatively
Marketwidecomponentpredictsfuturestockreturnspositively
Ahedgestrategybasedonthesetwocomponentsyieldsasignificantly
higherreturnthanthatofatypicalaccrualstrategy
Thereexisttwoaccrualsanomaly
Negativepredictabilityforsinglestocks:firmswithhighaccrualson
averageearnlowerfutureexpectedreturns
Positivepredictabilityforaggregatemarket:valueweightedaverage
ofaccrualsinthemarketpredictsfutureexpectedmarketreturns
positively(perHirshleifer,HouandTeoh(2008))
Intuitionofthecoexistenceofthesetwoaccrualanomalies
Firmlevel(discretionary)accrualsisaproxyforfirmlevelearnings
management
However,onthemarketlevel,thehigheraccrualssuggeststhaton
averagecompaniesareexpandingtheirbusiness,whichisagood
signformarketreturns
Decomposingfirmleveldiscretionaryaccruals
Step1:estimatingfirmleveldiscretionaryandnormalcomponents
ofaccruals
Runregression:Accruals(t)/totalassets(t)=alpha+a*
changeinrevenues/totalassets(t)+b*grosspropertyplant
andequipment(t)/totalassets(t)+residual(t)
Normalaccruals=Thefittedpartoftheregression
Discretionaryresiduals=theregressionresiduals
Step2:decomposingfirmleveldiscretionaryaccruals
Aggregateaccruals(AAC)isthevalueweightedaverage
discretionaryaccruals
Runregressionwith10year(t10tot1)data:
Discretionary_AC(t)=alpha+b*AAC(t)+residual
Marketcomponentofdiscretionaryaccruals=Thefitted
valuefromtheaboveregression
Firmlevelcomponent=theregressionresiduals
Constructingportfoliostoverifytheexistenceoftwoindependentaccruals
Portfolio1:Whensortingthestocksbycoefficientbfromstep2
above,theaveragemonthlyfourfactoradjustedreturnis0.105%
Portfolio2:Whensortingthestocksbyonfirmlevelcomponentfrom
step2,theaveragemonthlyfourfactoradjustedreturnis0.159%
Portfolio3:Doublesortingfirstbythefirmlevelcomponentof
discretionaryaccruals,andthenbythemarketwidecomponent
Thepositivereturnpredictabilityofthemarketlevel
componentishighestforlowfirmleveldiscretionary
accrualsfirms(intuitivelythesetendtobemorestable,
value,bigcompanies)
Paper Type:
Working papers
Date:
2009-08-03
Category:
Novel strategies, accruals, accruals quality, January effect
Title:
The Pricing of Accruals Quality: January vs. The Rest of the Year
Authors:
Christina Mashruwala and Shamin Mashruwala
Source:
SSRN Working Paper
Link:
Summary:
The paper attributes the accruals quality (AQ) to a January

effect. High AQ stocks are shown to outperform low AQ stocks
only in January
AQ effect is a well-documented anomaly and is a measure of
information risk
High AQ means that company financial reporting standard
(and in particular reported accruals) is less predictable
Estimating AQ step1: run the yearly regression on total
current accruals (TCA)
TCA=a + b1 *CFO (t-1)+b2* CFO (t) + b3*CFO
(t+1) + b4 change in revenues + b5*fixed assets
Where CFO=Net income before extraordinary
items- TCA +Depreciation
fixed assets = gross property, plant and
equipment
Intuitively, this means that TCA is mainly driven
by the cash flow balance, change in revenues and
fixed assets
Size is not listed as an independent variable
because fixed assets is used
Estimating AQ step2: AQ is defined as the standard
deviation of firm-specific residuals from year t-4 to year t
The firm specific residuals are defined as (the

Actual TCA) - (the Expected TCA) from the
regression above
Return predictability of AQ only significant in January
Similar findings for sorting stocks by AQ every month,
and for double-sorting stocks first by size and then by AQ
Thereturnofthezeroinvestmentportfolioisshowntobehighestduringthefirst5daysofeach
January(Table5)47.79%ofallthereturnsduringthemonthofJanuaryoccursinthefirst5days
Data
ThepaperusesCRSPandCOMPUSTATforthetimeperiod19712003
Discussions
TheAQreturnpredictabilityismuchhigherforequalweightedreturns(9.50%for
equalweight,3.79%forcapweight,pertable2,3),whichsuggeststhatthe
implementabilitymaysufferfromsizebiasandhighertradingcosts
Wewouldliketoseemorediscussionsonthereasonsofthefinding:WhyJanuary?This
isparticularlyinterestingsincemostcompaniesdonotfiletheirannualfinancialreports
inJanuary
Relationshipwiththediscretionaryaccruals:somequantmanagersusetheunexpected
componentofaccruals(theresidualafterregressingaccrualsonfactorssuchas
size,growth,cashpositions,etc)toforecaststockreturns.AQisanindicationofthe
volatilityofdiscretionaryaccruals,andseemstoustobealessdirectmeasure
Paper Type:
Working papers
Date:
2009-08-03
Category:
Novel strategies, accruals, accruals quality, January effect
Title:
The Pricing of Accruals Quality: January vs. The Rest of the Year
Authors:
Christina Mashruwala and Shamin Mashruwala
Source:
SSRN Working Paper
Link:
Summary:
The paper attributes the accruals quality (AQ) to a January

effect. High AQ stocks are shown to outperform low AQ stocks
only in January
AQ effect is a well-documented anomaly and is a measure of
information risk
High AQ means that company financial reporting standard

(and in particular reported accruals) is less predictable
Estimating AQ step1: run the yearly regression on total
current accruals (TCA)
TCA=a + b1 *CFO (t-1)+b2* CFO (t) + b3*CFO
(t+1) + b4 change in revenues + b5*fixed assets
Where CFO=Net income before extraordinary
items- TCA +Depreciation
fixed assets = gross property, plant and
equipment
Intuitively, this means that TCA is mainly driven
by the cash flow balance, change in revenues and
fixed assets
Size is not listed as an independent variable
because fixed assets is used
Estimating AQ step2: AQ is defined as the standard
deviation of firm-specific residuals from year t-4 to year t
The firm specific residuals are defined as (the
Actual TCA) - (the Expected TCA) from the
regression above
Return predictability of AQ only significant in January
Similar findings for sorting stocks by AQ every month,
and for double-sorting stocks first by size and then by AQ
Thereturnofthezeroinvestmentportfolioisshowntobehighestduringthefirst5daysofeach
January(Table5)47.79%ofallthereturnsduringthemonthofJanuaryoccursinthefirst5days
Data
ThepaperusesCRSPandCOMPUSTATforthetimeperiod19712003
Discussions
TheAQreturnpredictabilityismuchhigherforequalweightedreturns(9.50%for
equalweight,3.79%forcapweight,pertable2,3),whichsuggeststhatthe
implementabilitymaysufferfromsizebiasandhighertradingcosts
Wewouldliketoseemorediscussionsonthereasonsofthefinding:WhyJanuary?This
isparticularlyinterestingsincemostcompaniesdonotfiletheirannualfinancialreports
inJanuary
Relationshipwiththediscretionaryaccruals:somequantmanagersusetheunexpected
componentofaccruals(theresidualafterregressingaccrualsonfactorssuchas
size,growth,cashpositions,etc)toforecaststockreturns.AQisanindicationofthe
volatilityofdiscretionaryaccruals,andseemstoustobealessdirectmeasure

Paper
Type:
Working Papers
Date:
2008-08-13
Category: funds, asset allocation, earnings, accruals, Alpha Bubble, Quantitative

Strategies
Title:
Alpha, Alpha, Whos got the Alpha?
Authors:
Langdon B. Wheeler
Source:
CFA Institute conference
Link:
http://www.cfainstitute.org/memresources/conferences/080612/pdf/wheeler
.pdf
Summary
:
This paper
hypothesizes that todays market is in an alpha (excess return)
bubble, gives reason for the bubble and suggests what managers should do
now
.
Alpha bubble starts with initial (late 1990-early 2000s) investors
profit from investing into quant equity strategy, and the subsequent
investors excitement about the strategys potential
This profit attracts new investors, especially nave investors, who
drive the price up
Eventually this excessive investment leads to alpha bubble burst, as
evidenced in the August 2007 quant meltdown
The paradigms shifts in the market demand new innovations
Managers should focus on innovation
Either be big or be good: there should be a limit on assets under
management
Alpha may not return until alpha bubble deflates
Some basic quant techniques remain valid irrespective of bubble:
Buy more earnings or book per $ of share price
Buy clean earnings (avoid accruals)
Buy companies with improving earnings
Risk controlled portfolio
Paper Type:
Working Papers
Date:
2008-08-13
Category:
novel strategy, Intangible Returns, Accruals, Return Reversal
Title:
Intangible Returns, Accruals, and Return Reversal: A Multi-Period

Examination of the Accrual Anomaly
Authors:
Robert J. Resutek
Source:
SSRN working paper series, 2008
Link:
Summary:
This paper finds that

the well-documented accrual effect can be
subsumed by "intangible returns" from the period prior to accrual
formation.
Definition of intangible returns
Defined as the returns not explained by accounting
measures
Intuitively, it reflects investors anticipation of
future growth not yet captured by accounting
measures
Study accruals in 3 periods, not 2 periods. PPIR is
short for prior period (ie, year t-5 to year t-1)
intangible return, CPIR is short for current period
(ie, year t-1 to year t) intangible return
period 1 (prior 4 years return):
ret (t-5, t-1) = book/market (t-5) +
log (change of book value) + issuance + PPIR
period 2 (formation year return) :
ret (t-1, t) = book/market (t-1) +
total accruals (TACC) + non-accrual growth
(N_TACC) + issuance + CPIR
period 3 (future 1 year return): ret(t, t+1)
PPIR is driving previous accrual results
Based on a regression of ret(t, t+1) =
Book/market components + PPIR
The return predicting power of current period
accruals are due to the relations between prior
period intangible return.
Once PPIR are controlled, the negative association
between future returns and current period accruals
disappears.
Accrual anomaly is a derivative of value/growth anomaly
Both anomalies are driven by the intangible
returns.
Likely reason: return maybe driven by factors orthogonal
to accruals
Mechanically interpreting relationship between
future returns and current period accruals ignores
the fact that price can move for reasons that are
orthogonal to that captured by accounting metrics.
Comments:
1. Discussions
This paper is related to the Market Reactions to Tangible and
Intangible Information,
(
http://faculty.fuqua.duke.edu/areas/finance/papers/daniel.pdf
,
reviewed in 2006/04/07 issue), where it is shown that changes
in BM due to changes in book equity (so-called tangible
information) do not predict returns, but changes in price
unrelated to changes in book equity (intangible information)
have marginal forecast power.
A logical question people may ask is: will PPIR predict formation
year return, Ret(t-1, t), as well? It would be see why not if the
proposed reason is that stock return maybe driven by factors
orthogonal to accruals.
2. Data
Listed US firms from CRSP/Compustat merged dataset for the
period of 1968 to 2005. Firms needs to appear on the
CRSP/Compustat merged database and have positive book value
of equity at fiscal year end for years t-5, t-1.
Paper Type:
Working Papers
Date:
2008-03-16
Category:
Accruals, UK market, Global markets
Title:
The Accruals Anomaly - Can Implementable Portfolio Strategies

be Developed that are Profitable Net of Transactions Costs in the
UK?
Authors:
Nuno Soares, Andrew W. Stark
Source:
SSRN working paper
Link:
Summary:
In short, No. The paper profit disappeared after conservative

estimates of transaction costs are taken into account.
Moreover, accruals strategy profits significantly depend on
long/short relatively small capitalization stocks, where trading
cost and short cost can drastically lower profits
Paper Type:
Working Papers
Date:
2007-12-03
Category:
Accruals
Title:
Repairing the Accruals Anomaly
Authors:
Nader Hafzalla, Russell Lundholm, Matt Van Winkle
Source:
Penn State University working paper
Link:
http://www.smeal.psu.edu/acctg/research/RLundholm%20ARC0
7
Summary:
This paper finds that the accruals factor can be enhanced by 1)

combining with firm financial health measure, or 2) measuring
accruals by scaling earnings (instead of total assets).
Piotroskis financial health measure was used. This measure
simply gives one point for each one of eight attributes, such as:
1) earnings is positive, 2) cash from operations is positive, 3)
return on asset increases from the prior year, etc.
Key findings:
The traditional methods of calculating accrual strategy
profits are biased, since they inevitably select only those
stocks whose next years stock returns are available (so a
back-test can be done)
The size-adjusted return of highest earning quality
(lowest accrual decile) stocks is a significant
12.3% with the bias, but only an insignificant
2.7% without it.
Both accruals and financial health factors work on
stand-alone basis:
Eg, a decile strategy based on Piotroski financial
health measure generates an average
size-adjusted annual return of 8.3% from
1988-2004
Removing stocks with worst financial health scores helps
accrual strategy: when such stocks are removed, strategy
that is long (short) the stocks with lowest (highest) 10%
accruals generates an average size-adjusted annual
return of 13.6% (compared with 2.7% when all stocks are
included)
Two-way sort works even better: a strategy that is
long stocks with low-accrual, high financial health
short stocks with high-accrual, low financial health
yields a size-adjusted annual return of 24%
Earning is a better denominator than total assets
It yields a 2-3 percentage points higher returns

Using earning (instead of total assets) to scale
accruals generates a similar portfolio fo high
accruals stocks, but very different firms for the low
accruals stocks.
Comments:
1. Discussion
The so-called look-ahead bias theory is valid only for smaller
stocks. For large-cap managers, this should be a non-issue since
the likelihood of a large cap stock going bankruptcy is very
limited.
The authors show that removing look-ahead significantly
changes accrual strategy profit, we think this merely illustrates
that this paper, like many others, may have a strong size bias
where some small/illiquid/distressed stocks largely drive paper
profit.
This said, one possibility for managers covering small caps may
be to use high (low) accruals in an opposite way for stocks with
worst financial health measure.
Why earning is a better denominator? To us,
we think it is a
better measure since it directly measures the
impact of accruals
as a percentage of net earnings, which is what concerns and

mis-leads most investors
. An interesting quote by the authors is
that
when accruals are scaled by assets, the resulting measure
is
essentially the percentage change in operating assets.
Another insightful finding in the paper is that using earning

essentially removes the impact of special items in balance sheet
(which usually include restructuring charges, asset impairments
and other one-time gain/losses), while using total assets will
generate a list of stocks with large special items.
2. Data
1988-2004 stock data are from the 2004 merged
Compustat/CRSP database, with financial firms excluded. A stock
does not need to have next years return data to be included in
the portfolio, the only requirements are that it has sufficient
financial data to compute either operating accruals or total
accruals, and that it has return data available at the portfolio
formation date.
Paper Type:
Working Papers
Date:
2007-10-29
Category:
Accruals, earning surprises
Title:
Reconciling the Markets Overreaction to (Abnormal) Accruals

and Under reaction to Earnings
Authors:
Henock Louis, Amy X. Sun
Source:
London Business School working paper
Link:
http://www.london.edu/assets/documents/PDF/HLouis_paper.pdf
Summary:
This paper finds that the negative (positive) earning surprise drift
effect is stronger for stocks with high income-increasing
(decreasing) accruals.
The authors first make a general observation
- investors seem to overreact to (abnormal)
accruals
- but they under-react to earnings surprises
- and under-react to earnings-to-price ratios (E/P)
This may be due to investors failure to detect earning
management:
to mitigate shocks to investors, companies
with large negative unexpected earnings surprises
(standardized unexpected earnings, SUE) may have used
income increasing accruals, while companies with large
positive (SUE) may have used large income decreasing
accruals
Hence the negative (positive) earning surprise effect
should be stronger for stocks with high income- increasing
(decreasing) accruals. A strategy that is
- long stocks with positive surprise (ie, high SUE) / low
abnormal accrual / value (ie high E/P) firms- short stocks with negative surprise (ie, low SUE) / high
abnormal accrual / moderate E/P firms
earns an abnormal return of 46% annually (23% over the
two quarters after earning announcement). In
fact, there is virtually no earning surprise drift when
such stocks are removed.
Moderate E/P firms are used instead of low E/P firms to
select stocks for short, because investors are less likely to
be mistaken by the upward earnings management
activities of the negative SUE, low(or negative) E/P firms,
which tend to risky stocks.
This strategy is consistent across time, generating

positive abnormal returns in every quarter in the sample
period.
Comments:
1. Discussions
This paper gives a great example of factor interaction:
conditioning stock ranking of one factor on otherfactor(s) may
give improved results. 1 + 1 > 2.
The profit of the strategy sounds real big and rather consistent
(profitable very quarter during 1988- 2004). The problem is
whether this is strategy is outdated given the bad
performance of earning-based strategies since 2003
whether this strategy works in different universes. The
authors, like many others, throw all the stocks in all
exchanges in this study. The out-sized profit may be due
some small and illiquid stocks.
2. Data
1987 - 2004 stock data are from Compustat quarterly files.
Paper Type:
Working Papers
Date:
2006-12-17
Category:
Leverage, accruals
Title:
Leverage, Accruals, and Cross Sectional Stock Returns
Authors:
Ayla Kayhan, Adam Y.C. Lei, Ji Chai Lin
Source:
FMA 2006 conference paper
Link:
http://www.fma.org/SLC/Papers/LeveragenaccrualsnandCross-S
ectionalStockReturns.pdf
Summary:
This paper defines two quarterly leverage measures:

Market leverage = total debt divided by the sum of total debt
and market equity
Book leverage = total debt divided by the sum of total debt and
the book value of shareholders' equity
It shows that:
Financial leverage predicts lower stock returns. This result
is robust after controlling for many known factors
The return predicting
power of accruals becomes
insignificant when leverage is controlled
Comments:
Leverage largely accounts for the finding that firms with

higher financial constraints earn lower returns.
1. Why important
This paper is interesting because it shows a surprisingly strong
impact of leverage on stock risk adjusted returns and on other
known return predicting factors, including accruals.
2. Data
2004 stock price data are from CRSP database, accounting data
are from the Compustat database, and the institutional holdings
data from the CDA/Spectrum database.
3. Discussions
If the paper is right and leverage subsumes accrual effect, what
might be the reason? The author says that higher financial
leverage firms "tend to be financially constrained and rely more
o n outside equity capital, which raises incentives for managers
to manage earnings through accruals". This makes sense, and it
would-be interesting to directly test the correlation between
accruals and leverage, i.e. do high leverage firms have high
accrual Does accruals strategy give us a similar portfolio as when
we use leverage?
The result about the predicting power of leverage is different
from those discussed in other papers, notably Fama and French
(1992). We would like to see the authors explain more about
why there is such difference. Knowing that they are studying a
different set of data for different period, at least a study of same
sub period plus a portfolio return can help comparing notes.
Paper Type:
Working Papers
Date:
2006-10-20
Category:
Accruals, profitability
Title:
The Pricing of Accruals for Profit and Loss Firms
Authors:
Nicholas Dopuch, Chandrakanth Seethamraju, Weihong Xu
Source:
Olin School working paper
Link:
http://www.olin.wustl.edu/faculty/seethamraju/DSX_July_2005.pdf
Summary:
This paper finds that the accrual strategy is related to the

companies profitability:
The accruals for profit firms are overpriced, with a hedged
return ~15%
The accruals for loss firms are slightly underpriced, with an
insignificant hedged return ~6%
Further,
Accruals for transitory loss firms (loss firms that are more
likely to turn profitable ) are not mispriced
Accruals for persistent loss firms (loss firms that are less
likely to turn profitable are under priced
Comments:
1. Why important
The conclusion of this paper makes intuitive sense since investors
use accounting information very differently between profit and loss
firms. For loss firm, stock valuation is based on a probability to
reverse loss, and current accounting numbers are of less
relevance.
2. Data
1988 2001 financial statement data are from COMPUSTAT/CRSP
database. Financial firms were excluded in the study.
3. Discussions
This paper provides an interesting perspective by differentiating
profit and loss firms, as well as "persistent loss" and "transitory
loss" firms. It is interesting if one can expand this study to other
strategies that use accounting data, e.g., p/e
Paper Type:
Working Papers
Date:
2006-09-08
Category:
Strategy, accruals
Title:
Cash Flows, Accruals, and Future Returns
Authors:
Joshua Livnat, Massimo Santicchia
Source:
Financial Analysts Journal, Vol. 62, No. 4, pp. 48-61, July/August

2006
Link:
http://www.cfapubs.org/doi/abs/10.2469/faj.v62.n4.4186?journ
alCode=faj (abstract only)
Summary:
This study finds that the accrual anomaly exists for quarterly
accruals in addition to annual accruals. Also current net
operating cash flows have higher forecasting power than
accruals.
Comments:
Paper Type:
Working Papers
Date:
2006-09-08
Category:
Strategy, accruals
Title:
Cash Flows, Accruals, and Future Returns
Authors:
Joshua Livnat, Massimo Santicchia
Source:
Financial Analysts Journal, Vol. 62, No. 4, pp. 48-61, July/August

2006
Link:
http://www.cfapubs.org/doi/abs/10.2469/faj.v62.n4.4186?journ
alCode=faj (abstract only)
Summary:
This study finds that the accrual anomaly exists for quarterly
accruals in addition to annual accruals. Also current net
operating cash flows have higher forecasting power than
accruals.
Paper Type: Working Papers

Date:
2006-08-10
Category:
Strategy, Asset Growth Effect, size, value, momentum, accruals
Title:
What Best Explains the Cross-Section Of Stock Returns? Exploring the

Asset Growth Effect
Authors:
Michael J. Cooper , Huseyin Gulen And Michael J. Schill
Source:
Purdue working paper
Link:
http://www.mgmt.purdue.edu/faculty/mcooper/assetgrowth_071305.pdf
Summary:
This paper finds that a portfolio of long (short) stocks with lowest
(highest) last years asset growth rate generates 18% risk-adjusted
annual return. It also shows that such asset growth rate has a stronger
effect on subsequent returns than other known factors (b/p, market cap,
momentum, accruals, etc.)
Comments:
1. Why important
This paper is unique in that it shows that asset growth, a factor thats so
common to everyone, can predict returns better than other more
"sophisticated" factors. It also suggests that the asset growth effect may
dominate many other well-studied balance sheet structure effects, e.g.,
new equity issuance effect (IPO) and external financing.
2. Data
1962-2003 All NYSE, AMEX, and NASDAQ non-financial stocks data are
from CRSP/COMPUSTAT
3. Discussions
At the first glance, one can say that asset growth rate is correlated with
everything: value/growth, market cap and also momentum. So people
probably would care less about whats zero-cost return, but more about
how this new factor dominates other known factors (b/p, market cap,
momentum, accruals, etc). Statistic robustness test is key here. The
authors prove their point by (1) showing a much higher Sharpe ratio of
zero-cost portfolio based on asset growth (1.19) compared with other
factors. (2) repeating the study for largest 80 percent of stocks only. (3)
using 2-way sort to show the dominance of asset growth rate. (4) using
risk-adjusted returns. The rather consistent hedged return time series on
Figure 3 is very encouraging.
Our concerns are that (1) this strategy may behave like value strategy,
it works more often than not, but you dont know when. Many a times
the profit is a function of business cycle and market sentiment. (2) 80%
largest companies still include some small cap stocks. The performance
in large cap will be very telling.
Paper Type:
Working Papers
Date:
2006-07-27
Category:
Strategy, accruals, loan
Title:
Do Sophisticated Investors Understand Accounting Quality?

Evidence from Bank Loans
Authors:
Sreedhar T. Bharath, Jayanthi Sunder, Shyam V. Sunder
Source:
BIS Conference on Accounting, Transparency and Bank Stability
Link:
http://www.bis.org/bcbs/events/rtf04sunder.pdf
Summary:
Companies have to disclose more information to banks (when

applying for loans) than to investor communities. This paper
documents the relationship between bank loan terms and
accruals: loans are more costly and stricter for companies with
high abnormal operating accruals.
Given the information advantages of banks, we think it would be
interesting to test whether higher loan rate and stricter terms
can lead to lower stock returns.
Comments:
1. Why important
This is one of those few papers we reviewed that do not directly
discuss trading strategies. It is thought- provoking for a simple
reason: loan rate/terms reflect more information than an
investor could get, can this information predict stock returns? In
other words, this paper shows that loan rate/terms are
connected with stock accruals, and we know accruals can predict
stock returns. Is there a link between loan rates/terms and stock
returns? Hopefully the new information can predict returns better
than accruals.
We are always advocates of using new databases for new
strategies. Currently most quant strategies in US are based on
data from Compustat, in Europe from DataStream. These two
have been thoroughly studied by thousands of researchers
worldwide. We do believe that new data sources are more likely
to yield new strategy.
2. Data
The loan information is from the Loan Pricing Company (LPC).
They do offer trial subscription to interested companies.
3. Discussions
The authors find a "U-shaped" relationship between signed
abnormal accruals and loan terms, with firms having high
positive or negative abnormal accruals facing the most stringent
loan terms. This may be because banks seem to dislike
companies with both growth uncertainties, whether it's high
positive growth or negative growth. Given what we know about

accruals, quant researchers may want to compare stock returns
between stocks with high accruals and stricter loan rates/terms,
and stocks with average loan rates/terms.
Paper Type:
Working Papers
Date:
2006-06-29
Category:
Strategy, accruals, momentum, anomalies overview
Title:
Dissecting Anomalies
Authors:
Eugene F. Fama and Kenneth R. French
Source:
SSRN working paper
Link:
Summary:
In this paper, the two renowned professors review some stock

price anomalies, namely, net stock issues, accruals, momentum,
profitability, and asset growth. They conclude that some
anomalies (net stock issues, accruals, and momentum) are
pervasive, as evidenced by the back testing portfolio results and
cross-section regressions. Others (asset growth anomaly,
profitability) are less consistent.
Comments:
1. Why important
This paper is worth reading for two reasons: first, it gives an
overview of some well-studied anomalies from July 1963 up to
December 2005. Second, it offers insights in terms of how to
improve the robustness test in financial empirical research.
2. Data
The data are from CRSP and Compustat.
3. Discussions
The authors pinpoint two common problems with many empirical
research studies:
1.) The big impact of the extreme (return) values of "tiny" stocks
(defined as those with market cap below the 20th NYSE
percentile). Many existing papers compare the performances of
top and bottom segments, both of which tend to be filled with
these tiny stocks whose extreme (return) values can be
misleading.
2.) Different anomalies can be correlated. To address this issue,

the authors examine sorts of regression residuals on each
explanatory variable.
In our view, a sound robustness test should answer the following
questions:
Is the anomaly real? Is it driven by certain size, style,
sector, period (eg. internet bubble time)?
Is the anomaly new? Whats the correlation with other
existing factors?
What would be extra alpha if this new factor is added to
the existing quant model?
Paper Type:
Working Papers
Date:
2006-04-21
Category:
Strategy, Repurchase, Accruals, Earnings
Title:
Share Repurchases as a Tool to Mislead Investors: Evidence from

Earnings Quality and Stock Performance
Authors:
Konan Chan, David L. Ikenberry, Inmoo Lee, Yanzhi Wang
Source:
AFA 2006 Boston conference
Link:
Summary:
This paper documents that companies with lower equity quality

may be using share repurchase announcements to boost stock
prices in the short term.
Comments:
1. Why important for practitioners

With record high cash reserve, more companies are expected to
make share repurchase announcements. A strategy based on
stock repurchase has been shown to yield significant return
historically, but recent performance is mixed. This paper can
potentially improve this factor by combining with the earning
quality.
2. Data source
The repurchase data is from SDC, and earning quality data are
based on CRSP.
3. Next steps
For practitioners, a key question is: will a strategy based on both
repurchase announcements and earning quality provide better
alpha than any of the single factor? What would be the
performance after controlling for usual factors such as value,
momentum, etc.?

Paper Type:
Working Papers
Date:
2009-02-01
Category:
130/30, alternative index
Title:
Benchmarking 130/30 strategies
Authors:
Srikant Dash and Philip Murphy
Source:
SSRN Working Paper
Link:
Summary:
The paper claims that traditional market indices are the most
appropriate benchmarks for 130/30 managers.
With the growth of the 130/30 strategy the need for an
appropriate benchmark has arisen
S&P 500 130/30 and Credit Suisse 130/30 have
been launched to constitute passive exposure
The general problem with both indices is that there
is no broad consensus on underlying quantitative
investment strategies (e.g. accounting factors,
technical analysis, market factor or
macroeconomic factors)
The median or average returns of the peer group of funds
is also not very useful for 130/30 strategy
The survivorship bias is a serious concern for the
use average peer return as a benchmark in
general
Most of the 130/30 funds are fairly young and
there is no long enough time series history
The paper claims that traditional indices are better
benchmarks for 130/30 strategies
The short portion of the portfolio shouldnt change
the risk characteristics
The goal of 130/30 managers is to deliver a
portfolio beta of close to 1, which is the market
beta
130/30 managers themselves report that they
take the index as the benchmark (S&P survey
results)
Paper Type:
Working Papers
Date:
2008-08-13
Category:
alternative index, fundamental indexing
Title:
The Value of Fundamental Indexation
Authors:
David Blitz and Laurens Swinkels
Source:
SSRN working paper series
Link:
Summary:
This paper suggests that fundamental indexation (FI) is inferior

to other more sophisticated multi-factor quantitative strategies.
Definition of FI
An index in which stocks are weighted by
economic fundamentals, such as book value, sales
and/or earnings, instead of market capitalization
Rationale: capitalization weighted indices are
inferior because they necessarily invests more in
overvalued stocks and less in undervalued stocks
FI outperforms market index
FI (using RAFI 1000 index) generates the alpha
amounts to 0.19% per month in case of the
Fama-French market factor (beta) (1962-2005),
and 0.26% per month in case of the Russell 1000
index (1979-2005).
FI has high exposure to value factor
In the 3-factor Fama and French model, FI shows
a large and highly significant (tstatistic over 30)
exposure of 0.36 towards the value factor.
It shows a beta of 0.38 with regard to the Russell
1000 Value/Growth return difference, associated
with a highly significant t-statistic of over 30
Little exposure to size
The loading on the size factor is small and
negative, just -0.07
FI vs. Capitalization-weighted indices
The market capitalization is unique in the sense
that it is the only portfolio which every investor
can hold with minimum turnover
FI cannot be held in equilibrium by every investor,
and contrary to a market capitalization-weighted
index, a fundamental index does not represent
passive, buyand-hold strategy
Several subjective choices needed to define a FI.
Most notably, which particular fundamental factor
to use (e.g. book value, sales, earnings, cash-flow,
Comments:
dividends, etc.) and how exactly should it be

defined
Fundamental indices more resemble active
strategies
FI may be inferior to multifactor quantitative Strategies
FI benefit only from the value premium where as
Multifactor Quantitative Investment Strategies
benefit from numerous anomalies
1. Discussions
FI has been successfully marketed to investors. In our humble
view, it is more like wrapping an old idea (ie, value) with new
packaging. This paper provides a detailed analysis why the FI
strategies might not be bearing superior results as suggested by
proponents of fundamental indices. At a time when many smart
people have intensively studied equity quant strategies, we tend
to think its more likely for new alpha to come from new data
source.
Though this paper provides theoretical argument against the
fundamental indices, extensive empirical analysis is need for
supporting the conclusions.
2. Data
RAFI 1000 index (the Research Affiliates Fundamental Index for
the top 1000 US equities) and Russell 1000 index are used for
the period of 1962- 2005.
Paper Type:
Working Papers
Date:
2008-05-20
Category:
Title:
130/30 Investing: Just Another Hype or Here to Stay?
Authors:
David Blitz
Source:
Link:
Summary:
In terms of alpha potential and beta exposure, 130/30

funds behave more like traditional mutual funds than
hedge funds, mainly because of their market exposure.
Some 130/30 indices, e.g., 130/30: The New Long-Only
(
74622
) are questionable since they are not unambiguous
and transparent in selecting factors, weight and
optimizations.
Expenses for 130/30 funds are likely higher than
long-only funds due to cost related to shorting stocks and
managing a more complex portfolio
A piece-wise implemented 130/30 funds (eg, a 100% long
portfolio on top of a 30% market neutral portfolio) is
sub-optimal since its portfolio construction is not
integrated
Paper Type:
Working Papers
Date:
2008-05-01
Category:
130/30 index, alternative index
Title:
Benchmarking 130/30 Strategies
Authors:
Srikant Dash, Philip Murphy
Source:
S&P white paper
Link:
http://www2.standardandpoors.com/spf/pdf/index/Benchmarking_13030_Whitepaper.pdf
Summary:
This white paper proposes that a better benchmark for 130/30 funds is
actually an appropriate
long-only index. Any dedicated 130/30 index may be in-appropriate.
Their reasons:
No set of factors in 130/30 indices can capture a broad
consensus in identifying stock mis-pricing.
130/30 managers can use both quantitative and qualitatively
methodology
The 130/30 proposed by Lo and Patel (which emphasizes the impact of
leverage) is problematic since:
the effects of leverage are no different than effects of big factor
bets such as style, industry or size.
the goal of 130/30 managers is to deliver a portfolio beta of
close to 1
generally managers try to outperform in a risk controlled fashion

Interestingly, this paper does not agree with a 130/30 index by S&P
which we covered before
(
http://www2.standardandpoors.com/spf/pdf/index/SP_500_130-30_St
rategy_Index_Methodology_Web.pdf
), where a short extension is
added to S&Ps proprietary stock-selection model.
Paper Type:
Working Papers
Date:
2008-04-09
Category:
Optimal indexing scheme, MSCI World Index, alternative index
Title:
Alternative Indexing with the MSCI World Index
Authors:
Thomas Neukirch
Source:
SSRN working paper
Link:
Summary:
This paper finds that equal-risk weighting performs better than

the cap-weight scheme used by the MSCI World Developed Index
during 2001/01 through 2008/01.
Weighting
scheme
Description
Performance
Original index
weighting
Uses float-adjusted
market capitalization
as weights
Yields -2.86%
during 2001/01 2008/01
Equal weighting
All constituents get

same weight
Equal-weighted
both components
and countries
generates 8.19%.
Equal risk
weighting
Each constituents
get a weight of
Equal-risk
weighting index
1/(constituents
volatility) i.e., each
constituents
contributes the same
amount of risk
(volatility) to the
resulting portfolio
components:
6.27%,
Equal risk
weighting with equal
country weighting
generates 8.27%,
with low volatility
Other findings:
All alternative weighting schemes perform better than the
original index, though such out-performance is more
obvious when market is rising
The costs of implementing an equal weighting strategy:
Before expenses, the equal weighting strategy
returns 1.45% annually, the original index returns
-3.17%
After expenses, the equal-weighted index returns
0.70%, and the authors did not give the number
for the original index
Comments:
1. Discussions
Our major concern is that the finding here has a look-ahead bias.
What happened during 2001/01-2008/01 may not repeat in the
future. The author has the benefit of perfect hindsight: he first
found that during the past 7 years, higher cap weighted
countries yield lower returns (figure 2), and then proposes the
equal-risk weighting and equal-weighting. He argues that ?
riskiness is quite stable over time and hence a risk weighting
component may lead to more stable results, this may not
always be true. Using an example in US, energy sector was a
low-beta, low volatility sector before 2006, but it is no longer the
case.
Paper Type:
Working Papers
Date:
2007-12-26
Category:
Title:
130/30: The New Long-Only
Authors:
Andrew Lo, Pankaj Patel
Source:
SSRN working paper
Link:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1074622&d
ownload=yes
Summary:
This paper proposes two indices for the increasingly popular

130% long/30% short (130/30) funds.
The two indices are:
An investable index: which uses only prior information
and is dynamically rebalanced based on a mechanic
trading rule
A"look-ahead" index: which uses look-ahead information
(such as realized excess return) and can be used as a
performance upper bound.
The proposed indices are based on a stock ranking strategy and
a standard portfolio construction method.S
pecifically, stocks are
ranked based on 10 commonly used factors:
1. Traditional Value. (price ratios such as p/e, p/b, etc)
2. Relative Value
3. Historical Growth
4. Expected Growth
5. Profit Trends
6. Accelerating Sales
7. Earnings Momentum.
8. Price Momentum.
9. Price Reversal.
10. Small Size.
Key insights:
An optimal benchmark index should be: transparent
(systematic rules, clear), investable (liquid components),
passive (mechanical implementation, no human
discretion)
Compared with the S&P 50 index, the new 130/30 index
has similar volatility (about 15% annual
volatility for
both)
has slightly higher Sharpe ratio (0.4 for the 130/30 index,
vs 0.37 for the S&P 500 index).
The authors claim that
this comparison is fair since although 130/30 has 1.6
times leverage, the volatility and beta of the 130/30
index is at similar level to S&P 500)
It has high correlation with com on equity indices eg,
Russell 2000
Comments:
1. Discussions
In our view, t
he proposed indices sound more like a quant index
and less a 130/30 index.130/30 funds are
different from
(arguably, better than) the traditional long-only for two reasons:

it can exploit the short side of stocks, which many believe
there still exist in-efficiencies since managers do not have
a way to express their negative view of some stocks. An
ideal index should reflect opportunity set in this new
territory.
it has a 1.6 leverage (130% + 30%). In reality few
130/30 managers would keep their volatility and beta at
the same level of S&P 500. A more desirable index (in our
humble view) is an index with higher volatility.
This said, the proposed 130/30 index has better performance
than S&P500 due to its quant stock selection (likely value tilt).
2. Data
1996/01 - 2007/09 US stock data are used. The authors uses the
MSCI Barra Aegis Portfolio Manager with the Barra U.S. Equity
Long-Term Risk Model to construct the 130/30 portfolios
Paper Type:
Working Papers
Date:
2007-12-26
Category:
130/30 funds, alternative index
Title:
An Empirical Analysis of 130/30 Strategies
Authors:
Gordon Johnson, Shannon Ericson, Vikram Srimurthy
Source:
Lee Munder research paper
Link:
http://leemunder.com/upload/File/LMCG-130-30-WhitePaper.pdf
Summary:
This is a nice summary of the key features of the 130/30

strategies. Key points:
less than 10% of stocks can be underweight 25bps or
more relative to large cap benchmark
stocks with highest weights do not necessarily have the
lowest alphas
so a 130/30 funds can potentially increase alpha
In back-testing 130/30 outperform long-only by about 1.5
times, with a tracking error that is about 1.15 times
higher.
The authors also proposed a simple performance
contribution analysis.

Paper Type:
Working Papers
Date:
2009-02-01
Category:
Title:
Benchmarking 130/30 strategies
Authors:
Srikant Dash and Philip Murphy
Source:
SSRN Working Paper
Link:
Summary:
The paper claims that traditional market indices are the most
appropriate benchmarks for 130/30 managers.
With the growth of the 130/30 strategy the need for an
appropriate benchmark has arisen
S&P 500 130/30 and Credit Suisse 130/30 have
been launched to constitute passive exposure
The general problem with both indices is that there
is no broad consensus on underlying quantitative
investment strategies (e.g. accounting factors,
technical analysis, market factor or
macroeconomic factors)
The median or average returns of the peer group of funds
is also not very useful for 130/30 strategy
The survivorship bias is a serious concern for the
use average peer return as a benchmark in
general
Most of the 130/30 funds are fairly young and
there is no long enough time series history
The paper claims that traditional indices are better
benchmarks for 130/30 strategies
The short portion of the portfolio shouldnt change
the risk characteristics
The goal of 130/30 managers is to deliver a
portfolio beta of close to 1, which is the market
beta
130/30 managers themselves report that they
take the index as the benchmark (S&P survey
results)
Paper Type:
Working Papers
Date:
2008-08-13
Category:
alternative index, fundamental indexing
Title:
The Value of Fundamental Indexation
Authors:
David Blitz and Laurens Swinkels
Source:
Link:
Summary:
This paper suggests that fundamental indexation (FI) is inferior

to other more sophisticated multi-factor quantitative strategies.
Definition of FI
An index in which stocks are weighted by
economic fundamentals, such as book value, sales
and/or earnings, instead of market capitalization
Rationale: capitalization weighted indices are
inferior because they necessarily invests more in
overvalued stocks and less in undervalued stocks
FI outperforms market index
FI (using RAFI 1000 index) generates the alpha
amounts to 0.19% per month in case of the
Fama-French market factor (beta) (1962-2005),
and 0.26% per month in case of the Russell 1000
index (1979-2005).
FI has high exposure to value factor
In the 3-factor Fama and French model, FI shows
a large and highly significant (tstatistic over 30)
exposure of 0.36 towards the value factor.
It shows a beta of 0.38 with regard to the Russell
1000 Value/Growth return difference, associated
with a highly significant t-statistic of over 30
Little exposure to size
The loading on the size factor is small and
negative, just -0.07
FI vs. Capitalization-weighted indices
The market capitalization is unique in the sense
that it is the only portfolio which every investor
can hold with minimum turnover
FI cannot be held in equilibrium by every investor,
and contrary to a market capitalization-weighted
index, a fundamental index does not represent
passive, buyand-hold strategy
Several subjective choices needed to define a FI.
Most notably, which particular fundamental factor
to use (e.g. book value, sales, earnings, cash-flow,
Comments:
dividends, etc.) and how exactly should it be

defined
Fundamental indices more resemble active
strategies
FI may be inferior to multifactor quantitative Strategies
FI benefit only from the value premium where as
Multifactor Quantitative Investment Strategies
benefit from numerous anomalies
1. Discussions
FI has been successfully marketed to investors. In our humble
view, it is more like wrapping an old idea (ie, value) with new
packaging. This paper provides a detailed analysis why the FI
strategies might not be bearing superior results as suggested by
proponents of fundamental indices. At a time when many smart
people have intensively studied equity quant strategies, we tend
to think its more likely for new alpha to come from new data
source.
Though this paper provides theoretical argument against the
fundamental indices, extensive empirical analysis is need for
supporting the conclusions.
2. Data
RAFI 1000 index (the Research Affiliates Fundamental Index for
the top 1000 US equities) and Russell 1000 index are used for
the period of 1962- 2005.
Paper Type:
Working Papers
Date:
2008-05-20
Category:
Title:
130/30 Investing: Just Another Hype or Here to Stay?
Authors:
David Blitz
Source:
Link:
Summary:
In terms of alpha potential and beta exposure, 130/30

funds behave more like traditional mutual funds than
hedge funds, mainly because of their market exposure.
Some 130/30 indices, e.g., 130/30: The New Long-Only
(
74622
) are questionable since they are not unambiguous
and transparent in selecting factors, weight and
optimizations.
Expenses for 130/30 funds are likely higher than
long-only funds due to cost related to shorting stocks and
managing a more complex portfolio
A piece-wise implemented 130/30 funds (eg, a 100% long
portfolio on top of a 30% market neutral portfolio) is
sub-optimal since its portfolio construction is not
integrated
Paper Type:
Working Papers
Date:
2008-05-01
Category:
Title:
Benchmarking 130/30 Strategies
Authors:
Srikant Dash, Philip Murphy
Source:
S&P white paper
Link:
http://www2.standardandpoors.com/spf/pdf/index/Benchmarking_13030_Whitepaper.pdf
Summary:
This white paper proposes that a better benchmark for 130/30 funds is
actually an appropriate
long-only index. Any dedicated 130/30 index may be in-appropriate.
Their reasons:
No set of factors in 130/30 indices can capture a broad
consensus in identifying stock mis-pricing.
130/30 managers can use both quantitative and qualitatively
methodology
The 130/30 proposed by Lo and Patel (which emphasizes the impact of
leverage) is problematic since:
the effects of leverage are no different than effects of big factor
bets such as style, industry or size.
the goal of 130/30 managers is to deliver a portfolio beta of
close to 1
generally managers try to outperform in a risk controlled fashion

Interestingly, this paper does not agree with a 130/30 index by S&P
which we covered before
(
http://www2.standardandpoors.com/spf/pdf/index/SP_500_130-30_St
rategy_Index_Methodology_Web.pdf
), where a short extension is
added to S&Ps proprietary stock-selection model.
Paper Type:
Working Papers
Date:
2008-04-09
Category:
Optimal indexing scheme, MSCI World Index, alternative index
Title:
Alternative Indexing with the MSCI World Index
Authors:
Thomas Neukirch
Source:
SSRN working paper
Link:
Summary:
This paper finds that equal-risk weighting performs better than

the cap-weight scheme used by the MSCI World Developed Index
during 2001/01 through 2008/01.
Weighting
scheme
Description
Performance
Original index
weighting
Uses float-adjusted
as weights
Yields -2.86%
during 2001/01 2008/01
Equal weighting
All constituents get

same weight
Equal-weighted
both components
and countries
generates 8.19%.
Equal risk
weighting
Each constituents
get a weight of
Equal-risk
weighting index
1/(constituents
volatility) i.e., each
constituents
contributes the same
amount of risk
(volatility) to the
resulting portfolio
components:
6.27%,
Equal risk
weighting with equal
country weighting
generates 8.27%,
with low volatility
Other findings:
All alternative weighting schemes perform better than the
original index, though such out-performance is more
obvious when market is rising
The costs of implementing an equal weighting strategy:
Before expenses, the equal weighting strategy
returns 1.45% annually, the original index returns
-3.17%
After expenses, the equal-weighted index returns
0.70%, and the authors did not give the number
for the original index
Comments:
1. Discussions
Our major concern is that the finding here has a look-ahead bias.
What happened during 2001/01-2008/01 may not repeat in the
future. The author has the benefit of perfect hindsight: he first
found that during the past 7 years, higher cap weighted
countries yield lower returns (figure 2), and then proposes the
equal-risk weighting and equal-weighting. He argues that ?
riskiness is quite stable over time and hence a risk weighting
component may lead to more stable results, this may not
always be true. Using an example in US, energy sector was a
low-beta, low volatility sector before 2006, but it is no longer the
case.
Paper Type:
Working Papers
Date:
2007-12-26
Category:
Title:
130/30: The New Long-Only
Authors:
Andrew Lo, Pankaj Patel
Source:
SSRN working paper
Link:
ownload=yes
Summary:
This paper proposes two indices for the increasingly popular

130% long/30% short (130/30) funds.
The two indices are:
An investable index: which uses only prior information
and is dynamically rebalanced based on a mechanic
trading rule
A"look-ahead" index: which uses look-ahead information
(such as realized excess return) and can be used as a
performance upper bound.
The proposed indices are based on a stock ranking strategy and
a standard portfolio construction method.S
pecifically, stocks are
ranked based on 10 commonly used factors:
1. Traditional Value. (price ratios such as p/e, p/b, etc)
2. Relative Value
3. Historical Growth
4. Expected Growth
5. Profit Trends
6. Accelerating Sales
7. Earnings Momentum.
8. Price Momentum.
9. Price Reversal.
10. Small Size.
Key insights:
An optimal benchmark index should be: transparent
(systematic rules, clear), investable (liquid components),
passive (mechanical implementation, no human
discretion)
has similar volatility (about 15% annual
volatility for
both)
has slightly higher Sharpe ratio (0.4 for the 130/30 index,
vs 0.37 for the S&P 500 index).
The authors claim that
this comparison is fair since although 130/30 has 1.6
times leverage, the volatility and beta of the 130/30
index is at similar level to S&P 500)
It has high correlation with com on equity indices eg,
Russell 2000
Comments:
1. Discussions
In our view, t
he proposed indices sound more like a quant index
and less a 130/30 index.130/30 funds are
different from
(arguably, better than) the traditional long-only for two reasons:

it can exploit the short side of stocks, which many believe
there still exist in-efficiencies since managers do not have
a way to express their negative view of some stocks. An
ideal index should reflect opportunity set in this new
territory.
it has a 1.6 leverage (130% + 30%). In reality few
130/30 managers would keep their volatility and beta at
the same level of S&P 500. A more desirable index (in our
humble view) is an index with higher volatility.
This said, the proposed 130/30 index has better performance
than S&P500 due to its quant stock selection (likely value tilt).
2. Data
1996/01 - 2007/09 US stock data are used. The authors uses the
MSCI Barra Aegis Portfolio Manager with the Barra U.S. Equity
Long-Term Risk Model to construct the 130/30 portfolios
Paper Type:
Working Papers
Date:
2007-12-26
Category:
Title:
Authors:
Source:
Link:
Summary:

lowest alphas
higher.

Paper Type:
Working Papers
Date:
2014-04-10
Category:
Pre-announcements, Management forecasts, Analyst forecasts
Title:
Stock Market Overreaction to Management Earnings Forecasts
Authors:
Jean-Sbastien Michel
Source:
CIRPE
Link:
http://www.cirpee.org/fileadmin/documents/Cahiers_2013/CIRPEE1319.pdf
Summary:
Stock prices overreacts to management earnings forecasts, and revert

around the earnings announcement. Negative forecast surprises lead
to a -5.9% abnormal return around the forecast and a 1.9%
correction in the 2-month after earnings announcements. Positive
surprises lead to a 1.9% abnormal return and a -1.7% correction
Reaction to management earnings forecasts: the returns over
the first 3days following the forecast
Reaction to earnings announcement: the returns over the first
61 days following the announcement
Overreaction to management earnings forecasts, particularly negative
forecasts
The 3-day CAR is -5.86% for negative surprises, 1.93%/0.65%
for positive (no) surprises (Table 1)
Results are robust to controlling for firm characteristics and
analyst forecasts (Table 2)
Following the RegFD, the 3-day stock returns after
management forecasts is lower yet still significant (~2% after
RegFD vs ~6% before RegFD) (Table 3)
Correction after earnings announcements
Significant CAR reversal following earnings announcement:
negative surprises predicts 1.88% CAR over next two months,
positive(no) surprise predicts -1.72(-1.61%) (Table 1)
Robust to firm characteristics and analyst forecasts
(Table 2)
Source: The Paper

In regressions, more reliable results after RegFD when
controlling for firm characteristics and analyst forecasts (Table
4)
A management forecast cumulative abnormal return increase
of 1% is associated with a subsequent correction of -0.41%
(Table 4)
Robust to size, value/growth, and analyst coverage: a
management earnings forecast CAR increase of 1% is
associated with a subsequent correction of -0.38% to -0.44%
(Tables 6, 7, 8)
Overreaction is present mainly when analyst forecasts
corroborate management forecasts (Table 9)
Data
U.S. firms accounting data from the Compustat database
U.S. stock data from CRSP database
Data on companies EPS guidance from First Call
Data on analyst EPS forecasts from the I/B/E/S database
Data range: 1994 - 2011
Paper
Type:
Working Papers
Date:
2013-07-03
Category: Novel strategy, company guidance range, analyst estimate

Title:
Investor Overreaction to Analyst Reference Points
Authors:
Jean-Sebastien Michel
Source:
SSRN working paper
Link:
Summary
:
Analysts tend to keep their estimates within the company guidance range.
Those estimates that are exactly equal to endpoints of guidance range may
suggest analysts conservatism. Investors overreact to such forecasts, but
not other types of forecasts
Intuitions and definitions
Most companies tend to give a range of their expected earnings
Analysts tend to keep their estimates within the company issued
guidance (CIG) range. Any estimates outside of the range signals
analysts unusual confidence, and may risk their reputation
Investors seem to be overconfident that endpoints estimates are
conservative, and overreact to such estimates
Define Low RP (reference point): equals 1 when at least one analyst
forecast equals the low point of CIG, and 0 otherwise
Define High RP: equals 1 when at least one analyst forecast equals
the high point of CIG, and 0 otherwise
Define No RP (low): equals 1 when all analyst forecasts are less
than the low point of CIG , and 0 otherwise
Define No RP (High): equals 1 when all analyst forecasts are greater
than the high point of CIG, and 0 otherwise
Define forecast error: the percentage difference between the analyst
quarterly EPS forecast and realized quarterly EPS
1/3 of estimates are on the endpoints, with comparable forecast error
The percentage of forecasts exactly equal to the CIG Low (High) are
around 15% (20%) (Table 1)
The percentage of forecasts between the CIG Low and High hovers
around 50%. (Table 1)
When Analyst Forecast < CIG Low, the error is much higher at 19%,
compared with other cases where the error is -2% to 4% (Table 1, 2)
Strong reversal on announcement days for low RP stocks
For the Low RP stocks, days before the earnings announcements see
large negative abnormal return
T-stat is significant (Table 4)
Suggesting that investors react more strongly to analyst
forecasts in this case
Similar pattern for No RP (Low) and No RP (High) stocks (Table 4,
Figure2)
Source: the paper

The over-reaction theory is further supported by higher turnover
Low (high) RP stocks have share turnover of 2.67% (2.64%)
30% higher than the turnover of No RP stocks whose turnover is
2.09%. (Table 8 panel A)
Not driven by the magnitude of the forecast
When comparing the forecasts equal to CIG endpoints to those
that exceed CIG endpoints, the overreaction is even more
pronounced
Data
January 2000 to June 2011 EPS guidance are from First Call
Only retain range estimates
Data on analyst EPS forecasts are from the I/B/E/S
Stock returns, prices and shares outstanding are from
CRSP/Compustat
Paper Type:
Working Papers
Date:
2013-02-28
Category:
Novel strategy, insider trading, analyst revi
Title:
Insider Trading and Analyst Forecast Revisions: Global Evidence
Authors:
Wen Jin, Joshua Livnat, and Yuan Zhang
Source:
SSRN Working Paper
Link:
Summary:
Stocks with analysts revision confirming prior insider trading

yields significant return spreads, with a return spread of 8.6% in
the three-day period surrounding the revision. Such interaction
works best for insider sales in US, and for insider purchases in
international markets
Definitions
INSIDER: set to 1 if there is any insider trading activity in
the designated window, and 0 otherwise
Insider PURCHASE (SALE): set to 1 if the aggregate
time-weighted trading is a net purchase (sale), and 0
otherwise
In US, there are 833 purchases and 1439 sells on average
each month
In international market, there are 1478 net purchase
position and 904 net sale position each month(Table 5)
Suggesting a weaker emphasis on stock-based
compensation outside of the US
Insider trading predicts stock returns
From January 1996 to October 2011, long(short) insider
buy(sell) earns 0.22% in the 30-day window after the
calendar month end (Table 1)
Most of the hedge return coming from long portfolio:
suggesting that insider purchases are more informative
In international market, the returns spread is 0.77%, with
more return comes from short portfolio
Market reacts immediately to analyst revisions
Sort the analyst forecast revisions into 10 deciles
In US, the three-day hedged return is 7.6% (Table 2,
Panel A)
In international markets, the hedged return is much lower
at 2.5% (Table 6 Panel A )
Insiders trading and analyst revisions are supplement to each
other
In the US market, when analysts confirm the insider
trading signal, the hedged return around the three-day
period surrounding the revision is 8.6%, with the lowest
(highest) decile of revisions earns -5.2% (3.4%)
When analysts conflict with prior insider trading, the
hedged return is 7.1% (20% lower than confirming
scenario)
Similar findings in international markets
When analysts agree with insiders, the market
responds more strongly (coefficient 25% higher)
to their forecast revisions (Panel B, Table 7)
Data
1996-2012 US data are from the Thomson Reuters insider
trading database
Analyst forecast data are from IBES
2006-2012 international insider trading data are from 2iQ
Research, which covers European and Asia-Pacific
countries

Paper Type:
Working Papers
Date:
2012-07-29
Category:
Novel strategy, analyst revisions, analyst optimism
Title:
Are Analysts Really Too Optimistic?
Authors:
Jean-Sbastien Michel and J. Ari Pandes
Source:
AAA Conference Paper
Link:
http://aaahq.org/AM2012/display.cfm?Filename=SubID_557%2Epdf&
MIMEType=application%2Fpdf
Summary:
A new measure of analyst ability, firm-level relative analyst earnings

forecasts (ARAF), can predict future stock returns. A strategy based
on ARAF earns risk-adjusted return of 11% per year. This effect is
more pronounced among smaller, more illiquid and more uncertain
stocks
Background
Stocks with high analysts revisions (adjusted for average
estimate error) may signal analysts ability and confidence in
the stock
Note that such confidence is not analysts (unfounded)
optimism, and it should be based on analysts private
information and effective analysis
Constructing average relative analyst forecast (ARAF)
Step1: for each analyst, each stock, and each month, define
relative analyst forecast (RAF) as
Where Fi,j,t is analyst js forecast for firm i and for the

forecast date t; () is the average forecast of all analysts
for the period t to t-k for the same firm, and () is the
standard deviation of these forecasts
In other words, RAF is the (analysts forecast prior
3-months average forecast of all analysts) / (standard
deviation of these forecasts )
Step2: for each stock, get the aggregate RAF (ARAF) by
averaging RAF across all analysts
So ARAF controls for any company or time-specific
factors that affect forecasts and therefore eliminates
the general biases attributed to consensus forecasts or
recommendations
Average ARAF varies substantially by quintile (Table 3)
Constructing the ARAF portfolio
Each month, sort stocks into quintiles by ARAF

Rebalance monthly and calculate equal-weighted return for
each portfolio
The (unreported) value-weighted returns is qualitatively
similar, though with lower economic significance
Higher ARAF, higher returns
High-ARAF firms significantly outperform low-ARAF firms by
0.92% (1.45% vs. 0.53%) per month (annualized spread
11.04%) (Table 5)
The risk-adjusted hedged portfolio monthly return is 0.97%
and highly statistically significant at the 1% level (annualized
spread 11.64%) (Table 5)
Returns monotonically increase with ARAF measure
Robust to risk factors and Reg-FD
Double sort stocks by ARAF and size (P/B, momentum,
liquidity) into 5x5 portfolios
ARAF works better in smaller, riskier (measured by
book-to-market) and less liquid segments
But still demonstrate strong abilities among firms that are
larger, less risky and more liquid (Table 6, 7)
Sort by size
In small cap quintile,

22.68% annually
In large cap quintile,

2.76% annually
Sort by illiquidity
In illiquid quintile,
18.36% annually
In most liquid
quintile, 3.00%
annually
Sort by volatility
In high volatility
quintile, 24.00%
annually
In low volatility
quintile, 4.44%)
annually
Regression confirms the findings (Table 8)

Control variables include size, book-to-market,
momentum, analyst EPS forecast dispersion,
prior-month return to capture the reversal, S&P
long-term debt rating, and forecast error
Weaker but still effective post-Reg FD (Table 9)
Divide the sample into pre-Reg FD (1984-2000) and
post-Reg FD (2001-2010)
On a factor-adjusted basis, the annualized hedged
return is 14.40% pre-Reg FD and 7.56% post-Reg FD
Higher ARAF, better accounting performance and higher forecast
accuracy
Better operating performance in terms of ROA, CROA (cash
flow on assets), and ROE
Data
Strong and positive relationship: high ARAF portfolios

significantly outperform low ARAF portfolios
operationally by $0.95 to $1.32 per $100 of assets and
$3.53 per $100 of equity in mean (Table 4)
Forecast error (FCE) decreases with ARAF (Table 4)
More pronounced for high uncertainty firms: they see a
five-times larger mean difference in FCE between high
and low ARAF firms (0.88 versus 0.17), comparing to
low uncertainty firms (Table 4)
January 1984 to December 2011 stock data is from CRSP
Analyst EPS forecasts data (for the one-year fiscal period) is
from Thomson Reuters I/B/E/S unadjusted detail history file
Actual EPS is from the I/B/E/S unadjusted detail actuals file,
while other accounting data from Compustat
Paper Type:
Working papers
Date:
2010-12-20
Category:
Novel strategy, analyst estimates, warranted forecasts
Title:
A New Approach to Predicting Analyst Forecast Errors:

Implications for Investment Decisions
Authors:
Eric C. So
Source:
SSRN Working paper
Link:
Summary:
A new earnings forecasting metric, Warranted Optimism (WO),

yields long-short average portfolio returns of 16% per year. Such
WO is better than analyst forecast since it forecasts future
earnings directly from lagged firm characteristics, and is not
related to analysts private information or incentive
Warranted Forecast (WF) are forecasts of future earnings
estimated directly from lagged firm characteristics
The regressors are the lagged values of the
following firm characteristics: enterprise value
(Vj), total assets (Aj), dividend levels (Dj), a
binary variable indicating zero dividends (DDj), net
income before extraordinary items (Ej), and a
binary variable indicating negative earnings

(NEGE) (Equation 9, Page 11)
Warranted optimism (WO) = (Warranted Forecast (WF) Analyst Forecast (AF)) / (Total Assets)
The WF approach is less biased since it is directly based
on firm characteristics
It is well-known that Analyst Forecasts (AF) are
systematically biased
WF directly estimates future earnings based on
firm characteristics, instead of regressing realized
forecast errors on firm characteristics
So WF results in unbiased estimates of future
earnings, and WF forecast errors are unbiased
estimates of the realized analyst forecast error
Traditional approach to projecting analyst forecast errors are
biased
In this approach, analyst forecasts (Fj,t) are a linear
function of observable firm characteristics and analysts
private information and incentives
Traditional approach regresses FEj,t (Realized analyst
forecast errors, defined as FEj,t = Ej,t Fj,t ) on a set of
firm characteristics
The regression parameters obtained from this step
are then used with current firm characteristics to
estimate the analysts forecast error for the next
year
But the analysts private information or incentives are
correlated with firm characteristics, so this traditional
approach is biased (Equations 1, 2, and 3 on Page 5)
Constructing portfolios based on WO
Sort stocks into quintiles by WO
Portfolios are formed at the end of June each year, and
hold for 1-3 years
Stock raw and risk-adjusted returns increase with WO
(Table 4)
Over the next year, the long-short portfolio raw
return spread is 16.4% (statistically significant)
The long-short portfolio returns are statistically
significantly positive for up to 3 years
Risk adjusted return returns increase with WO:
Returns adjusted for Fama-French factors show
significant alphas increasing in WO (Table 5)
Robust to earnings drift and accruals (Table 6)
Robust to size, book-to-market, momentum, accruals,
turnover, and long-term growth forecasts (Table 7), as
WO effects still exist in a two-way sorting
Robust to extreme outliers: beginning in the third month

following portfolio formation, average returns
monotonically increase with WO, so the finding is not
driven by a extreme performers (Figure 4)
Good (maybe too good?) year-by-year performance (Table 9)
The performance number look extraordinarily consistent:
only 1 year during 1976-2008 see negative return spread
of WO Quintiles
WO long-short portfolio returns have been positive almost
every year during the 1976 - 2008 period. Over the
2003-2008 period, the size-adjusted long-short portfolio
return is between 5.19% and 19.71%
Data
1976-2008 60,010 firm-years stock data are from CRSP,
Compustat and IBES
Paper Type:
Working papers
Date:
2010-02-28
Category:
Analyst revisions, promptness, 8-K
Title:
Interpreters of Public Information or Developers of Private

Information: Which Role of Analysts Do Investors Value More?
Authors:
Joshua Livnat and Yuan Zhang
Source:
SSRN Working Paper
Link:
Summary:
Which analyst revisions are more valuable? This paper finds that
the highest value is generated by revisions following 8-K filings,
suggesting that revisions are more informative after analysts
digest the public information that is often qualitative in 8-K
Definitions
Form 8-K is used to notify investors of a current event
Prompt revision: if there is a preliminary earnings
announcement, 10-K, 10-Q or 8-K release within 3
trading days prior to the revision date, then this revision
is a prompt revision. Otherwise, the revision is
nonprompt
A prompt (non-prompt) revision reflects the analysts
ability to generate public (private) Information
60% of the forecast revisions are prompt revisions

48% of the revisions are issued promptly after
earnings announcements, 8% after 10-Q filings,
and 37% after 8-K filings
Market impact here is 3-day period around the forecast
revision day, excess buy and hold return
In the short term, higher market reaction for prompt revisions
Higher returns following extreme prompt revisions than
extreme non-prompt revisions
For top and bottom 10% prompt revisions, the
3-day excess returns are -5.1% and 3.6%
For top and bottom 10% non-prompt revisions,
the 3-day returns are -3.1% and 1.2%
Market reaction for prompt revisions are 21% stronger
than non-prompt revisions
In the short term, investors reacts strongly to prompt
revisions, (mostly earnings announcements and 8-K
filings)
In the long term, only revisions following 8-K has long term
impact
Only revisions following 8-K has long term impact (up to
the 90th trading days after the public disclosure)
Data
1996-2008 analyst forecast revisions are from I/B/E/S
detail dataset
Stock returns are from CRSP and accounting information
from Compustat
Dates of 10-K, 10-Q and 8-K are from the Quarterly
Compustat file and the S&P Filing Dates database
The total sample size is 1,236,097 individual analyst
forecast revisions over 1996-2008
Paper Type:
Journal papers
Date:
2009-10-14
Category:
analyst dispersion
Title:
Sell on the News: Differences of opinion, shortsales constraints

and returns around earnings announcements
Authors:
Henk Berkman, Valentin Dimitrov, Prem C. Jain, Paul D. Koch
and Sheri Tice

Source:
Journal of Financial Economics 92, 2009, pp. 376 399
Link:
http://linkinghub.elsevier.com/retrieve/pii/S0304405X09000221
Summary:
Miller [1977. Risk, uncertainty, and divergence of opinion.

Journal of Finance 32, 11511168] hypothesizes that prices of
stocks subject to high differences of opinion and short-sales
constraints are biased upward. We expect earnings
announcements to reduce differences of opinion among
investors, and consequently, these announcements should
reduce overvaluation. Using five distinct proxies for differences
of opinion, we find that
high differences of opinion stocks earn
significantly lower returns around earnings announcements than
low differences of opinion stocks
. In addition, the returns on high
differences of opinion stocks are more negative within the
subsample of stocks that are most difficult for investors to sell
short. These results are robust when we control for the size
effect and the market-to-book effect and when we examine
alternative explanations such as financial leverage, earnings
announcement premium, post-earnings announcement drift,
return momentum, and potential biases in analysts forecasts.
Also consistent with Millers theory, we find that stocks subject to
high differences of opinion and more binding short-sales
constraints have a price run-up just prior to earnings
announcements that is followed by an even larger decline after
the announcements.
Paper Type:
Journal papers
Date:
2009-10-14
Category:
analyst recommendations, buy/sell asymmetry
Title:
Behavioural Bias and Conflicts of Interest in Analyst Stock

Recommendations
Authors:
Thabang Mokoaleli-Mokoteli1, Richard J. Taffler1 and Vineet

Agarwal
Source:
Journal of Business Finance and Accounting, Volume 36 Issue

3-4
Link:
Summary:
This paper tests whether sell-side analysts are prone to

behavioural errors when making stock recommendations as well
as the impact of investment banking relationships on their
judgments. In particular, we analyse their report narratives for
evidence of cognitive bias. We find first that
new buy
recommendations on average have no investment value whereas
new sell recommendations do,
and take time to be assimilated
by the marke
t
. We also show that new buy recommendations are
distinguished from new sells both by the level of analyst
optimism and representativeness bias as well as with increased
conflicts of interest. Successful new buy recommendations are
characterised by lower prior returns, value stock status, smaller
firms and weaker investment banking relationships. On the other
hand, successful new sells do not differ from their unsuccessful
counterparts in terms of these measures. As such, we provide
evidence that analysts are prone both to behavioural bias as well
as potential conflicts of interest in their new buy stock
recommendation decisions. We also show that these two
explanations of analyst behaviour are to a great extent
independent of each other. Consequently, the recent attempts by
regulators to address potential conflicts of interest in analyst
behaviour may have only limited impact.
Comments:
Paper Type:
Working papers
Date:
2009-10-14
Category:
Sell-side firms, analyst recommendations, pre-disclosure
Title:
Getting Out Early: An Analysis of Market Making Activity at the

Recommending Analysts Firm
Authors:
Juergens, Jennifer L. and Lindsey, Laura
Source:
Link:
http://www.zerohedge.com/sites/default/files/getting_out_early.pdf
Summary:
Sell-side analyst may have disclosed their sell recommendations

earlier to their own prop-trading desk and/or some favored clients
prior to official release.
This is evidenced in the disproportionate
increase in market making volume associated with the firms
recommendation changes the 2 days before downgrade
Background:
Nasdaq PostData is a unique source where trading data

(daily total and signed volume) are attributed to particular
market makers
PostData is for subscription from January 2002 to March
2005
PostData are only available August 23, 2004, through March
16, 2005
Sell-side firms are involved in more market making of stocks whose
buy/sell directions match their recommendations
They broker disproportionately high trading volume for the
recommended stocks around upgrades and downgrades
This is not due to better execution prices, so this is rather a
reward for the research recommendation at the cost of other
investors
The direction of the volume is in the same direction as the
analyst revision
The finding is true for a broad set of Nasdaq securities
Evidence of pre-disclosing of sell recommendations
There is much higher sell volume at the recommending
analyst firms market maker in the 2 days preceding a
downgrade
Such increase in sell volume is limited to firms that with
proprietary trading groups
So bad news may have been shared with internal trading
group or favored clients of the firm
By contrast, buy volume for the market maker is confined to
the upgrade release date
Data
August 23, 2004, through March 16, 2005 daily attributed
market making volume are from Nasdaq Post-Data
Information on analyst recommendations comes from
Thomson Financials I/B/E/S
Additional information are from the NASD, SEC Filings,
CRSP, Institutional Investor, and Yahoo! Finance
Paper Type:
Working papers
Date:
2009-07-06
Category:
Analyst notes, novel strategies
Title:
Do Analysts Notes Provide New Information?
Authors:
Gus De Franco and Ole-Kristian Hope
Source:
SSRN Working Paper
Link:
Summary:
This paper discusses a new data source, analyst notes, which

tend to lead the analysts forecast/revision by a couple of days. It
shows that on average, analyst notes can cause significant
return reactions on the release dates
Intuition: analysts notes is a superior source compared with
analyst forecasts/recommendations
More details: Analyst notes represent sell-side analysts
daily reports and are more detailed than summary-type
recommendations
Higher frequency: Analysts notes are issued more
frequently (3.5 times more than forecasts and 8 times
more than recommendation changes)
Earlier release: Analysts notes precede recommendations
by couple of trading days and therefore include fresh
information
Use "Absolute return changes"(AR) to test the impact of analysts
notes
AR is defined as the absolute value of size-adjusted
returns (which in turn is firms raw returns less the CRSP
size-matched decile index returns)
3 steps to get AR:
1. get a firms size-adjusted returns, which is firms raw
returns less the CRSP size-matched decile index returns
2. get the absolute value of size-adjusted returns (Using
absolute returns as opposed to signed returns is
necessary when the sign of the news is unknown)
3. the absolute returns in step2 is then scaled by the mean
of firms absolute value of abnormal returns (this is to
remove the impact of firm risk characteristics)
To test the impact of analyst notes, the following
regression is run
|AR| = b0 * + b1 * Note Day + b2 * Other Analyst
Disclosures + b3 * Firm Disclosures + error term
Large impact of analysts notes
The effect of analysts notes on normalized absolute
returns is 7% on the release date (Table 5)
The effect is stronger for smaller firms
Such finding is robust to major firm disclosures (earnings
announcements, quantitative and qualitative management
forecasts, conference calls, and press releases) and
previously documented analyst disclosures (forecasts,
recommendations, and reports)
Data:
Over 380,000 firm notes are hand-collected from First

Calls webpage for seven quarters between 10/1999 and
06/2001
The final sample consists of 2,178 firms
The sample is matched with CRSP and COMPUSTAT for
returns and accounting variables
Discussions:
This paper is very interesting because it studies a new
data source that makes strong economic sense
A question to be answered: Now that information in
analyst reports/recommendations are first disclosed in
analysts notes, can one improve the conventional analyst
revision signal by using analyst notes information?
To do this, one should perhaps analyze semantically the
notes to forecast analyst revision and recommendation
changes. This does not look to be an easy task
Concerns:
This study suffers from the short sample period and small
number of firms
There is no ready quantified data for analysts notes, the
authors have to hand collect that part of their data set
The frequent update of analysts notes may like lead to
frequent rebalancing and high transaction costs
Paper Type:
Working Papers
Date:
2009-04-14
Category:
Analyst industry recommendations, novel strategy
Title:
Do industry recommendations have investment value?
Authors:
Ohad Kadan, Leonardo Madureira, Rong Wang and Tzachi Zach
Source:
SSRN Working paper
Link:
Summary:
The paper shows that analysts industry recommendations can be

used to form a profitable strategy.
Analysts issue stock
recommendations for industries (in addition to stocks)
Since 2002/09, IBES started recording analysts industry
outlook, measured as optimistic, neutral, or pessimistic
The industry recommendations in this study only come from
the six major banks (Bear Stearns, Credit Swiss, Goldman
Sachs, Morgan Stanley, CIBC, and Lehman Brothers)

Analysts from other banks are not included in IBES database
The distribution of industry recommendations is similar to
that of stock recommendations: 30% optimistic, 55%
neutral, and 15% pessimistic
Analyst-based industry portfolios generate 11.7% per year
The consensus industry recommendation is the monthly
average of all recommendations issued for the industry in
that month
Every month 4 portfolios are formed by using the industry
recommendations from the last month (P1 through P4)
Such strategy generate significant Fama-French four factor
out-of-sample alphas
Though correlated with industry momentum, industry
recommendations is not subsumed by momentum
Combining with stock-level analyst recommendations works even
better
The out-of-sample alpha is 19.2% per year
Stock level recommendations alone predict future stock
returns
Double sorting based on industry and individual stock
recommendations
Comments:
Discussions:
We find the findings interesting because it is less used, it has large
capacity and it makes intuitive sense
Note that the turnover may be low too.
This is because
industry recommendations are often less frequently updated
and are sometimes even stale. On average it takes 320
(217) days to see a change of recommendations (footnote
9)
The results are very striking: double-sorting produces
monthly alphas of 2.4%. Sounds a bit too good to be true. It
may be due to the short history covered
The sample-size is very short (less than 5 years) and the
recommendations are only from 6 investment banks and for
certain industries. Recent shake-up in financial industry may
have changed the picture
Data:
2002/09-2007/12 stock returns and accounting variables
are from CRSP and COMPUSTAT. IBES is used for industry
and stock level analyst recommendations.
GICS-defined 69 industries are used. Industry returns are
the value-weighted return across all CRSP firms in certain
industry
Note that other large investment banks (such as Merrill

Lynch, JP Morgan) also issue industry recommendations, but
such recommendations are not included in firm reports, and
hence not recorded by IBES.
Pape
Working Papers
r
Type:
Date: 2009-02-25
Categ
ory:
Analyst forecasts, Global markets
Title:
Dispersion effect in International Stock Returns
Auth
ors:
Markus Leippold and Harald Lohre
Sourc
e:
CFF conference paper
Link:
http://www.campus-for-finance.com/fileadmin/docs/docs_cfp/Paper_2009/Leippo
ldl_and_Lohre_-_The_Dispersion_Effect_in_International_Stock_Returns.pdf
Sum
mary
:
The paper shows that, on average, dispersion in analysts earnings forecasts

negatively predicts returns for US and European stocks. But such performance is
not consistent: it worked during 2000-2003, but after 2003 completely reversed
in US and has been volatile in Europe
Definitions of dispersion in analysts earnings
Dispersion is the standard deviation of earnings forecasts over the
absolute value of its mean.
In larger stock markets the paper ranks the stocks into quintiles
In smaller markets, stocks are ranked into terciles using the last
months dispersion.
Varied performance in different time periods
On average, high dispersion, low returns
Very profitable during 2000 to 2003, mainly due to short portfolio
which worked extraordinarily well in this time
Did not work well in other times(Per Fig. 1). It can be used as a
negative signal before 1998-2000 and since 2003 in US, while it
has been volatile in Europe.
The strategy is strongest for stocks with low information quality and low
liquidity
Low analyst coverage stocks
Small-cap stocks (no such effect for large-cap stocks)
High volatility stocks

Highly illiquid stocks
Compared to high dispersion portfolios, the low dispersion
portfolios have disproportionally lower analyst forecast dispersion
(0.66 vs. 55.32 in US and 2.39 vs. 101.82 in Europe), much lower
betas (0.77 vs. 1.30 in US and 0.87 vs. 1.28 in Europe), less
volatile (return standard deviations of 4.32% vs. 6.71 in US and
3.96% vs. 5.68% in Europe)
Concerns
Performance not consistent across time, as describe above.
Note that for the periods other than 2000-2003, high dispersion
predicts high returns. This still suggest higher risk, higher return:
high dispersions suggest larger difference of opinions and hence
high uncertainty (risk).
Data
The sample covers data for 15 European Markets and the US
market for the time period 1987-2007. Earnings revisions data are
from IBES. Stock returns and t-bill returns are from Datastream.
Paper Type:
Working Papers
Date:
2009-01-12
Category:
Analyst, macro factors, Short Interest, Analyst

Recommendations
Title:
Trading Against the Prophets: Using Short Interest to Profit from

Analyst Recommendations
Authors:
Michael S. Drake, Lynn L. Rees, Edward P. Swanson
Source:
SSRN working paper
Link:
Summary:
This paper proposes a strategy based on two-way sort of

"analyst recommendations" and "short interest".
Specifically, the
strategy is
1) long stocks with unfavorable analyst recommendations but
low short interest
2) short stocks with favorable analyst recommendations but high
short interest,
Such strategy earns a size-adjusted annual return of 19.2% (6
month return 8.6%) during 1994-2006,
though is getting weaker
in recent years (2003-2006)
As a stand-alone factor, analyst recommendation does

not work
Long best and short worst analyst
recommendation give -3.3% 6 month return
Mainly due to the failure during 1999-2003
sub-period, when the 6-month return is -7.8%. In
other periods, the returns is close to 0
However, revision in analyst recommendations
(i.e., change of analyst recommendation) yields
significant 2.3% 6-month return.
From Table 3, analysts recommendations and
revisions lost its power in recent period
(2003-2006)
As a stand-alone factor, short interest is weak
Short interest strategy yields 4.3% 6-month
return, which is significant only during 2004-2006
From Table 5, during recent period (2003-2006)
short interest yields similar returns as before
Combining the two factors works
Combining "analyst recommendations" and "short
interest" yields a size-adjusted return of 9.6% in 6
months
Combining "analyst recommendations revisions"
and "short interest" also works. It yields a
size-adjusted return of 7.9% in 6 months
Long stocks add as much value as short stocks
From Table 6, such strategy is weaker in recent
period (5.4% return 2003-2006, 15.6% return
1999-2003)
Relationship with known factors
Short interest works because it incorporates
information of the 11 commonly known return
predicting factors
Moreover, it adds incremental value to such 11
factors
By contrast, analyst recommendations are
negatively correlated with the 11 factors.
It reflects analysts behavior bias, i.e., they tend to
favor primarily glamour stocks).
Our concerns: did two-way sort add extra value?
Given that "short interest" and analyst
recommendation are nothing new to many quant
managers, the questions here are 1.) whether
such combination (conditional two-way sorting)
can add value 2.) whether such combination
(hence such strategy) makes economic sense.
We do believe that conditional sorting may add

value sometimes, but this paper stops short of
showing that conditional sorting here enhances a
nave model that incorporates the 11 factors plus
short interest and analyst
recommendations/revisions.
Data
1994 to 2006 US stocks returns are from CRSP,
and analyst recommendations are from the
Thompson Financial I/B/E/S Recommendations
database
Paper Type:
Working Papers
Date:
2009-01-12
Category:

Recommendations
Title:

Authors:
Source:
SSRN working paper
Link:
Summary:

Specifically, the
strategy is
low short interest
short interest,
not work

(2003-2006)
months
1999-2003)
predicting factors
factors
Data

database
Paper
Type:
Working Papers
Date:
2008-12-20
Categ
ory:
earnings, analyst, Earning profit and loss, earning surprise
Title:
Post loss/profit announcement drift
Autho
rs:
Karthik Balakrishnan, Eli Bartov and Lucile Faurel
Sourc
e:
SSRN working paper
Link:
Sum
The paper documents a profitable investment strategy that goes long on
mary: high-profit firms and short on high-loss firms 120 days following earnings
announcements. Such earnings level factor adds value to the conventional
earning surprise strategy.
Definitions and portfolio constructions:
Every quarter firms are ranked by their earnings before
extraordinary items/total assets into quintiles.
Highest (lowest) quintile firms defined as high profit (high loss)
firms.
The buy-hold returns of each profit-loss quintile are reported for
120 days following the earnings announcement (Figure 2)
Earnings level predicts [2, 120]-day returns after earning
announcements:
Results strongest for the highest profit and loss quintiles (quintiles 1 and
5).
Not subsumed by the conventional earning surprise strategy
SUE is defined as the standardized unexpected earnings, and is a
measure of earning surprise
The profit (loss) level factor not subsumed by SUE, BM and
Accruals
Data
358,634 firm-quarters and 11,667 distinct firms are used over the
sample period 1976-2005.
Accounting variables are taken from COMPUSTAT
Returns are taken from CRSP.
Fama-French Factors are from Kenneth Frenchs webpage
Authors:
Pavel Savor
Source:
SSRN Working Paper
Link:
Summar
y:
The paper documents a strong return reversal after non-information related

major price changes in individual stocks. A trading strategy based on this
finding yields 1.6% per month abnormal returns over 20-day horizon.
The return predictability depends on the non-information based major
price changes
Definitions
Major price change:
a daily stock return that is 10% more or less than the
same days market return
Non-information based price change:
A daily return is defined as non-information based if
there is no analyst recommendation at the same day,
the day before or the day after the price change.
High return reversals for non-information based major price changes
By contrast, major price changes surrounded with an analyst
recommendation dont experience return reversals.
A zero-investment portfolios that goes long (short) on major
price decreases (increases) yields high risk adjusted returns:
1.6% per month abnormal returns over 20-day horizon
The highest profitability occurs for 5-day holding period
Holding
period
Daily CAPM
alpha
Daily FF3
alpha
Daily Carhart 4
factor alpha
5 days
0.42%
0.42%
0.42%
10 days
0.18%
0.18%
0.18%
20 days
0.07%
0.08%
0.08%
Commen
ts:
Robustness: profitability not due to small-growth stocks or due

to penny stocks.
Proposed reason: liquidity driven price changes will reverse itself
The likely reason is that non-information based extreme
returns are likely to occur because of demand pressures which
disappear later
Our concerns: the definition of information related price changes is
weakly defined. Analyst recommendations are only one source for
public information arrival into the prices.
Data
IBES sell-side analyst reports for 1993-2007.
CRSP daily tapes for 1993-2007.
Compustat tapes for quarterly accounting data.
Fama-French factors from Kenneth Frenchs webpage
Paper Type:
Working Papers
Date:
2008-11-30
Category:
Title:
Implied Cost of Capital Based Investment Strategies-Evidence

from International Stock Markets
Authors:
Florian Esterer and David Schroeder
Source:
Bonn Graduate School of Business
Link:
http://www.affi.asso.fr/images/cnf_18_doc_765.zip
Summary:
The paper presents a trading strategy based on the "implied cost

of capital" (ICOC), which is based on equating stock prices to
analysts forecast future cash flows.
Definition of ICOC:
ICOC is the internal rate of return that equates
expected discounted payoffs per share to the
current price
Payoffs are defined as the expected cash flows
from equity analysts ( the paper uses the term
"expected cash flows", which in our understanding
should be dividends )
In other words, stock price = sum of( (expected
cash flows for year t) / ( 1 + ICOC) ^t)
The analysis combines analyst forecasts for

different horizons, such as short-, mid- and
long-term growth projections
ICOC is set to be the same for short-, mid- and
long-term horizons
ICOC is estimated using two alternative discount models
The dividend discount model (DDM): it assumes an
initial high dividend growth period of 5 years,
followed by a transition period of 15 years and a
perpetual stable growth period (which continues
forever with a constant growth rate)
The Residual Income Model (RIM): the stock prices
equals to the "invested capital" (book value) plus
the "expected residual income from future
activities". In other words, ICOC is that rate that
satisfy
Price = book value of equity per share +
sum(E(R(t))/(1+ICOC)^t)
where E(R(t))=(E(return on equity(t))-ICOC)*Book
value per share (t-1)
The RIM method estimates the book value of
equity in the future as well as the future earnings
An investment strategy based on ranking the stocks by
the ICOC works in many countries
The returns (capital gains and dividend yields) on
8 different portfolios based on different holding
periods over 1 to 24 months.
Across US and international stocks ICOC predicts
higher future expected returns.
The return predictability is the highest for 1 month
holding period, i.e. the performance of portfolios
decrease with holding period.
Comments:
1. Discussions
It is great to see the new evidences and new measures of
stocks cheapness (value-ness). But we had a hard time
to think of any intuitive reason why ICOC can add extra
value to the existing value factors.
High ICOC firms systematically show low loadings on the
momentum and high loadings on Book-to-market factors
between 1995 and 2006. The validity of ICOC as an
additional factor is therefore questionable.
Both Discount models require important assumptions to
estimate the ICOC figures
DDM is based on three different states in firms
growth cycle, and it produces a single constant
discount rate. As we know, it is well documented

that discount rates vary with the changes in the
riskiness of the company.
RIM requires the estimation of book value of
equity as well as future earnings (the RIM
framework requires the future earnings and book
value of equity), and it also produces a constant
discount rate throughout the sample.
2. Data:
1995-2006 Datastream and Worldscope data are used for US,
Canada, France, Germany, Italy, Japan and UK. IBES is used for
analyst forecasts.
Paper Type:
Working Papers
Date:
2008-11-05
Category:
IPO/SEO, quiet period, analyst coverage
Title:
The Quiet Period Has Something to Say
Authors:
Patrick A. Lach and Michael J. Highfield
Source:
FMA 2008 paper
Link:
http://www.fma2.org/Texas/Papers/QuietPeriodLongRun.pdf
Summary:
IPO firms that receive positive analysts recommendation at the

expiration of the quiet period tend to perform better that firms
that do not. A related trading strategy yields statistically
significant profits
Definitions of quiet period
Quiet period refers to the period from the time a
company files a registration statement with the
SEC until SEC staff declares the registration
statement "effective."
During that period, the federal securities laws
limits what information a company and related
parties can release to the public.
NYSE Rule 472 and NASD Rule 2711 extended the
quiet period from 25 calendar days to 40 calendar
days beginning on July 9, 2002.
Along with the Global Settlement, which was
finalized on April 28, 2003 and forced investment
Paper
Type:
Working Papers
Date:
2008-07-20
companies to not issue biased recommendations,

the rules may have made analyst
recommendations more reliable for investors.
Level of analyst coverage predicts 6-12 months returns
Stocks that have analyst coverage 3 days after the
expiration of the quiet period outperform firms
that do not have any coverage at that point over
6, 9, and 12 month horizons.
A trading strategy that buys(sells) the IPOs that
have (have no) analyst coverage yields statistically
significant profits of 15.44% and 16.96% over the
9 month and 6 month horizons, respectively
The portfolios are established 4 days after the
expiration of the quiet period (thus allowing time
for the public to receive the rating news).
Level of recommendations (buy vs hold) also matters
Of those firms with coverage, companies that
receive only buy recommendations outperform
those with at least one Hold (market-neutral)
recommendation over the 1, 6 and 9 month
horizons.
Regression results confirm that firms that receive
Buy ratings statistically outperform those with
Hold ratings over 1, 3, 6, 9, and 12 month
horizons.
Multiple Buy-ratings outperform single Buy rating.
Proposed Reasons:
Consensus among analysts suggests more precise
information
Data
Companies that went public between July 2002
and December 2005 (a total of 268 companies,
increasing from 14 in 2002 to 140 in 2005). IPO
data are from Thompson Financial Securities Data
Company (SDC) US Common Stock New Issues
database. Analyst recommendations are from
marketwatch.com and briefing.com. Stock returns
are from CRSP.
Categor
y:
analyst, Financial disclosure contents and expected returns
Title:
The Effect of Disclosures by Management, Analysts, and Financial Press on

Cost of Capital, Return Volatility, and Analyst Forecasts: A study using content
analysis
Authors
:
S. P. Kothari, Xu Li, James E. Short
Source:
SSRN Working Paper
Link:
Summar
y:

companys favourable (unfavourable) disclosures predict
a significant lower (higher) risk
(note its not stock returns)
,
measured as the
cost of capital, stock return volatility, and analyst forecast dispersions
The study is based on more than 100,000 firm-specific reports by
company management
analysts
news reporters
Definition of favourable/unfavourable reports: depending on whether
the report discloses information related to:
Growth in earnings, cash flow and sales, and/or
Favourable product reviews, enhanced management credibility,
etc.
Impacts of favorable/unfavourable reports on risk measures (based on
quarterly Fama-MacBeth regressions)
Across the different disclosure sources, financial press has the largest
effects on cost of capital compared to analyst reports and management
itself.
Comme
nts:
1. Discussions
This paperstops short of discussing the impact of financial news on stock
returns, and only talks about cost of capital, return volatility and analyst
forecast dispersion. It would be very interesting to see what the result may
be. But given the findings on some previous studies, (eg, More Than Words:
Quantifying Language to Measure Firms Fundamentals,
http://www.mccombs.utexas.edu/faculty/paul.tetlock/papers/TSM_More_Than
_Words_JF_05_07.pdf
), our guess is that the impact of stock returns is likely
to be limited and (if any) short-lived.
2. Data
For the time period 1996-2001 stock returns are extracted from CRSP,
variables about firm characteristics from COMPUSTAT. Fama-French factors
are taken from Kenneth Frenchs webpage and disclosure contents are taken
from datasets like Dow Jones Industrial, Investex, Factiva and SEC Edgar.

Paper Type:
Working Papers
Date:
2008-06-08
Category:
Analyst forecast bias, Reg FD, Global Analyst Research

Settlements
Title:
Conflicts of Interest and Analyst Behavior: Evidence from Recent

Changes in Regulation
Authors:
Armen Hovakimian, Ekkachai Saenyasiri
Source:
SSRN
Link:
Summary:
This paper finds that analysts forecasts were much less biased
after the Regulation FD (October 2000) and Global Analyst
Research Settlements
(December 2002, the settlement is an
agreement between U.S. regulators and 12 major investment
banks to eliminate research analysts conflicts of interest).
Before Regulation FD, analysts on average over-estimated
company earning by 2% of stock prices, and such biases
decrease as earnings release approaches (+3.3% 20
months before, +0.4% 1 month after the end of the
forecasted year.)
Reg FD reduced but does not eliminated forecast bias
forecast bias declines by 0.35% of the stock price
this may be driven by the unexpectedly poor
macroeconomic conditions
The Global Analyst Research Settlements had a much
stronger impact
mean forecast bias falls sharply to +0.6%
median forecast bias disappears
Paper Type:
Working Papers
Date:
2008-06-08
Category:
Analyst Coverage Initiations
Title:
The Long-Run Performance of Analyst Coverage Initiations
Authors:
Yonca Ertimur, Volkan Muslu and Frank Zhang
Source:
SSRN Working Paper
Link:
Summary:
Analysts tend to issue overly optimistic recommendations

when initiating coverage, therefore stocks with initiation
recommendations perform poorly in the post-initiation
period.
Such underperformance is disproportionately
concentrated around earning announcements
The initiation stocks are revised sooner and delisted more
often due to poor performance.
The underperformance is greater for initiations with
favorable (Strong buy and buy) recommendations and for
firms with no prior analyst coverage.
Paper Type:
Working Papers
Date:
2008-03-16
Category:
Sell-side bond analyst
Title:
The Informational Role of Bond Analysts
Authors:
Gus De Franco, Florin P. Vasvari, Regina Wittenberg-Moerman
Source:
University of Chicago working paper
Link:
http://faculty.chicagogsb.edu/workshops/accounting/pdf/DVW%
20Bond%20Analysts%20Jan%2003%2008%20Final.pdf
Summary:
Bond analysts recommendation leads rating agency

disclosures, particularly rating downgrades.
Bond analyst reports generate significant bond trading volume
and bond price changes.
Like stock analysts, distribution of bond analysts buy/hold/sell
recommendations is skewed positive.
Paper Type:
Journal papers
Date:
2008-03-10
Category:
Analyst Forecasts
Title:
Earnings Forecasts of Firms Experiencing Sales Decline: Why So

Inaccurate?
Authors:
Huong Ngo Higgins
Source:
The Journal of Investing, Spring 2008
Link:
http://www.iijournals.com/JOI/default.asp?Page=2&ISS=24559
&SID=701954
Summary:
Many studies show that earnings forecasts of poor-performance

firms contain large errors
(Kothari et al. [2005], Brown [2001],
Hwang et al. [1996], and Elgers and Lo [1994]).
Why are these
forecasts so inaccurate? This article demonstrates that inflexible
costs, as captured through operating and financial leverage
above the industrys normal range, are associated with large
forecast errors during sales decline.
The results are useful in
helping investment managers better evaluate analyst forecast
ability, and help analysts improve their forecasts by better
anticipating the impact of inflexible costs on earnings.
Paper Type:
Journal papers
Date:
2008-03-10
Category:
Analyst Forecasts
Title:
The Value of Adjusting the Bias in Recommendations:

International Evidence
Authors:
Marina Balboa, J. Carlos Gomes-Sala, German Lopez Espinosa
Source:
European Financial Management, Forthcoming
Link:
http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-036
X.2007.00421.x
Summary:
The financial literature has shown that both earnings forecasts

and investment recommendations are optimistically biased.
However, while the bias in earnings forecasts has decreased over
time and even some recent studies show that they are no longer
optimistic, in the case of investment recommendations this bias
still remains relatively constant over time. Therefore,
it seems
that recommendations are less credible to investors than
earnings forecasts.
The vast majority of recommendation studies
have been carried out at the country level. In this paper, we use
an international context to study whether profitable investment

strategies exist when adjusting the recommendation bias of each
analyzed country. The adjustment we propose to correct this bias
takes into account the differences across countries, and also
varies in time to correct for the changes in bias over time within
countries.
Our empirical results show that there are in fact
significant differences in the level of bias among countries, with
the US and the UK being the countries with the highest bias.
Second, the adjusted consensus portfolios are more orthogonal
to typical investment styles (size, book-to-market and attention)
and we find that investors could implement a higher number of
profitable investment strategies using this adjusted measure. In
this line, the results show that the countries with the lowest bias
obtain the highest risk adjusted abnormal returns. Third, our
work entails a practical implication, as it shows the value
embedded in a simple necessary adjustment in the global asset
management context.
This is an important result showing that
profitable investment strategies exist when considering a global
portfolio based on adjusted recommendations.
Paper Type:
Working Papers
Date:
2008-02-18
Category:
Analyst long-term and short-term forecast, forecast bias
Title:
Analyst Forecast Biases and Stock Returns
Authors:
Zhi Da, Mitch Warachka
Source:
SSRN Working Paper
Link:
Summary:
The paper finds that analyst forecasts exhibit over-optimism and

over-pessimism, and such forecast biases have medium-term
(6-month) return predictability.
high
long-term
high implied
short-term earnings
growth forecast
low implied short-term

earnings growth
forecast
Reflect analysts
optimism, since
earning
growth
forecast
low
long-term
earning
growth
forecast
Comments:
earning growth
expected to accelerate
predicting lower
stocks returns
Reflect analysts
pessimism, since
earning growth
expected to slow
predicting higher
stocks returns
Stocks with high long-term, low short-term earnings

growth forecast earn a significantly negative risk adjusted
return (-27 bps per month), and stocks with low
long-term, high short-term earnings growth forecast earn
a significantly positive risk-adjusted return (21 bps per
month) in the first month of portfolio formation.
A strategy that buys stocks with low long-term and high
short-term earnings growth and sells stocks with high
long-term and low short-term earnings growth produces
persistent positive profits for six months (1.9%).
The intuition is that the market fails to completely
mitigate the influence of analyst optimism and pessimism,
and investors under-react to information that contradicts
analysts prevailing forecasts. Consequently a measure of
relative long-term and short-term forecast biases can be
a contrarian predictor.
1. Discussions
The paper reports that stocks with high long-term/low
short-term forecasted earnings growth significantly
under-perform stocks with low long-term/high short-term
forecasted earnings growth. This cross-sectional return
predictability may be used to create positive profits.
One of the interesting aspects of the paper is that it combines
time-series and cross-sectional predictability.
2. Data
1983-2006 analyst earnings forecast data is obtained from
I/B/E/S unadjusted file. Company return and accounting data are
from CRSP and COMPUSTAT.

Paper Type:
Working Papers
Date:
2007-12-26
Category:
Mutual fund herding, analyst recommendations
Title:
Analyst recommendations, Mutual fund herding and Overreaction

in Stock prices
Authors:
Nerissa Brown, Kelsey Wei, Russ Wermers
Source:
Olin School working paper
Link:
http://www.olin.wustl.edu/fs/acadseminars/downloadPDF.cfm?re
cNum=44428
Summary:
This paper documents a stock price over-reaction when mutual

funds sell stocks following an analyst recommendation
downgrade, and also (to a lesser extent) when mutual funds buy
stocks after
a recommendation upgrade,
i.e,
Analyst upgrades
Analyst downgrades
Mutual funds
buy herding
negative returns in the small impact on

following year
returns in the following
year
Mutual funds
sell herding
small impact on returns positive returns in the

in the following year
following
year
Key findings:
A strategy that is long on downgraded and sell-side
herded and short on the upgraded and buy-
side herded
brings an average return of 6% per annum.

The return reversals in the following year seem to be
caused by loser funds and not by winner funds.
Such stock price overreaction is robust to size,
book-to-market, price and earnings momentum, turnover,
return volatility and dispersion of analyst earnings
forecasts.
It is also robust after censoring for the nature of the
recommendation changes and show the persistence in
fund managers' herding due to index trading (i.e. use of
indices as benchmarks results in more herding among
different mutual fund managers)
The results stay similar when the authors use earnings
forecast revisions instead of analyst recommendation
revisions.
Comments:
1. Discussions
From Figure 2 in the paper, (Quarterly average DGTW-adjusted
abnormal returns for the long-short strategy), we can tell that
the paper profit mainly comes from 1994Q3-2000Q2 period, and
it has not been performing since 2000Q2. This makes us think
that this strategy may be too cor elated with market condition.
As we know the US stock market was growing 1994-2000, but
experienced significant downturn in the 2000-2003 period. It is a
question mark to us in terms of what may be the recent
performance of this strategy.
2. Data
1994:03-2003:04 (quarterly data) are from Thomson Financial
mutual fund holdings; I/B/E/S recommendations detail file; CRSP
mutual fund database; and CRSP monthly stock database.
Paper Type:
Working Papers
Date:
2007-03-02
Category:
Analyst estimate revision clusters, company information

announcements
Title:
Analyst Estimate Revision Clusters and Corporate Events
Authors:
Mark Bagnoli, Stanley Levine, Susan Watts
Source:
SSRN working paper
Link:
Summary:
This study groups corporate information events (CIEs) into two

subsets:
Type 1: CIEs that focus on financial statement information (e.g.
earnings announcement, earnings guidance). They are CIEs that
occurred either close to earning announcement dates, or CIEs
related to forward looking earning that occur at distinctly different
times.
Type 2: CIEs that offer strategic or soft information (e.g. Merger
and acquisition, joint venture)
It is shown that type 1 CIEs triggers greater analyst revisions, and

subsequently stock prices adjust more quickly to such revisions.
In a related paper by the same authors, Trading Strategies Based
on Analyst Estimate Revision Clusters and Associated Corporate
Information Events (abstract only,
http://www.iijournals.com/JOI/DEFAULT.ASP?Page=2&ISS=21470&
SID=616842
), they study the price impact of different type of CIEs
Type
1:
Earning
s/guida
nce
announ
cement
s
Typ
e 2:
othe
r
ann
ounc
eme
nts
(e.g.
,M&
A,
strat
egic
allia
nce)
signific
ant
excess
returns
No
exce
ss
retu
rn
small
but
signific
ant
No
exce
ss
retu
rns
excess
returns
Comments:
1. Why important
Analysts revision lost part of its predicting power recent years in
US, although it still works in many other parts of the world. We
hope that by identifying alpha generating revisions, the
categorization proposed in this paper can help refine the analyst
revision strategy.
On a related note, we also think this is an illustration of generating
alpha by using a less used database CIEs)
2. Data
1998/12 2003/02 82,000 analysts revision clusters data are from
First Call analysts earnings estimate revisions, corporate events are
from First Call (Historical, Company Issued Guidance, and Events
databases); CCBN (Street Events database); and Multex (Significant
Developments databases)
3. Discussions
In US, most earning based strategies are no longer working well
after the booming of hedge funds. It is said that there may be alpha
hours after the announcements, but not days or weeks. This said,
effectiveness of this new categorization remains to be tested.
We think this strategy may be improved if one can do refine the
way CIEs are grouped. In this study ~25%of clusters are
unmatched, partially due to the fact that the authors didnt use a
commercial database that covers broader news sources (such as
news related to company being placed on S&P credit watch)

Paper Type:
Working Papers
Date:
2007-03-02
Category:
Analyst recommendations, peer firms
Title:
Stock recommendation spillovers
Authors:
Roger K. Loh
Source:
Ohio State Unviersity seminar paper
Link:
http://www.cob.ohio-state.edu/fin/dice/seminars/RecSpillovers_
20Sep06.pdf
Summary:
Favorable changes of analysts stock recommendation leads to

peer stocks lower month returns. A strategy that sell peer firms
in upgraded industries and buy peer firms in downgraded
industries generates a risk-adjusted return of ~10%+ annually
Comments:
Paper Type:
Working Papers
Date:
2006-04-07
Category:
Strategy, analyst estimates skewness
Title:
Analyst Disagreement, Forecast Bias and Stock Returns
Authors:
Anna Scherbina
Source:
Harvard University working paper
Link:
http://www.people.hbs.edu/ascherbina/dispersion.pdf
Summary:
Strategy 1: Long stocks with right-skewed forecast distribution

(since it indicates the absence of negative opinions), short the
opposite. The risk-adjusted profit is shown to be 2.7% per year.
Strategy 2: For stocks with high forecast dispersion, long stocks

with a non-decreasing analyst following over the past three
months, short the opposite. The risk-adjusted return is shown to
be 4.8% annually.
Comments:
1. Why important
Analysts earning has been used by quant managers for many
years to an extent that this strategy is not helping, if not hurting,
performance at many funds. This paper is important because it
presents a potentially improved strategy by using some less
popular data items (forecast dispersion, risk-skewness, and
number of following analysts).
The story is based on observations of analysts behavior: they
dont like to issue "sell" forecasts (so dropping number of
following analysts is a bad sign), their forecast distribution is not
normal (a right- skewed forecast distribution signals less
negative opinions). We have seen many anecdotal evidences that
support such observations. For example, for the past 15 years,
analysts from major investment banks are wrong on the
aggressive side for 13 years. The only exceptions are 2001 and
2002.
2. Data
Analysts earnings forecasts are taken from (I/B/E/S). Stock
returns, prices, and accounting data are from the merged
CRSP/Compustat database
3. Discussions
One challenge of this strategy is the correlation with other
earning-based strategies. The author shows that it is indeed
closely related to price momentum and earnings momentum. The
data used in the paper only covers till 2002, and things have
changed a lot since then. A study of recent performance and
correlation with other factors will shed more light.
Paper Type:
Working Papers
Date:
2006-03-22
Category:
Novel strategy, analyst, target prices
Title:
The Value of Equity Analysts Target Prices
Authors:
Zhi Da, Ernst Schaumburg
Source:
Kellogg working paper
Link:
http://www.kellogg.northwestern.edu/faculty/da/TargetPrice.pdf
Summary:
Long stocks with higharget-price implied return (percentage

difference between the analysts target price and traded stock
price), and short stocks with low target-price implied return. The
annualized profit is shown to be 22%.
Comments:
1. Why important
This paper makes innovative uses of the "target price" item from
FirstCall database. The story is intuitively appealing, i.e.,
collectively analysts can discern the relative mis-pricing of stocks
within sectors (albeit not on sector level). The higher the target
price implied return, the higher the expected return.
2. Data
Target price, recommendation, and earning announcement data
are from First Call. Prices and returns from CRSP/COMPUSTAT
and TAQ.
3. Next steps
When looking into the correlation with other existing factor, we
found it difficult to reconcile the two tests that compare
performances within value and growth segments (table 21 and
table 23). Table 21 shows similar profits for value and growth
stocks, while table 23 indicates that the strategy does better in
the former. This is important for practitioners that focus on
different styles. Another caveat is that this looks to be a
high-turnover strategy that needs monthly rebalance.
The authors did a solid empirical study, but we found their
theory framework not as convincing. It claims that the abnormal
return can be explained by liquidity. A high r-square with
measures of liquidity (the bid- ask spread, price impact) does not
necessarily prove a causal relationship. In our view, this finding
shows that analysts can tell the difference between individual
firms but not relative value between at sector level.

Paper Type:
Working Papers
Date:
2007-03-18
Category:
General empirical test methodology, data mining, regression
Title:
The Interval of Observation
Authors:
Ben Jacobsen, Ben Marshall, Nuttawat Visaltanachoti
Source:
SSRN working paper
Link:
http://www.ssrn.com/abstract=965336
Summary:
This paper shows that, in forecasting stock market returns, a

slight change in the interval of forecasting indicators
(commodities returns in this case) can dramatically change the
significance and sometimes the direction of forecasts.
As an illustration, commodity returns during the last 8 trading
days of the previous month can significantly predict next months
stock returns, but returns over the last 8 trading days can not.
In most cases, longer intervals of historical commodity
observations lead to stronger predictability
Comments:
The general question we need to answer here is how we detect

"data mining": slicing and dicing the data in many ways and you
will find something that is statistically significant on paper.
One thing we can do is to judge how many patterns were tested.
If 100 possible combinations of observation intervals are tested,
at 95% confidence level, then one can expect 5 of these
combinations will appear significant in statistic tests. I.e., they
are just results of data mining. In this paper, the authors use
23combinations to find an optimal interval to use gold to forecast
stock market, (6 day interval is the winner).
But we need to bear in mind that two false positives are
expected in such test, and it may well be the 6 day
Combination.
As another illustration, many papers talked about calendar
effects, e.g. which calendar month yields higher returns than
others. Given that there are only 12 months in a year, and that
we only have one set of capital markets history, certain months
will have to show up to be significant.
How to judge what strategy is reliable remains an open question.

We believe two tests are of help:
Consistency: an ideal strategy should work consistently
across different period, and within different segments,
and across different stock markets.
Economic rationale: whether there is an economic force
behind a strategy.
Paper
Type:
Working Papers
Date:
2015-06-05
Categ
ory:
Market timing, asset allocation, lumber, gold
Title:
Lumber: Worth Its Weight in Gold: Offense and Defense in Active Portfolio
Management
Autho
rs:
Charles Bilello and Michael Gayed
Sourc
e:
SSRN paper
Link:
Summ
ary:
The relative returns of lumber(proxy for optimism, economic activity via

construction) and gold(proxy for pessimism) can help market timing. When
lumber futures outperform, riskier assets outperform in the next week
Background and intuitions
Lumber demand can be a proxy for optimism, as it indicates more
economic activity via construction
Gold demand can be a proxy for pessimism, as it serves as safe haven for
many investors
Constructing portfolios
Go on offense (defense) the next week if lumber futures outperform
(underperform) spot gold over the prior 13 weeks
Rebalance weekly
Example: Lumber-Gold (LG) small-cap/bond strategy: invest in Small
Caps on offense and 5-7 year Treasuries on defense
Example: Lumber-Gold (LG) cyclical/bond Strategy: invest in Cyclical
Index on offense and 5-7 year Treasuries on defense
For each strategy, select 2 out the 7 indexes below (from lowest to
highest risk)
BofA Merrill Lynch 5-7 Year Treasury Index

CBOE S&P 500 Buy-Write Index
S&P 500 Low Volatility Index
S&P 500 Index
Russell 2000 Index
Morgan Stanley Cyclicals Index
S&P 500 High Beta Index
The lumber-gold relationship predicts U.S. stock market states
S&P 500 volatility is lower when lumber is leading: the average
annualized S&P 500 volatility (standard deviation) is 13.5% in the
following week
versus 19.4% when Gold is leading
Similar patterns when using implied volatility (VXO Index, chart 4)
Gold outperformance precedes extreme low S&P500 returns
In the worst 5% of weeks, Gold was outperforming in advance
74% of the time
Strategies based on LG relationship significantly outperform S&P 500
For example, the small-cap/bond strategy produces a return that is 3.8%
higher than the S&P 500 with 4.9% lower volatility
The maximum drawdown is -20.8%, less than half of the S&P 500
(-54.7%). (Table 9)
Strategies using Treasuries (as opposed to defensive stocks) on defense
perform better
Source: the paper

Data
This study covers the period of 12/1983-2/2014
Paper
Type:
Working Papers
Date:
2015-06-05
Categor
y:
Mean variance, momentum, tactical asset allocation
Title:
Momentum and Markowitz: A Golden Combination
Authors
:
Wouter J. Keller, Adam Butler, Ilya Kipnis
Source:
SSRN Papers
Link:
Summar
y:
The classic Markowitz mean-variance optimization(MVO) framework is

criticized for being unstable. However, using a lookback horizon of less than
12-month and using only positive asset weights (no short-sales) can help the
performance of MVO
Intuition
Traditionally, MVO is performed using a longer range of data (e.g. 60
months)
However, such a long lookback period includes both momentum returns
as well as longterm reversal returns, so the best assets in the past
often become the worst assets in the future
Therefore, limiting the lookback period to up to 12 months results in
more relevant predictions about asset returns
Applying MVO over a shorter lookback horizon of less than one year
improves returns due to avoiding long-term return reversals
Using long-only portfolio weights helps to stabilize the optimization and
make the model more practical
Classical Asset Allocation (CAA) model applies MVO with the following
constraints:
The lookback period is up to 12 months
Short sales are not allowed
3-month T-Bills and US Government 10 year bond are used as
cash
The Target Volatility (TV): 10% (for offensive) and 5% (for
defensive models)
A maximum weight for all risky assets (cap) is 25%
Equal Weight (EW or 1/N) allocation is used as a benchmark
Next month expected returns and covariances are proxied by the
rolling historical means (returns) and covariances
Sharpe Ratio with 5% threshold: SR5 = (Annual Return 5%)/Annualized Volatility

Calmar Ratio with 5% threshold: CR5 = (Annual Return 5%)/abs(Maximum Monthly Drawdown)
Three investment universes
SmSmall asset
universe
(Global, N=8)
SP500, EAFE, EEM, US Tech, Japan Topix,

T-Bills, US Gov10y, and
US High Yield
Intermediate
sized asset
universe (US,
N=16)
10 Fama/French US sectors plus five US

bonds: US Gov10y, US
Gov30y, US Muni, US Corp, US High Yield
and (3m) T-Bills
Large asset
universe
(Global, N=39)
All assets from the small and intermediate

sized universes plus US
Small Caps equities, GSCI, Gold, Foreign
bonds, US TIPS, US
Composite REITs, US Mortgage REITs, FTSE
US 1000/US
1500/Global ex US/Developed/EM,
JapanGov10y, Dow
Util/Transport/Industry, FX-1x/2x, and
Timber
Source: The paper

Portfolio formation
Each month, estimate the optimal mix of asset weights based on the
information from the prior 1 to 12 months
Use this mix for the next month
CAA model outperforms EW (1/N) model for 8, 16 and 39-asset universes
Source: The Paper, Figures 6, 10, 14
Cumulative outperformance of CAA offensive (TV10) and defensive
(TV5) models:
Source: The paper

Results are robust to different cap levels (Figure 18)
Data
Returns for 39 asset from Global Financial Data (GFD), Kenneth French
Database (FF), Barclays, MSCI, Yahoo and other providers of historical
data
Data range: January 1915- December 2014
Paper
Type:
Working Papers
Date:
2015-06-05
Categor
y:
Momentum, diversification, asset allocation
Title:
Momentum and Diversification: A Powerful Risk-Adjusted Combination
Authors
:
Newfound Research LLC
Source:
Link:
http://www.thinknewfound.com/wp-content/uploads/2014/11/Momentum-AN
DDiversification- A-powerful-risk-adjusted-combination.pdf
Summar
y:
Combining momentum and diversification across a spectrum of static asset

allocation portfolios improves total risk-adjusted strategy returns
Intuition
Momentum selection process is usually implemented within an asset
class
The benefits of diversification can be added to a momentum strategy
by treating a portfolio as an asset class
Spectrum of US investments includes static portfolios consisting of a US
Equity (S&P 500 Index) / Treasury (Barclays US Treasury 20+ Year
Index) allocation of 100%/0%, 80%/20%, 60%/40%, 40%/60%,
20%/80%, 0%/100% rebalanced on an annual basis
Spectrum of globally diversified portfolios:
Source: The paper

Portfolio formation
Sharpe ratio strategy: each month, invest in the asset class (US
Equities or Treasury) with the greater Sharpe ratio based on the trailing
6 or 12-month Sharpe Ratio
Diversified strategy: each month, invest in the asset allocation (one of
the defined static portfolios) with the greater Sharpe ratio based on the
trailing 6 or 12-month Sharpe Ratio
Diversified strategy outperforms simple Sharpe switching strategy and broad
index
Strategy performance is similar when using 12-month or 6-month
lookback periods:
Source: The paper
The two last major downturns were particularly favorable for the
diversified strategies
Source: The paper
Diversified strategy also outperforms across a spectrum of globally
diversified portfolios (2001 2014):
Source: The paper

Data
The 12-month strategy took longer to adjust its allocation during 2002
and 2008; 6-month allocation delivered preferable returns
Data range: 1977-2014
Paper Type:
Working Papers
Date:
2015-03-26
Category:
Asset allocation, use global growth to predicting returns
Title:
The End-of-the-year Effect: Global Economic Growth and

Expected Returns Around the World
Authors:
Stig V. Mller and Jesper Rangvid
Source:
SSRN
Link:
Summary:
Level of global economic growth at the end of prior year predicts

many asset class returns the next year
Definitions and methodology
Global industrial production growth (GIPG) is the equally
weighted average of quarterly OECD industrial production
growth in 12 developed untries
For the 12 OECD countries, use data from 1970 - 1989 as
in-sample, 1990 2013 as out-sample
For other 18 countries, use recent 20 years data
Lagging economic growth data by three month to account
for publication lag (Table A1)
Lower end-of-year GIPG, higher future returns for most asset
classes
Works in most equity markets: Significant strong negative
relationship for 28 of 30 country stock markets (Table 5)
The t-statistics range from -1.4 in Italy to -4.1 in
the Netherlands (Panel A of Table 5)
GIPG during other quarters does not predict (Panel
A of Table 5)
Works for world equity indices: a 1% higher fourth
quarter GIPG predicts a 3.1% lower next-year world
equity market real return (Table 3)
Data
Works for foreign exchange, 19 commodities, U.S.

corporate bonds: Relatively strong fourth quarter GIPG
indicates relatively low next-year real returns
Does not work for global government bond: GIPG is not a
significant predictor of global government bond real
returns
Better than most other predictors: In terms of average
absolute error for out-of-sample annual stock market
return forecasts, GIPG is better than historical mean
returns, global dividend-price ratio, short-term interest
rate (U.S. Treasury bill yield) and U.S.
consumption-wealth ratio
Similar patterns when using December-only (instead of
fourth quarter growth), and when using the GDP rather
than industrial production
970 through 2013 data for global industrial production
growth are from OECD
Annual total returns for 30 country, two regional and
world stock indexes, currency spot and one-year forward
exchange rates relative to the U.S. dollar, spot prices on
19 commodities, total annual returns for a global
government bond index and a U.S. corporate bond index,
and country inflation rates are from DataStream
Paper Type:
Working Papers
Date:
2014-09-02
Category:
FOMC announcements, equity premium, asset allocation
Title:
Stock Returns over the FOMC Cycle
Authors:
Anna Cieslak, Adair Morse, Annette Vissing-Jorgensen
Source:
University of California Berkeley
Link:
http://faculty.haas.berkeley.edu/vissing/CieslakMorseVissing.pdf
Summary:
Over the last 20 years, the returns of stocks in excess of bonds

were earned entirely in weeks 0, 2, 4 and 6 in FOMC cycle time,
with week 0 starting the day before a scheduled FOMC
announcement day. A strategy of holding stocks only in these
weeks yields an annual excess return of 11.58%
Intuition
Stock index returns are driven by either 1) monetary policy
news or 2) macro news as reflected in monetary policy
Such news mainly comes out between FOMC meetings,
disproportionately in even weeks in FOMC cycle time
Higher stock market returns in even weeks in FOMC cycle,
particularly for high-beta stocks
Source: the paper

The pattern is robust in subperiods of 1994-2000,
2001-2007 and 2008-2013 (Figure 3)
The pattern holds internationally, with particularly strong
returns in emerging markets (daily return of 19 basis points
during even weeks in FOMC cycle) (Table 2)
Holding stocks only in even weeks in FOMC cycle improves
returns and reduces volatility:
Source: the paper

Returns are particularly high for high-beta stocks (Table 3)
Adding a short position during odd weeks in FOMC cycle
increases returns but substantially increases volatility (Table
3)
Results are robust to controlling for arrivals of other
macroeconomic data, reserve maintenance periods and high
payment flow days (Table 4)
It is likely that the bi-weekly pattern result from both subtle
intentional and unintentional communication coming from
the Fed
Data
U.S. stock data from The Center for Research in Security
Prices (CRSP)
Data range: 1994 - 2013
Paper
Type:
Working Papers
Date:
2014-09-02
Category:
S&P timing, asset allocation, Double-Seven
Title:
Improving The Double Seven Strategy
Authors:
Jeff Swanson
Source:
SystemTraderSuccess website
Link:
http://systemtradersuccess.com/improving-the-double-seven-strategy/
Summary: The Double Seven is an effective strategy for trading S&P500 as it tries to
buy pullbacks in a major up trend. This study improves Double Seven by
adding a conditional trailing stop
Intuitions
An effective strategy for trading S&P500 is to buy pullbacks in a
major up trend
In Double Seven, the major up-trend is defined by price being
above the 200-day moving average
A pull-back is defined as a close below the lowest-low over the past
seven days
The original double seven strategy
Buy S&P when it is above its 200 day moving average, and closes at
a seven-day low
Sell when S&P500 closes at a seven-day high
Decent returns with low risk, and similar pattern for other market
indices
Source: the paper

The improved strategy
The original rules have no hard stop, only dynamic exit at a new
seven-day high
If a new seven-day high occurs and the trade is making money, then
add a trailing stop: sell off when the price is at or below the
seven-day low
If before the trailing stop is set, the market makes a new seven-day
high and the trade losing money, then call this a losing trade and exit
at the market
The profit factor (gross profits divided by gross losses) increases to
2.96 from 2.68, though number of winning trades goes down to 43%
from 80%
Pape
r
Type
:
Working Papers
Date
:
2013-07-03
Cate
Asset allocation, moving average, stop-loss and stop-gain
gory:
Title: Timing Method Performance Over Ten Decades
Auth
ors:
Mutual Fund Observer blog
Sour
ce:
Mutual Fund Observer
Link: http://www.mutualfundobserver.com/2013/06/timing-method-performance-overten-decades/
Sum
mary
:
I
n the past 100 years, a 10-month moving average asset allocation strategy
significantly outperforms the standard 60/40 mix strategy in terms of Sharpe
Ratio. Alternatively, a stop-loss and stop-gain strategy also yields comparable
returns and much lower risk
Simple methodology
Use the 10-month simple moving average timing method (10-mo SMA)
If stock price ends the month above its 10-mo SMA, then invest in stocks
the following month
Otherwise invest in bonds in the following month
Significantly outperforms the standard 60/40 mix strategy
Simple
moving
average
60/40 mix
Stock
Annual
Return
11.9%
8.7%
9.9%
Annualized
Standard
Deviation
12.9%
12.2%
19.1%
Sharpe
Ratio
0.63
0.41
0.32
Annual turn-over is 12%

Timing strategy beats 60/40 fixed strategy 78% of the 988 rolling 5-year
periods
Decent performance since year 2000 (see the graph below, note the
growth axis is logarithmic)
Stop-loss and stop-gain strategy

Covered in a related paper, The Value of Stop-Losses and Stop-Gains in
Enhancing Risk-Adjusted Return
(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2285222&download
=yes)
Tests a strategy that switches between stock/bond based on stop-loss and
stop-gain rules
The stop-loss and stop-gain are defined using rolling 6-month
annualized standard deviation of return of each of the underlying
assets
Sharpe Ratio of 0.90 vs the 0.55 for 70/30 stock/bond mix during
1990-2012 (Table 3)
Much less drawdown in crisis: In year 2002 and 2008 when stocks
plummeted, the strategy outperforms stocks by 15%/19% respectively.
Robust to stop-loss and stop gain parameters, such as the level and
number of stop placements
Source: the paper

Data
For paper1, returns prior to 1972 for bonds, 1970 for stocks, and 1962 for
cash are from the Goyal and Shiller websites. All subsequent returns are
from the Morningstar database found in Steele Mutual Fund Expert
For paper2, January 2, 1990 to Dec 31, 2012 data for two Vanguard funds:
VFINX (the Vanguard 500 Index Fund), and VWESX (Vanguard Long-Term
Investment-Grade bond fund) are from Vanguards investor website
Paper
Type:
Working Papers
Date:
2013-01-31
Catego
ry:
Tactical asset allocation, momentum, volatility, correlation
Title:
Generalized Momentum and Flexible Asset Allocation (FAA): An Heuristic

Approach
Author
s:
Wouter J. Keller and Hugo S.van Putten
Source
SSRN Working Paper
:
Link:
Summ
ary:
An asset allocation strategy based on assets relative momentum, absolute

momentum, volatility and correlation greatly outperforms traditional momentum
strategy
Intuition
Traditional momentum strategy (i.e., the cross-section
relative
returns)
is infamous for its large drawdown
This study shows that
absolute
momentum can help reducing drawdown
Funds volatility and correlation can be used to further reduce portfolio
risk
Trade 7 assets
3 global stocks (VTSMX, FDIVX, VEIEX) covering US, EAFE and
EM regions
2 US bonds (VFISX) (VBMFX) covering short- and mid-term
horizons,
1 commodity (QRAAX) fund
1 REIT (VGSIX) index fund
Calculate momentum, volatility and correlation based on prior 4 months
data
Choose 3 (out of 7) funds to build an equally weighted (EW) portfolio
Form four portfolios
Return momentum (R): rank funds based on lagged total returns.
Long/short funds with higher/lower returns
R+Absolute momentum(A): when winner funds have a negative
momentum, replace them with cash
R+A+Volatility momentum (V): to lower risk, further rank funds
by volatility (standard deviation of daily returns). Lower is better
R+A+V+Correlation momentum (C): to diversify, rank funds by
their average pair-wise correlation of daily returns and lower is
better
Optimized portfolio: Change weights on (relative momentum,
volatility, correlation) from (1, 0.5, 0.5) to (1, 0.8, 0.6)
Leveraged and optimized portfolio: apply 2x leverage to match
that of S&P 500 index, add transaction costs (0.1% per
transaction) and interest costs of leverage (3% annual)
Use simple linear functions to combine volatility and correlation with
return momentum ranking
Benchmark portfolio is the equal-weighted all 7 funds, rebalanced
monthly
The combined strategy (R+A+V+C) performs best
Similar pattern for out-of-sample tests during 1998-2004
Benchmark SR is 0.85
R+A+V+C Sharpe Ratio is 1.73

Data
Robust to look-back months of 1-12 months, with 4 months performing

the best (Figure 8)
This study covers 1997 - 2012 for the seven index funds
Paper
Type:
Working Papers
Date:
2012-12-31
Category: Novel strategy, dual momentum, asset allocation

Title:
Risk Premia Harvesting Through Dual Momentum
Authors:
Gary Antonacci
Source:
SSRN Working Paper
Link:
Summary
:
Combining absolute and relative momentum can greatly improve returns for
pairs of equity/credit/reits/stress assets. A composite portfolio that combines
these pairs yields 50% higher Sharpe ratio than benchmark with limited
turnover
Different types of momentum
Cross-sectional (or relative) momentum: using an assets returns
relative to other assets to predict future relative return
Absolute momentum (or time series): using an assets own past

return to predict its future return
Intuitively, investors want to pick those assets with both absolute and
relative momentum
Constructing the portfolio
Step1: select one asset from a pair based on relative momentum
Using a 12-month formation return given its lower transaction
costs
Skips the most recent month during the formation period for
equity assets. No such skipping for non-equity assets
Step2: if the selected asset does not show positive absolute
momentum, invest in Treasury bills, otherwise invest in the selected
asset
Equity pair
MSCI U.S.
MSCI EAFE/MSCI
ACWI
Compared with US index,

dual momentum outperform
by 400 basis points (15.79 vs
11.49%), with 400bps lower
standard deviation (12.77%
vs 15.86%) (Table 1)
Doubles the Sharpe ratio
and cuts the drawdown by half
Sharpe ratio also much
higher than the AQR large-cap
momentum index (0.73 vs
0.45) (Table 1, 2)
Credit pair
High Yield Bonds

The Barclays
Capital U.S.
Intermediate
Credit Bond Index
Dual momentum almost

doubles Sharpe ratios
compared with individual
assets (0.97 vs 0.51)
o Mostly from much lower
volatility (Table 4)
Dual momentum is
comparable to the best U.S.
bond funds over the past 20
years, the PIMCO Total Return
Institutional Fund (Table 5)
Real estate pair
Morningstar
mortgage REITs
Morningstar
equity based
REITs
Dual momentum generates

significantly higher return and
higher Sharpe ratio (Table 7)
Economic stress
pair
The Barclays
Capital U.S.
Dual momentum
substantially raises the return
Treasury 20+ year

bond index
Gold
and Sharpe ratio (Table 8)
Robust to sub-period: similar pattern in two equal sub-periods

(January 1974 - December 1992, January 1993 - December 2011)
(Table 9)
Limited turnover: the average number of switches per year are 1.4
for foreign/U.S. equities, 1.2 for high yield/credit bonds, 1.6 for
equity/mortgage REITs, and 1.6 for gold/Treasuries
Better than asset value-weighted return: dual momentum creates
59% higher profits than the weighted average returns of the
individual assets (Table 11)
A composite portfolio works best
Equally weighting the four modules above
The benchmark is the equal weighted portfolio of all nine assets (two
per module plus Treasury bills) without the use of dual momentum
50% higher Sharpe ratio: 1.07 vs 0.50 (Table 12)
Data
For equities, use the MSCI US, MSCI EAFE, and MSCI ACWI ex US
indices.
Fixed income index are the Bank of America Merrill Lynch U.S. Cash
Pay High Yield Index starting November 1984
Treasury bills is the Bank of America Merrill Lynch 3-Month Treasury
bill Index
REIT data is the MorningStar Equity REIT and Mortgage REIT index
Gold index is the London PM gold fix
Paper Type:
Working Papers
Date:
2012-06-25
Category:
Novel strategy, exchange-traded notes (ETNs), asset allocation
Title:
Volatility Exchange-Traded Notes: Curse or Cure?
Authors:
Carol Alexander and Dimitris Korovilas
Source:
SSRN Working Paper
Link:
Summary:
VIX futures ETNs, which exploit roll yields and term structure
convexity, can provide excess returns and diversification benefits
to classic asset classes
Background:
VIX ETNs have decent market cap: ~30 ETNs available

with a market cap of $3 billion
Large trading volume: Trading volume on some ETNs can
reach $5 billion per day
$875 million was traded per day on average during
2012/01-2012/02 on just two of these ETNs (VXX,
the Barclays iPath 1-month constant maturity
tracker and TVIX, its supra-speculative, twice
leveraged extension)
The first generation ETNs are not good investments
They are VIX futures trackers such as VXX and
VXZ
VXX and VXZ have a Sharpe ratio of -0.77 and
-0.16, respectively, due to term structure
convexity (Figure 5 and Table 5)
The second generation ETNs have good risk-adjusted
returns (Figure 5 and Table 5)
They are roll-yield arbitrage ETNs such as XVIX
and XVZ
They exploit the term structure convexity by
selling (buying) short (long)-term VIX futures
XVIX and XVZ has Sharpe ratio of 1.21 and 0.74
respectively
ETN portfolios may provide excess return and
diversification in a world where the traditional asset
classes are more correlated
Re-construct VIX futures ETNs daily value
Because such ETNs began to trade in 2009
Step1: construct indices for the S&P investable,
constant-maturity VIX futures for 2004/3-2012/3
Using the daily close price for (1) all VIX futures
contracts; (2) 30-day (VIX) and 93-day (VXV) S&P
500 implied volatility indices calculated by CBOE;
(3) S&P constant maturity VIX futures indices; (4)
1-month (VXX) and 5-month (VXZ)
constant-maturity VIX futures tracker ETNs; (5)
XVIX and XVZ
Two sets of synthetic constant-maturity time
series
Set1: a non-investable futures price time
series which illustrates the general level of
VIX futures, and the contango and
backwardation features of their term
structure
Set2: the S&P indices of investable VIX
futures returns
Step2: With the above S&P indices of investable constant

maturity VIX futures, replicate the VIX futures ETNs daily
indicative value
Individual VIX ETNs provide excess returns and diversification
Assuming annual service fee of 0.85% and 0.95%, for
XVIX and XVZ respectively
XVIX and XVZ have a Sharpe ratio of 1.21 and 0.74,
respectively (Figure 5 and Table 5)
Complementing each other: XVIX performs best when the
market is in contango (when the XVZ returns are low or
negative); XVZ performs well in backwardation (when the
XVIX loses money)
ETNs portfolios have even higher Sharpe ratios
Portfolio1 (Static CVIX): allocates 75% capital to XVIX
and 25% to XVZ
Because historically the ratio of contango to
backwardation is 75% to 25%
Portfolio2 (Dynamic CVZ): holds XVIX when the VIX term
structure is in contango and XVZ in backwardation
CVIX and CVZ have higher Sharpe ratios (1.21 and 1.32,
respectively) than any individual ETNs
CVIX has a total return of 254% (similar to the
XVIX) and the CVZ has a total return of 871%
(much better than the XVZ)
Provides diversification in standard asset allocation (Table
6)
Higher Sharpe ratio: CVIX and CVZ outperform US
equities, commodities and bonds in terms of
Sharpe ratio
Negative correlation: CVIX and CVZ have a
significant negative correlation with the S&P 500
equity index and a small negative correlation with
the commodity index
Data
March 26, 2004 to March 31, 2012 daily close data are
from Bloomberg
Paper Type:
Working papers
Date:
2011-01-23
Category:
Leverage, asset allocation, risk parity
Title:
Leverage Aversion and Risk Parity
Authors:
Cliff Asness, Andrea Frazzini, and Lasse H. Pedersen
Source:
Yale working paper
Link:
http://www.econ.yale.edu/~af227/index_files/AFP_201012277.pdf
Summary:
In reality, investor cant or wont use leverage, this causes safe

assets to offer higher risk-adjusted returns than riskier asset. A
leveraged investor can benefit by investing in a Risk Parity (RP)
portfolio as RP equalizes the risk allocation across asset classes
Leverage aversion causes high risk, low returns
The high risk, high return rule comes from Modern
Portfolio Theory (MPT), which assumes unlimited leverage
Per MPT, the most efficient portfolio based on historic data
(1926-2010 stock returns 7.4% per year with a volatility of
16.0%, while bond returns 5.2% per year at volatility of
3.4%) should be 88% in bonds and 12% in stocks. In
reality, average investor put 75% in stocks and 25% in
bonds (Figure 2)
This is because investor cant or wont use leverage, such
as mutual funds or pension funds
To achieve high returns, investors shift their allocation
towards more stocks and less bonds, effectively increasing
the prices (and decreasing the returns) of stocks and
reducing the prices (and increasing the returns) of bonds
A leveraged investor can achieve higher risk-adjusted
returns by having the opposite portfolio tilts and
over-weighting safe assets
Construct a RP portfolio to take advantage of high risk, low
returns
Diversify across asset classes to equalize the risk of each
asset class
This results in a portfolio with low risk and low
return, since more investment allocated to low risk
bond
Investors can then leverage to increase expected
returns. This will increase the overall risk but would
still result in a risk-diversified portfolio
RP portfolio beats 60% stock/40% bond portfolio and
value-weighted market portfolio from 1926 to 2010 (Figure
1)
In essence, RP portfolio is diversified, but is diversified by
risk, not by dollars
Caveats: RP is better only when each asset has similar risk
adjusted returns. When the expected return of stocks was
high enough versus bonds (a high equity risk premium),

one should invest in a portfolio that overweight equities
RP perform better than the market portfolio and 60-40 portfolio
Market portfolio weights stock and bond by total market
capitalization and rebalance monthly
60-40 portfolio is 60% stocks and 40% bond
The RP portfolio weights securities to the inverse of the
estimated volatility (based on past 3-year rolling covariance
of monthly excess returns), and then lever up to match the
ex-post realized volatility of the value-weighted benchmark
For US stocks and bonds from 1926 to 2010, RP portfolio
outperform both the value-weighted and 60/40 portfolios
(Table 2, Panel A)
The alpha is 7.98%, 4.63%, 3.83%, respectively
The Sharpe Ratio is 0.55, 0.4, 0.25, respectively
Similar results when using 1973 - 2010 world stocks,
bonds, credit and commodities (Table 2, Panel B)
Data
January 1926 to June 2010 US stock and government
bonds data are from CRSP
Stock market proxy is the MSCI Word index provided by
MSCI/Barra
Corporate bonds data are Barclays aggregate US Credit
index from Barclays Capitals BondHub database
Commodity data are S&P GSCI index from Bloomberg
Paper Type:
Working papers
Date:
2010-12-20
Category:
Bull/bear market timing, Asset allocation, regime switch
Title:
How to Identify and Predict Bull and Bear Markets?
Authors:
Erik Kole and Dick J.C. van Dijk
Source:
International Paris Finance Meeting conference paper
Link:
https://www.eurofidai.org/Kole_2010.pdf
Summary:
A rules-based method (LT-method) that predicts bull and bear

markets can be used for a trading strategy that outperforms a
simple buy-and-hold strategy by up to 10.5% per year with a
Sharpe ratio of 0.60
Background of two approaches to predict bull/bear markets
Approach1: rule-based methods
Lunde and Timmermann (LT): a bull market occurs

if the index has increased by at least 20% since
the last trough. A bear market occurs if the index
has decreased by at least a fraction 15% since the
last peak
Pagan and Sossounov (PS): this approach is based
on the identification of business cycles in
macroeconomic data. No requirements on the
magnitude of the change of the index during bull
or bear markets, but instead restricts on the
minimum duration of phases and cycles
No assumptions on distributions, so more robust
Approach2: regime-switching models
Such model take both signs and volatility of
returns into account
Use a data generating process of a stock market
index that allows for prolonged bullish and bearish
periods
Four variations: either two or four regimes (suffix
2 or 4) and having either constant or time-varying
probabilities (suffix C or L)
Difference between the two approaches
Rules-based approaches are typically more transparent,
but require some arbitrary or subjective settings that
possibly affect the outcomes
Rules-based approaches has better investment
performance, but regime-switching models has higher
out-of-sample predictions in terms of statistical accuracy
A full-blown statistical model like regime-switching
models offers more insight into the process under scrutiny
and its drivers
Regime switching models are faster in signaling switches
Selecting predicting variables
Consider eight variables that can help predicting the
future state of the stock market
Monthly inflation rates, Three-month Treasury Bill
rate, the 10-year government bond yield and
Moodys AAA and BAA corporate bond yields, Trade
weighted exchange rate, Unemployment rate and
Industrial production, Dividend yield
Add variables one-by-one using a repetitive procedure to
reach maximum significance with a likelihood ratio test
Select the variable-transition combination with the
largest improvement, repeat the search procedure
with the remaining variables- transition
combinations until no further significant
improvement is found
Constructing investment strategies based on 4 models

These 4 models are: LT, PS, a two-state regime switching
model, and a four-state regime switching model
Benchmark for all combinations is the risk-free index,
which returns 2.4% per year (in excess of the risk-free
rate) with a yearly volatility of 17.5% and a Sharpe ratio
of 0.14
Weekly forecast of market status, and quarterly updates
of the model parameters, using an expanding window
Only dividend yield add value as a bull/bear status
predictor (Table 3)
Rule-based models predict a smaller number of
longer-lasting bull/bear markets when compared to
regime-switching models (Table 5)
LT-approach has the best predictive quality with hit rates
of approximately 89%, other three models range from
72-86%
LT-strategies perform best: beat benchmark with average
returns exceeding 10.5% and Sharpe ratios up to 0.6
PS-strategy also consistently beat the benchmark, though
less convincing. The regime switching models perform
close to benchmark
Data
December 26, 1979 - July 1, 2009 US stock market
(weekly MSCI price index) are from Thompson
Datastream
Backtest covers the period from July 7, 1994 to July 1,
2009
Uses past data (starting December 26, 1979) to identify
past bullish and bearish periods and to estimate models
to make predictions with
Paper
Type:
Working papers
Date:
2010-11-22
Category
:
Novel strategy, daily return correlations, asset allocation
Title:
Average correlation and stock market return
Authors:
Joshua M. Pollet and Mungo Wilson
Source:
Emory University Working Paper
Link:
http://www.goizueta.emory.edu/Faculty/JoshuaPollet/documents/jp_mw_jfe_
forth.pdf
Summar
y:
An increase in the daily return correlations of the 500 largest stocks over a
quarter forecasts increase in the market excess returns over the next
quarter. The reason is higher correlation reflects higher market risk
Intuition: a higher correlation means higher market (systematic) risk
The return of each stock is partially driven by market factors (i.e.,
macro factors). A higher correlation means that stock return are more
driven by market factors than by idiosyncratic factors
Other things equal, an increase in market risk will cause increased
tendency of stock prices to move together, i.e., higher correlations
So a higher correlation among stock returns indicates a higher market
risk and a higher future market returns
Mathematically, average correlation partially drives market risk
Market risk (i.e., variance) can be estimated as (average correlation
between all pairs of stocks) * (the average variance of all individual
stocks)
Such estimation explains 98% of variation in stock market return
variance (table 2)
Average correlation accounts for 36.9% of variation in stock
market variance, average variance accounts for 69.82%
Average correlation predicts excess market returns, while average variance
does not (Table 4)
Regression: Future quarterly market excess return = Average
correlation + Average variance + GARCH(1,1) + rem + cay + pd + rf
Average correlation and variance are both market-value
averages for the largest 500 stocks
GARCH(1,1) is the in-sample conditional variance estimates for
CRSP log market excess returns generated by a GARCH(1,1)
estimator
cay from Lettau and Ludvigson (2001)
pd is the log ratio of the S&P 500 index level to the previous
one years dividends
rf is the log 3-month Treasury bill yield
Average correlation is a significant predictor future index returns
A one-standard deviation increase in the average correlation
forecasts a 1.86% additional stock market excess return over
the following quarter
This is true even when other predictors are included (Columns
4 and 5, Table 4)
Robust to sub-period tests except for 1985-1996
Though the predictive power is weaker in recent period
Robust when using different horizons
The pattern holds when forecasting monthly returns (instead of
quarterly) based on monthly correlation data(Panel B, Table 4)
The pattern holds when using past 1 to 30 months data.

Average correlation predicts excess log returns for longer
return horizons up to 30 months with a significance level of
more than 5% (Table 7)
The R2 of the regression is higher at 6 months (to 5.14%), and
is again higher at horizons of 18 months (6.82%) and 24
months (9.04%) falling slightly at horizons of 30 months
(8.33%)
Data
1963 2006 stock data are from CRSP
Paper Type:
Working papers
Date:
2010-11-22
Category:
Asset allocation, inflation
Title:
Portfolio management and inflation risk
Authors:
Bob Litterman
Source:
Inquire Europe seminar paper
Link:
http://www.inquire-europe.org/seminars/2010/papers%20Berlijn
/mo%201%208.35%20am%20slides%20Litterman%20final.pdf
Summary:
Bob Litterman summarizes recent research on portfolio

management and inflation risk. Key findings: 1.) No assets can
hedge inflation 2.) Given inflation risk, the optimal equity
holdings should be much lower 3.) Inflation does not seem to be
an important driver of alpha strategies
There exists only weak and unstable relationship between
inflation and asset returns
The distribution of inflation is highly skewed to the right
Meaning deflation has been much less common
than significant inflation
There probably is an inflation risk premium
In usual cases, the inflation risk premium should
be negative; i.e. the risk premium for nominal
bonds will be positive
The recent experience is unusual (except in
Japan), i.e., the inflation risk premium today might
be positive
Such inflation premium is on average large and
time varying
Weak and unstable relationship between inflation and

asset returns (per Inflation risk and the inflation risk
premium by Bekaert and Wang)
Stocks and bonds are not good inflation hedges;
since equity and bond betas to inflation are close
to 0 in US, and varies widely from country to
country
Treasury bills, foreign bonds, real estate and gold
good are not inflation hedges
Considering inflation risk gives much lower equity holdings
Unanticipated inflation is a realistic risk factor
Much lower optimal equity holdings after considering
inflation risk (Per Stock returns and inflation risk;
Implications for portfolio selection by Katzur and
Spierdijk)
Given inflation risk, an optimal portfolio (consisting
equities and TIPS) will hold equity that is much
lower than the case without inflation
Such change is based on the assumption that real
returns of equities is independent of inflation
Investor should have no nominal bond exposure (Per
Inflation risk and inflation-protected and nominal bonds
by Illeditsch)
Inflation does not seem to be an important driver of hedge fund
strategies
Hedge funds risk exposures are mostly determined by the
cost of leverage, the carry trade return, and the recent
performance of equity indices
But not inflation (Per On the dynamics of hedge
fund risk exposures by Andrew Patton, Tarun
Ramadorai)
When forecasting yield changes along the interest rates
term structure, considering inflation risk do not add much
value (Per Affine models of the real and nominal term
structure by Greg Duffee)
Paper Type:
Working papers
Date:
2010-09-24
Category:
Asset allocation, industrial metal prices
Title:
Return Predictability When News Means Different Things in

Different Times
Authors:
Source:
SSRN working paper
Link:
Summary:
Increases in industrial metal prices predict increases in stock

market prices during recessions, but predict falling stock market
prices during expansions. A corresponding trading strategy yields
~0.7% per month
Rationale: why industrial metal price predict state of the
economy
During recessions, they may signal upcoming expansion
During expansions, they may signal an overheating
economy
Such metals include aluminum, copper, nickel, lead, and
zinc
Confirming the pattern using regressions
Regress stock market return in month t on IMt-1 (the
return on the industrial metal in month t-1) and Dt-1 (a
dummy variable that equals 1 if the economy is
expanding and 0 if it is contracting)
No returns predictive power over the whole sample (Table
1)
Positively predicts returns during 2001 - 2010 and
negatively predicts returns over 1990 2000
Significant predictive power when studying contraction or
expansion periods separately (Table 2)
Designating each month as contraction or
expansion, then run the regression
Using NBER measure of economic activity(Panel
A): t-statistics during contraction are positive and
significant, and expansion statistics are negative
and often significant
The difference between expansion and contraction
coefficients is negative and significant
Robust to different IM measures: the Industrial Metals
Index and individual metal series yield similar results
Robust when adding other economic factors into
regression (Table 4)
Robust to different economic cycle measures: Panel B
confirms these results using CFNAI indicator for economic
activity
Similar findings in Europe (Table 5)
Regressions using European data yield results
similar to those obtained from the US data
Trading strategy generate profits (Table 6)
Data
Trading rule: Invest in the equity market if in prior month

the industrial metal return predicts a return higher than
the risk-free rate, otherwise invest in the risk-free asset
for the month
Apply this trading rule in the 5-year out-of- sample period
from 2005 - 2010
The returns to trading rules (based on different metals)
can be up to 0.73% per month or over 8% per year
with the exception of those based on nickel
while the equity market has declined in this period
The five industrial metals that comprise the industrial
metals segment of the Goldman Sachs Commodity Index
(GSCI)
Aluminum, copper, nickel, lead, and zinc futures
data from Thomson Reuters Datastream (starting
at different years, from 1977 to 1995)
US equity market proxy is the S&P 500 price index and
European equity market series (Austria, Belgium, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg,
Netherlands, Portugal, Spain) from Datastream
US business cycle phases of contraction and expansion
metrics: NBER business cycle data and the Chicago Fed
National Activity Index (CFNAI)
European Business Cycle data from the Euro Area
Business Cycle Dating Committee
Paper Type:
Working papers
Date:
2010-06-09
Category:
Novel strategies, predicting volatilities, optimal leverage, asset

allocation
Title:
Alpha Generation and Risk Smoothing using Volatility of Volatility
Authors:
Tony Cooper
Source:
NAAIM award paper
Link:
http://naaim.org/files/2010/1st_Place_Tony_Cooper_abstract.pdf
Summary:
This paper proposes a strategy that lowers the portfolio volatility

of volatility (VOVO), and applies higher (lower) leverage when
market volatilities are expected to be lower (higher). Essentially,
investors smoothens the portfolio volatility, and more efficiently

budget portfolio volatility over time
Intuition
It is difficult to predict stock returns, but relatively easy to
predict volatility
Portfolio managers usually consider portfolio volatilities
when constructing portfolios, but not VOVO. So managers
can see extreme values of volatility at times. i.e., VOVO is
very high
Higher VOVO costs the portfolio returns. E.g., a manager
may stick to an asset allocation of 60% equities and 40%
bonds, but ignore that equities see 3x higher volatility in
some years than in other years
So volatility constraints hurts returns, and VOVO
management solves that problem
Methodology
Estimate volatility using an EGARCH model, where
compound returns become a function of volatility and
somewhat more predictable
Use leveraged ETF as example to implement the strategy,
and index ETF as benchmark
The EGARCH(1, 1) model is
Left hand is the log variance on day t. right hand is the a
weighted average of the long run log variance m, the
previous days log variance , and the absolute value of the
previous days return
Apply higher leverage when returns compound quickly and lower
leverage otherwise
Leverage timed on volatility predictions generally
increases (decreases) exposure to the market return at
the right times
Simple strategies for translating daily volatility predictions
into daily leverage allow setting sensitivity to predicted
volatility and targeting overall portfolio volatility
Better return/risk using this strategy
Reduced volatility of portfolio volatility (VOVO)
When constrained to the market volatility, such strategy
helps in bull/sideways markets, but not in bear markets
When constrained to leverage <= 1, the strategies reduce
portfolio volatility without significantly reducing gross
returns
As a stress test, the strategy uses very low leverage
during the 1987/10 crash
Two strategies tested on S&P 500 Index
Strategy1: The Constant Volatility Strategy (CVS)
Data
Applies daily leverage according to a constant

divided by the predicted next-day volatility
Generates annual gross returns of 10.1%, better
than 7.0% of the unleveraged S&P 500 index
Strategy2: The Optimal Volatility Strategy (OVS)
Applies daily leverage according to a constant
divided by the square of the predicted next-day
volatility
Generates annual gross returns of 12.1%, better
than 7.0% of the unleveraged S&P 500 index
OVS more sensitive to accuracy of predicted volatility than
CVS
Yearly closes prices of several broad stock market indexes
(excluding dividends) are from Yahoo.com (except for the
US stock market data from 1885 to 1962 which comes
from (Schwert 1990) (the capital index is used)
Paper Type:
Working papers
Date:
2010-05-11
Category:
Asset allocation, adaptive asset allocation
Title:
Adaptive Asset Allocation Policies
Authors:
William F. Sharpe
Source:
Standord University Working Paper
Link:
http://www.stanford.edu/~wfsharpe/retecon/wfsaaap.pdf
Summary:
Traditional asset allocation policy is contrarian in nature and

flawed in the sense that it cannot be followed by all investors.
The author proposes a new approach, where investor uses the
change of asset values to modify allocation policy
Traditional Asset Allocation Policies is contrarian in nature and
cannot be followed by every investor
Each broad asset class is assigned a weight (between 0%
and 100%) stated as a percentage of the total value of
the fund
Asset allocation policies do not change frequently
Investor will buy the assets that underperformed relative

to the portfolio, and sell the assets that outperformed
relative to the portfolio
If such policy is followed by every investor, then there will
be no trading since at any given time every investor
wants to buy/sell the same securities
Why investor need adaptive allocation
Assume a fund adopts a 60/40 stock-bond mix at
1976/01, meaning stock was expected to have higher
returns than bond
However over 1976/01 2009/06, the value of bonds
increased more than the value of stocks. So in
reality
stock had lower returns than bond (Figure 2)
Thus, if the 60/40 mix was representative of expected US
stocks/bonds return at the
beginning
of the period, it was
not at the end(Table 5)
In other words, such 60/40 ratio is no longer
representative of the markets risk and return
Monthly rebalancing makes the fund riskier
To reflect the changes of return expectations, investor
needs adaptive allocation policy
Adaptive Strategy1 (simpler and recommended): Adaptive Asset
Allocation Policy (AAA)
The desired stock proportion in portfolio is
Stock proportion = (pre-set stock proportion) *
(current stock value / original stock value) /
(current stock value / original stock value +
current bond value / original bond value)
So when stocks fell from representing 60% of total
market value to 48%, the funds asset allocation
policy changed from one with 80% invested in
stocks to one with 71.43% (table 6B)
Why AAA is better
Less turnover: no need to make large purchases or
sales of assets
This contrasts with investors following traditional
asset allocation policies, who must frequently
purchase assets that are relative losers and sell
those that are relative winners
All investors can follow such strategy: holdings of
each class will change by precisely the same
percentage as does that of the market
Adaptive Strategy2 (more complex): Optimization based on
Reverse Optimization
General asset allocation policy:
Asset Allocationt = f (Investor Characteristicst , Market
Forecastst)
where market forecasts of consultants and others are roughly

Market Forecasts>t = f (History<=t , EconomicTheoryt ,
MarketValuest )
Why should market values inform forecasts: because an
assets current market value reflects the collective view of
the probabilities of possible future prospects
Consequently, an investors asset allocation should
change over time to reflect changing market values
Less rebalance: this approach does not rely on constant
rebalancing
Complexity: however, the process requires complex
models in order to accommodate real-world aspects and
can be used by relatively few organizations
Suggestions/implications for different parties
For institutional funds
Assuming the asset allocations were appropriate at
the base policy adoption time, institution funds
should factor in relative weights of asset classes
For balanced funds (asset allocation funds)
Such funds could shift allocation over time, thus
adapting market changes (Figure 3) and maintain
its aggressive/defensive position relative to the
market
A representative fund could be designed to
provide the same risk as the overall market
For target-date funds
These funds can use AAA (per the more-general
formula 17) for asset allocation
When stocks represent more than 60% of the
value of the market, the funds allocation to stocks
will be greater than that called for by the glide
path
For the investment industry
More data will need to be made available about the
market values of the securities in each of the
benchmarks designed to represent major asset
classes
Institutional investors should at least compute the
asset allocations that would result from an
adaptive policy
Some mutual fund companies might offer adaptive
balanced funds and/or adaptive target-date funds
Data
While the paper is mostly theoretical in nature, it uses the
Barclays Capital (formerly Lehman) Aggregate U.S. Bond
Index and the Wilshire 5000 U.S. Stock Index for
illustration
Paper
Type:
Working papers
Date:
2009-11-23
Categor
y:
Asset Allocation, Novel Strategies, Market Timing
Title:
Predictive Signals and Asset Allocation
Author
s:
Hui Ou-Yang, Zhen Wei, and Haochuan Zhang
Source: SSRN Working Papers

Link:
Summa
ry:
The paper develops a strategy to allocate assets between S&P 500 index and
US Treasury bond futures. The strategy is based on three macroeconomic
variables that predict future economic growth, and brings 14.8% per annum in
risk adjusted terms
Three predictive signals
Signal1: credit standard
Defined as the net percentage of domestic respondents
tightening their standards for commercial and industrial loans in
the Senior Loan Officer Opinion Survey
Credit standard is informative about future lending rates, a high
value corresponds to high future loan rates and a future
economic recession
Intuition: When credit standards tighten (loosen), banks give out
fewer (more) loans to businesses, and the US economy slows
down (picks up)
Signal2: the percentage change in the Baltic Dry Index (BDI)
BDI signals the demand for freight around the world
Intuition: When the level of the BDI increases (decreases), the
cost of shipping raw materials around the globe increases
(decreases), signaling an expansion (contraction) of the
economy (Exhibit 6)
Signal3: the change in 2 year constant maturity swap rate (CMS)
CMS responds to Fed target funding rate and reflect expected
monetary policy changes
It is useful because it changes more frequently than the Fed
target funding rate
It is a strong predictor for 2 year Treasury futures (Exhibit 5)
The predicting power of these signals
Following a tightening (loosening) in the credit standard, stock returns

decrease (increase) and bond returns increase (decrease)
Following an increase (decrease) in the BDI, stock returns increase
(decrease)
An increase (decrease) in the 2yr CMS rate leads to a lower (higher)
Fed rate
Construct the asset allocation portfolio
Using a framework proposed by Brandt and Santa-Clara to predict
equity and bond returns
Excess return volatility for equities is assume to be 20% and the excess
return volatility for a short-term bond is assumed to be 2%
Use credit standards and BDI to predict equity returns
Use credit standards and the 2yr CMS rate to predict bond returns.
The strategy outperforms the market and long-term US Treasury futures
Monthly rebalancing
The profitability of the strategy is higher compared to the index and
long-term US treasury returns in both the full sample and in
sub-samples (Exhibit 12)
Data:
1993-2009 S&P 500 return and Treasury Bond Futures data are from
CRSP
Senior Loan Officer Opinion Survey can be found online
http://www.federalreserve.gov/boarddocs/snloansurvey/200908/chartd
ata.htm
BDI and CMS data are taken from Datastream
Paper Type:
Working papers
Date:
2009-11-23
Category:
Portfolio optimization, asset allocation
Title:
Geometric Mean Maximization: An Overlooked Portfolio

Approach?
Authors:
Javier Estrada
Source:
IESE Business School Working Paper
Link:
https://editorialexpress.com/cgi-bin/conference/download.cgi?db
_name=finanzas2009&paper_id=149
Summary:
At a time when quant managers are trying to de-correlate with

peers, a new portfolio construction method may help. This paper
finds that Geometric mean maximization (GMM) is superior to
Mean-Variance optimization in certain aspects
Note that this study tests their theory on various national stock
indices and asset classes (instead of individual stocks)
Intuition
The traditional Mean-Variance optimization is not
intuitive to common investors, whom care less volatility
(or variance) of their investment
Instead investors on the growth rate of invested capital
grows
In this sense, a more plausible goal is to maximize the
geometric mean return, i.e., grow the invested capital
at the fastest possible rate
Difference between GMM and Mean-Variance optimization
Mean-variance optimization maximizes the expected
return for given volatility (risk)
It maximizes the Sharpe Ratio
(E(R)-R(f))/sqrt(Var(R))
Volatility is undesirable because it is synonymous
with risk
GMM maximize the terminal wealth by maximizing the
capital growth rate
The objective function is: max ((1+R-period1)
(1+R-period2)...(1+R-period-n)), which equals to:
max (E(R)- exp (var(R)/2(1+E(R))^2)) (per
Apendix A2)
Return variance is also a negative input, since it
lowers geometric mean return by lowering the rate
of growth of the capital invested
In-sample test: GMM has higher terminal wealth, though lower
Sharpe ratio
This paper compute optimal portfolio at there time points
(06/1998, 06/2003 and 06/2008)
GMM portfolios are less diversified, have a higher
expected return, and higher volatility
This is true for developed markets, emerging markets,
and different asset classes (US Stocks, EAFE Stocks, EM
Stocks, US Bonds, US Real Estate)
Out-of-sample test: GMM has higher Sharpe ratios and higher
terminal wealth
For out-of-sample results, the author look at the actual
performance of $100 invested in the optimal portfolios
formed in Jun/1998, passively held through Jun/2003 and
Jun/2008
This is true for stocks indices in developed and emerging
markets (Exhibit 6)
Data
MSCI database for 26 developing, 22 developed market
returns are used for the sample period of 1998-2008

Paper Type:
Working papers
Date:
2009-08-03
Category:
Risk and Return, asset allocation, bonds vs. Stocks
Title:
Stocks versus Bonds and Shortfall Risk
Authors:
Brian Balyeat, David Hyland
Source:
FMA Meetings 2009
Link:
http://www.fma.org/Reno/Papers/Stocksvsbondsandshortfallrisk.pdf
Summary:
Using shortfall risk as risk measure, this paper shows that one
should invest less in stocks and more in bonds. It also shows the
importance of time diversification (investment risk decreases as the
holding period of the portfolio increases)
Shortfall risk measures the risk of not meeting an investment goal
E.g., if the goal is beating inflation, then the short fall risk is
the probability of losing to inflation
This paper use a long time series of stock (S&P 500 index)
returns and bond (Treasury bond) returns returns for the
time period 1926-2006 (Ibbotson data)
Returns are simulated each year by randomly drawing from
their 1926-2006 distribution
Why not use the actual returns: the paper claims that
using historical returns is just one realization of the
random variable
One potential concern: the return time-series
structure is lost
Portfolios with varying levels of stocks and bonds are
compared to benchmarks such as inflation, zero return and
the return of the stock portfolio
Time diversification and assets diversification are both important
Time-diversification: as the holding period of the portfolio
increases, the risk decreases
Asset-diversification: for each of the investment objectives,

the optimal portfolio is always a mixture of stocks and bonds
(Tables 4, 5 and 6).
The result challenges the conventional notion that stock
market is the optimal investment for the long-run
The risks of bonds decrease at a higher rate than the risk of
stocks
In the cases of Goal 1 and 2 below, the optimal portfolio has
a decreasing weight in stocks as the holding period increases
Data:
Stock(S&P500index)returnsandbond(Treasurybond)returnsforthetimeperiod
19262006arefromIbbotson
Paper Type:
Working papers
Date:
2009-05-08
Category:
Asset allocation, regime detection
Title:
Dynamic Strategic Asset Allocation
Authors:
Pim Van Vliet and David Blitz
Source:
SSRN working Paper
Link:
Summary:
ThepaperdevelopsaDynamicStrategicAssetAllocation(DSSA)strategy
thatfeaturesconstantriskacrossdifferenteconomicregimesand
timevaryingcorrelations.Suchstrategyyieldsreturnsthataresuperiorto
otherwidelyusedstrategies
TwoFeaturesofDSSA
Timevaryingriskandcorrelations:assetshastimevaryingriskand
correlations
Constantriskacrosseconomiccycles:DSSAhasconstantrisk
acrosseconomiccycles:expansion,peak,recessionandrecovery.
Bycontrast,astaticstrategysriskwouldincreaseinrecessions
(riskmeasuredasreturnvariance)
ConstructingtheDSSAstrategy
Detectingeconomiccyclesusingfourmacroeconomicconditioning
variables
Creditspread,earningsyield,unemploymentrateand
manufacturerssurveyproductionindex
ThestrategysuccessfullypredictsNBEReconomiccycles
Timevaryingriskofeachassetandtimevaryingcorrelations
betweendifferentassetclasses(Table3)
Riskmeasuredastheannualvariances,andcorrelations
measuredasannualcovariance
Thiscontraststhefixedriskandcorrelationofastatic
strategy
Constantportfolioriskacrossdifferentregimes
Assuch,DSSAensuresconstantportfolioriskacross
economiccycles
Superiorreturnscomparedtootherwidelyusedstrategies(19482007)
Data
Thispapercoverstheperiodof19482007
Datacomesfromvarioussources:EquitydataisS&P500returnsvalueandgrowth
returnsisMSCIBARRAvalueandgrowthreturnsseriesfromKennethFrench(BVand
BG)SmallcapsdataisRussell2000indexCreditreturnsaretheLehmanUS
aggregatecorporateindex,etc.
Pape
Working Papers
r
Type:
Date: 2009-03-18
Categ
ory:
Momentum, Asset allocation, statistic methodology
Title:
Robust Optimization of the Equity Momentum Strategy
Auth
ors:
Arco van Oord, Martin Martens and Herman K. van Dijk
Sourc
e:
Erasmus University Rotterdam Working paper
Link:
http://publishing.eur.nl/ir/repub/asset/14943/2009-0114.pdf
Sum
mary
:
The paper develops a modified momentum strategy that uses an alternative past
return measure, and also uses quadratic optimization to trade-off between risk
and return.
The mean-variance quadratic optimization
Specifically, the quadratic function is
1. max h*f - lambda*h*V*h

2. where f= expected returns, V=var-cov matrix, h=portfolio
weights, lambda = risk aversion
High (low) values of risk aversion imply high (low) emphasis on the
expected returns
Increased universe: the long (short) portfolio invests in stocks in
the top (bottom) 50% of the stocks sorted by expected returns (by
contrast, the classic momentum strategy invest in top(bottom)
10% stocks
Estimating expected variance-covariance matrix: the
zero-investment momentum portfolio is regressed on Fama-French
factors and the predicted sum of squares is taken as
variance-covariance matrix
Estimating expected future returns: using five methods
1. benchmark case: use the stocks average returns between
the month (t-7, t-2)
2. Method1: use the 1965 to 2006 historical average return of

the 10 respective bucket the stock falls in
4. Method3: use the 1965 to month (t-1) historical average
return of the 10 respective bucket the stock falls in
Reasons for treatment in method 2-5: the shape of realized return
is usually very different from forecast returns. (see the graph
below)
Much better performance compared with the traditional method
The strategies with more buckets and higher risk aversions bring
higher monthly Sharpe Ratios
Of course, Method1 and Method2 are for illustration purpose only
given its look-ahead bias, while Method3 and Method4 may be
more useful
Discussions
Thetwographsaboveareverythoughtprovoking,sincemostquantfactorshavesimilar
problem,i.e.,theforecastreturnsandrealizedreturnsfordifferentbucketsarevery
different.Forbetteroptimizationresults,itmakessensetousethepastrealizedfor
differentbucketsasexpectedreturns.
Interestingly,thedifferencebetweenmethod2(withlookaheadbias)andMethod4
(withoutlookaheadbias)isrelativelysmall
Thestudydoesntreallybeattheconventionalmomentumstrategyforhighvaluesofrisk
aversionparameter
Data
ThestudyusesNYSEandAMEXstocksduringthetimeperiod19262005fromCRSP
andFamaFrenchfactorsfromKennethFrenchswebpage
Paper Type:
Working Papers
Date:
2009-02-25
Category:
Asset allocation, value, size and momentum
Title:
Portfolio of Risk Premia: a new approach to diversification
Authors:
Remy Briand, Frank Nielsen and Dan Stefek
Source:
SSRN Working Paper
Link:
Summary:
The paper develops a new diversification technique based on risk

premia (as opposed to the conventional beta measures).
As an
illustration, during 1995 - 2008, this risk-premia based strategy
yields similar returns to the traditional 60%equity/40%bond
allocation but with 65% less volatility
The strategy is based on decomposing risk premium into
four categories: asset class beta, style beta, strategy
beta, and alpha
Asset class beta
captures the market beta of the
general asset class such as equities or bonds.
Asset class beta= traditional beta x
general market return
Style betas
capture the market beta of individual
security characteristics (e.g. B/M, size, credit
spread of fixed income securities).
Style beta = expected return of the style
x exposure to the respective style
Strategy beta
captures the systematic return
captured by replicating the investment strategy
(e.g. Merger arbitrage, convertible arbitrage, etc.).
Investment strategy beta= expected
return of the investment strategy x
exposure to the investment strategy
Alpha
is the remaining part of the risk premium
after the three betas above.
Historical risk premiums of some well-known styles, strategies
and asset classes
Diversifyingbasedontheriskpremiaofstyles,strategiesandassetclasses
Thestrategyis
equally
weightedinallthestyles,strategiesandassetclassesinabove
table
Thereismonthlyrebalancingbetween1995and2008
Thestrategyiscomparedtotheclassical60/40strategy,whichis60%longonMSCI
Worldand40%longonDomesticUSbonds
Thestrategybeatstheclassical60/40strategyintermsofSharperatio(0.94vs.0.26)
ThestrategyisalsosuperiorinextremeeventmonthssuchasAsianCrisis,LTCM,9/11,
etc.(Table7)
Data
Thepaperusesdatafortheperiodof1995to2008.MSCIindicesandMerrillLynch
DomesticMasterBondIndexarefromdatastream.

Paper Type:
Working Papers
Date:
2009-02-01
Category:
Asset allocation, US bond liquidity, Global markets
Title:
Flight-to-liquidity and global equity returns
Authors:
Ruslan Goyenko and Sergei Sarkissian
Source:
McGill University Working Paper
Link:
http://web.management.mcgill.ca/Sergei.Sarkissian/papers/flight.pdf
Summary:
The paper shows that US Treasury bond illiquidity is a negative

predictor of stock returns in 46 different international markets.
Definition of US bond illiquidity
Illiquidity is defined as the average percentage bid-ask
spread of off-the-run US Treasury bonds with
maturities of up to one year
Proposed reason: the flight-to-liquidity/quality in international
portfolio flows
When investors are pessimistic about stock market,
they chase safest and most liquid securities such as US
treasuries and by doing so improving US bonds
liquidities
When the US bond is very liquid, that means investors
are shifting money away from stock markets. Since
such shifting usually last for some time, it predicts
lower returns for stock indices
The more an asset is exposed to flight-to-quality, the
higher should be its expected return
Illiquidity predicts stock market returns in international
markets
US treasury bond illiquidity predicts future and
contemporaneous returns negatively
The effect of US Treasury bond illiquidity on returns
works through the effect on stock market liquidity
Bondilliquidityalsopredictsstockmarketilliquiditybothatthecountrylevelandworldwide
Theproxyforstockmarketilliquidityisvalueweightedproportionofdailyzeroreturnsinagiven
monthineachmarket
USTreasurybondilliquiditycanbeaddedtoaninternationalassetpricingmodel
Bondilliquidityrisknotsubsumedby,andonlyaddsto,allotherglobalandlocalfactors
Themodelholdsinthewholesampleaswellasforthedevelopedandemerging
marketsseparately
Theaverageannualpremiumattributedtoflighttoliquidityriskisbetween0.35%and
0.75%.
Ourconcerns
Intuitively,thisfindingperhapsarebasedontwowellknownfacts:1)USmarketand
internationalmarketsareincreasinglymorecorrelated2)wheninvestorsarepessimistic
aboutstockmarket,theyaremoreliketobuyUStreasury.
Regressionsresultsinthepapershowthatitismainlyafactorforemergingmarket
returns,whereasthepapertriestodevelopaninternationalassetpricingmodeloutofit
Data
Thestudycovers19772006,indexreturnsanddividendyieldsdataforUStreasury
and46stockmarketsarefromDatastreamandIFC.
USTreasurybilldataisextractedfromCRSPdailyTreasuryQuotesfiles.
Paper Type:
Working Papers
Date:
2009-02-01
Category:
statistic methodology, asset allocation
Title:
Beat the Market - A Strategy for Conservative Investors
Authors:
Lewis Glenn
Source:
SSRN Working Paper
Link:
Summary:
The paper develops a stock/cash allocation strategy based on the

past market returns moving-average. Such strategy yields an
annual return of 12% over stock index return.
The motivation
The strategy rotates between the market portfolio
and risk-free asset
The motivation is to take advantage of the high
profitability of the market portfolio in bull markets
and its underperformance in bear markets
The Moving Average Look-Back (MALB) strategy
The strategy is (1) to long on the index when the
ratio of the k-day moving average at day n-1 to
the same average at day n-m-1 exceeds
equivalent of 3% per annum (which is the rate of
interest that could have been obtained in the
period n-m by being in cash position) and (2) to
long on the risk-free asset otherwise.
From 03/10/1999 to 11/20/2008 the MALB (k=200
and m=20) has brought a total return of 78%
compared to -49% for the Buy-and-Hold strategy
MALB method is shown to create superior excess

returns to other moving average methods (such as
Moving Average Crossover (MACO) and Moving
Average Convergence/Divergence)
A volatility adjusted version (MALBV) also add value
MALBV uses the implied volatility data from the
VIX index
MALBV is identical to MALB whenever VIX>20
MALBV has the additional feature of turning into a
Buy-and-Hold strategy whenever VIX<20.
The intuition of the MALBV strategy depends on
the high market returns in low volatility regimes
and therefore buy-and-hold strategy is the most
profitable one
MALBV strategy has brought a total return of
141% between 03/10/1999 to 11/20/2008
Data
For the period of 1980-2008, VIX index of S&P 500
index are from Chicago Board Options Exchange,
S&P 500, QQQQ and risk-free asset returns are
from Datastream.
Paper
Type:
Working Papers
Date:
2009-02-01
Category
:
Asset allocation, macro factors
Title:
Time-varying short-horizon predictability
Authors:
Sam Henkel, Spencer Martin and Frederico Nardari
Source:
University of Arizona Working Paper
Link:
http://finance.eller.arizona.edu/documents/seminars/2007-8/FNardari.Predict
ability03-08.pdf
Summar
y:
he paper shows that in G7 countries, stock index return predictors (such as

T
dividend yield and the short rate) only work during business cycle
contractions
and not in
expansions
.
Short rate, term spread and dividend yield are effective predictors
during recessions and not during booms

Adjusted R-squared in US index over 1953-2007 was 18%
during recessions and 1% in expansions
The difference in predictive power doesnt come from high
volatility or negative skewness of returns in bear markets
This result is not driven by the prediction of negative expected
returns in bad times
Aggregate return predictability has varied significantly in time
In 1960s and 1970s there was very little predictability and
returns were almost random walk
Following recessions in 1980s there was predictability
There was again little predictability in 90s following the booms.
Paper Type:
Working Papers
Date:
2008-12-20
Category:
Quantitative Insights, Asset allocation, statistic methodology
Title:
Seven Quantitative Insights into Active Management
Authors:
Ronald N.Kahn
Source:
Barra
Link:
http://www.barra.co.za/research/misc/quantitative_insights.pdf
Summary:
Seven quantitative insights into active management are

discussed.
Insight 1: Active Management Is Forecasting
The goal of active management is to forecasts
differently from the consensus and produce a
portfolio with higher Sharpe ratio and positive
alphas
As such, the implied expected returns will be
different from the consensus expected returns
Insight 2: Information Ratios Determine Value Added
No matter what is an investors risk aversion level,
the most desirable manager will have the highest
information ratio (IR), which is defined as IR =
alpha / residual risk
A top quartile manager on average has an
information ratio of 0.5. In other words, they add
50 basis points of outperformance for every 100
basis points of active risk, before expenses.
Insight 3: The Fundamental Law of Active Management

To achieve a high IR, a manager must
demonstrate an edge for every asset chosen and
must diversify that edge over many separate
assets."
IR = IC (square root of BR)
IC = information coefficient (skill, or
correlation of forecast and realized residual
returns)
BR = independent bets per year (breadth
or the number of independent bets the
manager takes per year, which measures
diversification)
Implications
Given skill, the more bets a manager
makes, the higher the IR will be
Breadth applies across models as well as
assets. E.g., an international equity
manager can bet on countries, currencies,
and individual stocks."
Insight 4: Three-Part Alpha
There are three parts to every alpha: an
information coefficient (IC), a volatility, and a
score: = IC S
IC is a measure of skill, it is the correlation of raw
signals (like analyst expectations) and realizations
is the standard deviation of the residual return.
Higher means higher volatility of alpha
S is a variable with mean zero and standard
deviation 1. It ranges roughly from -2 to +2.
Insight 5: Data Mining Is Easy
Statistics of Coincidence: The odds of Evelyn
Adams winning the lottery twice in a matter of 4
months are in fact 17 trillion to 1. The odds of
someone, somewhere, winning two lotteries
given the millions of people entering lotteries
every day are only 30 to 1. If it wasnt Evelyn
Adams, it could have been someone else."
So when viewed from the correct (broad)
perspective, coincidences are no longer
so improbable. But in research, some promising
strategies tend to have a narrow perspective and
are hence not likely to add value
The four Guidelines for Backtesting Integrity
Intuition:
Need to make economic sense
Restraint:
it is not desirable to studying
strategies, looking and results and then
going back to continually revise the

strategy.
Sensibility:
Results that seem improbably
successful should be ignored.
Out-of-sample testing:
Strategies should be
tested using an independent data set.
Insight 6: Implementation Subtracts Value
Constraints reduce value added. Some constraints
come from the structure of the strategy (like
transaction costs) and some from investors
perspective (like stocks they cannot own).
Controlling transactions costs can help, most of
the value added can be accomplished by reducing
turnover
Thus: (1) promising strategies with high turnovers
may be worth taking a second look, and (2)
transaction cost research is highly valuable.
Insight 7: Its Hard to Distinguish Skill from Luck
It takes improbably long periods of observation to
estimate skills with some precision.
Four types managers when measured on two
dimensions: skill and luck
Blessed
(those who have both) succeed and
thrive
Doomed
(those who have neither) fail and
get eliminated
Forlorn:
possess skill but not luck, thus
their performance often fails to show their
true potential and they suffer for that
Insufferable:
possess luck but no skill, yet
they thrive.
Overall, successful managers need both luck and
skill to succeed.
Implications of these 7 insights on active management
Stage
Explanation
Relates to Insight #
Research
Search for
information that is
superior to the
consensus.
1: Active
Management is
Forecasting
Investigating many
signals may help
succeed
3: The Fundamental
Law of Active
Management
But data mining

should be avoided
5: Data Mining Is
Easy
The outcome should

be a strategy with a
high information
ratio
2: Information Ratios
Determine Value
Added
Refinement
Convert research
signals into alphas
4: Three-Part Alphas
Portfolio
Construction
and
Rebalancing
Trading
Implement while
6: Implementation
losing as little of the Subtracts Value
strategy value as
possible
Performance Observe what has

7: Its Hard to
Analysis
worked and what
Distinguish Skill from
has not, provide
Luck
feedback to research
stage
Paper
Type:
Working Papers
Date:
2008-11-05
Catego
ry:
asset allocation, Developed-emerging markets correlation, international

diversification, Global markets
Title:
Stock Market Uncertainty and Developed-Emerging Market Return Comovement
Author
s:
Xi Dong
Source
:
FMA 2008 working paper
Link:
http://www.fma2.org/Texas/Paper/StockMarketUncertaintyandDevelopedEmerg
ingMarketReturnRelation.pdf
Summ
ary:
When volatility (ie, uncertainty) increases in the developed markets, the linkage
between developed countries and emerging markets weakens.
Implication: when developed markets become volatile, shifting investments to
developing countries can provide higher diversification benefits
Definitions
Contagion: a significant increase or decrease in cross-market

return linkages resulting from a shock originating in one country
(or group of countries).
Uncertainty: measured as a stock markets daily implied volatility
indices.
When developed markets gets volatile, linkage weakens
At such times, developed-emerging correlations are significantly
lower than overall average
Comovement between developed markets, specifically between
U.S. and European markets increase
The sample period: from 2001 to 2006. Major turbulent
subperiods in this period are characterized by shocks originated
in developed markets (eg., the 9/11/2001 terrorists attack in US,
accounting scandals 2002 in US and European countries.)
Data:
The return data is the Morgan Stanley Capital International
(MSCI) daily free float-adjusted total return indices for Jan. 1,
2001 - Dec. 31, 2006
Measuring market volatility: "An implied volatility index is
calculated for a synthetic national/regional market index option
with 30 or 45 calendar days to expiration. It is a measure of the
expected volatility of the underlying market index over the next
30 or 45 calendar days."
Paper Type:
Working Papers
Date:
2008-09-25
Category:
Mutual fund flows, bond vs stock returns, asset allocation
Title:
Flows between Bond and Stock Funds and Stock Returns
Authors:
Azi Ben Rephael, Shmuel Kandel and Avi Wohl
Source:
SSRN Working paper
Link:
Summary:
The paper documents that fund exchanges from bond funds to

equity funds have predictive power on subsequent market
returns.
Fund flows are divided into 4 groups:
1) Sales and 2) redemptions: either enter or exit a
fund category (e.g., bond funds, growth equity
funds)
Comments:
3) Exchanges in and 4) exchanges out are

transfers of existing cash flows between different
funds in the same fund family
Groups 1) and 2) are not studied by the paper
Higher net exchanges to equity fund, lower subsequent
market return:
Form a strategy that goes long on the stock
market index if the last 3 months net exchanges
are negative (52% of the months)
and goes long on the risk-free rate if the last 3
months net exchanges are positive (48% of the
months)
The strategy results in a monthly excess return of
0.70% (in excess to risk-free rate) and with a
standard deviation of 2.96%
Likely reason: the price impact of mutual fund trades in
the market
Mutual funds push the prices up during the months
they are net buyers
The temporary price impact fades away during the
next 3 months
This effect happens more in months with greater
investor sentiment, suggesting that there is a
behavioral effect with mutual fund trading.
1. Discussions
The paper documents a profitable trading strategy for the whole
market using the ICI database, a less used data source to our
knowledge.
In line with the related literature discussed in the paper, one
would expect that the price impact to be higher when the
unexpected net exchange is higher. A time-series decomposition
of net exchanges into expected and unexpected parts would
provide more insights and may hopefully yield stronger results.
2. Data
1984-2007 monthly flows and asset values of aggregate US
mutual fund categories are from ICI. The data are published on a
monthly basis. NYSE, AMEX and NASDAQ indices returns are
from CRSP.
Paper
Working Papers
Type:
Date:
2008-11-05
Catego
ry:

Title:
Author
s:
Xi Dong
Source
:
Link:
Summ
ary:
Definitions
indices.
Data:
2001 - Dec. 31, 2006

Paper
Type:
Working Papers
Date:
2008-09-03
Category:
asset allocation, Mutual fund holdings
Title:
Acting on the Most Valuable Information: Best Idea Trades of Mutual

Fund Managers
Authors:
Lukasz Pomorski
Source:
University of Toronto working paper
Link:
http://www.rotman.utoronto.ca/pomorski/best_ideas_of_fund_managers.p
df
Summary:
This study finds that stocks

that are traded by multiple managers within a
fund family (i.e., funds owned by investment company) outperform their
benchmarks, while those that are only traded by single managers do not.
"Best idea" defined as consensus buy/sell within a fund family
That is, at least two funds owned by one investment
company buy/sell the stock at similar times
Trades have to be directional - omit the stocks with both
buys and sells in a quarter
Likely reason: consensus trades contain extra information (possibly
buy-side research)
If more than one manager within the family like /dislike the
stock (i.e., there is some consensus), this may reflecting the
value of proprietary research within the investment company
Best-idea trades outperform benchmarks in regression study
Outperform by as much as 4% per year (as measured by
alphas in a Fama-French and Carhart regression framework)
Single-fund trades yield essentially 0 alphas
Stronger results when 3 or 4 managers trade the same way
(as opposed to just 2)
Buys drive the results more than sells do (more skilled in
buying than selling)
Good results based on zero-investment portfolio
For each quarter, look for at least 5 stocks that were bought
by a family of funds, and at least 5 that were sold, exclude
stocks with both buys and sells
Construct a portfolio that is long the buys and short the sells
at the beginning of the quarter following trades
Compute the return on the portfolio over the quarter
Implications: managers are skilled but trade too much
No evidence of outperformance for those trades that do not

qualify as "best-idea"
Best-idea trades only make up about 30% of dollar trading
volume
There may be rational explanations to why managers trade
too much (like diversification)
Robust checks:
Analyst recommendations do not influence results
Results do not reverse in the long run
"Best-ideas" distinct from "herding": Herding means multiple
managers from different families trade in the same direction
Comments: 1. Discussions
The strategy proposed here are novel as well as intuitive. Our concern is
mainly that the number of consensus stocks sounds fairly small (five stocks
in some cases), that can be translated into a small capacity of this
strategy.
2. Data
The study covers 104 quarters between the first quarter of 1980 and the
last quarter of 2005. Thomson Financial mutual fund holdings database
used to infer quarterly trades of mutual funds. CRSP Mutual Fund database
for mutual fund data are used in conjunction with CRSP and Compustat for
stock data.
Paper
Type:
Working Papers
Date:
2008-08-13

Strategies
Title:
Authors:
Langdon B. Wheeler
Source:
Link:
.pdf
Summary
:
This paper
now
.

drive the price up
management
Paper Type:
Working Papers
Date:
2008-06-08
Category:
asset allocation, Equity premium, European stocks, Global

markets
Title:
The Implied Equity Risk Premium- An Evaluation of Empirical

Methods
Authors:
David Schroeder
Source:
University of Bonn Working Paper
Link:
http://www.uni-bonn.de/~dschroed/ImpliedERP.pdf
Summary:
The paper compares two methods of stock value estimation: (1)

Dividend discount model (DDM) and (2) Residual income model
(RIM).
The results suggest that for European stocks, DDM has
superior predictive power to RIM.
In short DDM tries to estimate the expected return by
using the dividend rates and future dividend discount
rates, whereas RIM uses the earnings and future earnings
growth rates.
The paper estimates expected risk premiums of Euro Area
and UK stock markets using the 2-stage and 3-stage DDM
and RIM methods:
Comments:
2-stage (3-stage) DDM estimates expected UK risk

premium as 5.21% (6.31%) and Euro Area
between 4.83% and 5.08% (6.35% and 6.43%).
2-stage (3-stage) RIM estimates expected UK risk
between 6.78% and 7.19% (7.05%% and 7.75%).
In terms of return prediction of DDM and RIM, as shown
in Table 7:
For all horizons the predictive power of the 2-stage
DDM is the greatest compared to 3-stage DDM and
both RIM specifications.
The slope coefficients on expected returns are
significantly positive for most of the horizons and
models.
1. Discussions
Quite some managers use DDM/RIM for the purposes of stock
evaluation and stock/bond allocation. The results in this paper
can be used as an effectiveness of benchmark.
The paper compares two widely used expected return estimation
models on a relatively new dataset, our concerns:
As stated in the paper, one common weakness of both
models is the assumption about constant growth rates in
the future, which is certainly violated once the expected
returns are time varying or if the proxy used in the
literature long-term earnings growth rate from analyst
forecasts- are noisy.
Another drawback of having multi-stage DDM and RIM
models is the underlying assumption about the jumps in
dividend and book-value of equity values, which can
imply confusing book-to-market ratios.
2. Data
The study employs companies that are members of the Euro
Stoxx, Euro Stoxx-50 and FTSE-100.
Current share prices, market capitalizations, last cash
dividends, expected earnings, treasury yields and the
book values of equity capital are taken from Bloomberg
database.
Consensus forecast of long-term earnings growth is
provided by First Call.
Real GDP growth and inflation rate for European countries
are taken from Consensus Economics Inc.
Individual stock returns are taken from Datastream.
Paper Type:
Working Papers
Date:
2008-06-08
Category:
Asset allocation, stock/bond returns, non-Linear Predictability
Title:
Non-Linear Predictability in Stock and Bond Returns: When and

where is it exploitable?
Authors:
Massimo Guidolin, Stuart Hyde, David McMillan
Source:
Manchester Business School Working Paper
Link:
http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%
20MEETINGS/2008-athens/HYDE.pdf
Summary:
Non-linear models (e.g., Markov switching, threshold,

TARCH, GARCH and EGARCH) can help predicting the
bond and stock returns in G7 countries
US and UK asset returns show the biggest favor for
non-linear models.
There isnt a consistent outperformer across all countries
The out-of-sample predictive power of non-linear models
are evaluated against the simple random walk with a drift
and AR(1) models according to root mean squared
forecast errors, forecast error variance, mean absolute
forecast error, mean percent forecast error, success ratio
and forecast error bias criteria
Paper Type:
Working Papers
Date:
2008-06-08
Category:
Asset allocation, stock/bond returns, non-Linear Predictability
Title:
Non-Linear Predictability in Stock and Bond Returns: When and

where is it exploitable?
Authors:
Massimo Guidolin, Stuart Hyde, David McMillan
Source:
Manchester Business School Working Paper
Link:
20MEETINGS/2008-athens/HYDE.pdf
Summary:
Non-linear models (e.g., Markov switching, threshold,

TARCH, GARCH and EGARCH) can help predicting the
bond and stock returns in G7 countries
US and UK asset returns show the biggest favor for
non-linear models.
There isnt a consistent outperformer across all countries
The out-of-sample predictive power of non-linear models
are evaluated against the simple random walk with a drift
and AR(1) models according to root mean squared
forecast errors, forecast error variance, mean absolute
forecast error, mean percent forecast error, success ratio
and forecast error bias criteria.
Paper Type:
Journal papers
Date:
2008-03-10
Category:
Asset allocation
Title:
International asset allocation under regime switching, skew and

kurtosis preferences
Authors:
Massimo Guidolin and Allan Timmerman
Source:
Review of Financial Studies, February 2008
Link:
http://rfs.oxfordjournals.org/cgi/content/full/hhn006v1
Summary:
This paper investigates the international asset allocation effects

of time-variations in higher-order moments of stock returns such
as skewness and kurtosis. In the context of a four-moment
International Capital Asset Pricing Model (ICAPM) specification
that relates stock returns in five regions to returns on a global
market portfolio and allows for time-varying prices of covariance,
co-skewness, and co-kurtosis risk, we find evidence of distinct
bull and bear regimes. Ignoring such regimes, an unhedged US
investors optimal portfolio is strongly diversified internationally.
The presence of regimes in the return distribution leads to a
substantial increase in the investors optimal holdings of US
stocks, as does the introduction of skewness and kurtosis
preferences.
Paper Type:
Working Papers
Date:
2008-02-18
Category:
Output gap, asset allocation
Title:
Time-varying risk premia and the output gap
Authors:
Ilan Cooper, Richard Priestley
Source:
D-CAF conference paper
Link:
http://www.d-caf.dk/gap_conference_dk_19_12_06.pdf
Summary:
This paper finds that a business-cycle related variable - the

output gap, or gap - helps to forecast relative returns of stock
market and bond.
Gap
is defined as the cyclical component of industrial
production, and it assumes high values during economic
expansions and low values in recessions. An alternative
measure is the difference between the observed GDP and
potential GDP (provided by Congressional Budget Office,
CBO).
A fall in gap is associated with significant higher future
excess and real U.S. stock market returns.
a one standard deviation decrease in
gap
translates to an increase in annual excess returns
of 5.31%
This suggests that time-varying (expected) returns
are linked to business-cycle fluctuations.
These effects are robust to monthly, quarterly and
annual returns, and with both CRSP
value-weighted index and S&P 500 index returns.
The in-sample predictability is also robust to the inclusion
of alternative forecasting variables (dividend yield,
change in the short-term interest rate, term structure
spread, default spread, and net payout ratio) and
sub-sample analysis.
As an (cross-sectional) out-of-sample test, gap forecasts
significantly negative market returns in the remaining G7
countries.
In terms of (time-series) out-of-sample predictability of
market returns,
gap
performs better than the historical
average return, for both U.S. and most international
markets.
gap
also forecasts negative U.S. excess bond returns,
both in- and out-of-sample.
Comments:
1. Discussions
One of the advantages of the
gap
variable is that it does not
depend on stock prices, which means that that the predictability
is not associated with a fad in prices that is subsequently
corrected (as it might be the case with alternative forecasting
variables).
The statistical power associated with (time-series) out-of-sample
predictability is usually low, so the out-of-sample predictability
results should be interpreted with some caution. Furthermore,
the out-of-sample predictability is significantly weaker for the
other G7 countries.
2. Data
1948/01-2005/12 CRSP value-weighted index and the S&P 500
index are from CRSP. The bond return data are the Fama and
Bliss data are from CRSP. The international stock index data are
from Morgan Stanley.
Industrial production data are obtained from the Federal
Reserve. Potential GDP data are from the Congressional Budget
Office (CBO). The international industrial production corresponds
to the total production in the economy (Canada, Italy and UK)
and production in the manufacturing sector (France, Germany
and Japan).
Paper Type:
Working Papers
Date:
2008-02-18
Category:
Stock-bond asset allocation, stop-loss rules
Title:
When Do Stop-Loss Rules Stop Losses?
Authors:
Kathryn M. Kaminski, Andrew W. Lo
Source:
SSRN Working Paper
Link:
Summary:
The paper shows

that for stock-bond asset allocation, stop-loss
rules (policies that reduce a portfolios exposure after reaching a
certain level of cumulative losses) has earned a positive
premium in the 1950-2004 period
. Key findings:
Comments:
The paper builds a strategy that switches between the

buy-hold US equity and long-term US government bonds,
depending on the cumulative past excess returns of the
stocks (the decision to exit or stay in) and their last
period returns (the decision to enter or stay out).
Using monthly returns, the paper finds that stop-loss rule
adds 1% per year to the buy-hold portfolio with a
corresponding reduction in overall volatility of 0.8%.
The profitability of the strategy is attributed to higher
relative returns of bonds compared to stocks in certain
periods (flight to security) and downside momentum in
equities.
The stop-out periods are relatively uniformly distributed
over time, in contrast to the common conjecture that a
small number of major market crashes are driving the
results.
The paper uses four cumulative-return windows (3, 6, 12
and 18 months) over different stop-loss thresholds
(4-14%) and two re-entry tresholds of 0% and 2%. There
exist consistently positive stop-loss premium and a lower
conditional volatility (i.e. lower risk associtated with the
strategy).
The positive profits of the stop-loss strategies can be
attributed to non-linearities in stock return processes
(efficient market explanation) or behavioral biases like
loss aversion and disposition effect.
1. Discussions
The paper outlines the theoretical conditions on return
generating processes in which the stop-loss strategies create
positive value.
Asset allocation managers may be interested in the finding that
flight to security months is accompanied by downside
momentum months in equity markets.
2. Data
1950-2004 monthly stock returns data are from CRSP.
Long-term government bond returns are from Ibbotson.
Paper Type:
Working Papers
Date:
2008-02-18
Category:
Asset allocation, value and momentum
Title:
Global Tactical Cross-Asset Allocation: Applying Value and

Momentum Across Asset Classes
Authors:
David Blitz, Pim Van Vliet
Source:
SSRN working paper
Link:
Summary:
This paper examines the Global Tactical Asset Allocation (GTAA)

strategies and finds that
Momentumand value strategies applied toGlobal Tactical
Cross-Asset Allocation (GTCAA) deliver statistically and
economically significant abnormal returns.
During 1986-2007, the authors find a return
exceeding 9% per annum for a long top-quartile
and short bottom-quartile portfolio (Q1-Q4) based
on a combination of momentumand cross-asset
value strategies.
The paperanalyzes both1-month and 12-1 month
momentum strategies, while the value strategy
uses valuation ratios and yields associated with
each asset class. The portfolio (Q1-Q4) applied to
1-month momentum, 12-1 month momentum and
value strategies yield produce annualized returns
of 7.4%, 5.0% and 4.4%, respectively.
The results remain valid even when one accounts for
FAMA-French (market, size, SMB and value, HML) and
Carhart (momentum, UMD) factors and is also robust to
transaction costs.
Comments:
1. Discussions
Given that global asset classes are addressed in this study, the
authors should develop equivalent "global" FAMA-French-Carhart
factors (or use the international version of HML constructed by
Fama-French). This may change the reported results.
We are not sure why the authors have chosen certain asset
classes for analysis, e.g. why the fixed income data of UK or
equity data of Germany are excluded from the asset classes. This
may very well questions the validity of their results.
2.Data
1986/01 2007/09 US, UK, Japan and emerging markets equity
data; US, Germany and Japan fixed income data are used.
Paper Type:
Working Papers
Date:
2007-12-03
Category:
Asset allocation, endowment management
Title:
Secrets of the Academy: The Drivers of University Endowment

Success
Authors:
Josh Lerner, Antoinette Schoar, Jialan Wang
Source:
SSRN working paper
Link:
Summary:
This paper identifies two most important factors used by

successful Ivy League university endowments from 1992 - 2005.
The two factors are: 1.) earlier and heavier investments in hedge
funds and private equity funds, 2.) a contrarian emphasis on
small growth factors
Key findings:
Why good endowments did a better job:
1. Invest earlier and invest more in alternative assets
(hedge funds and private equity funds) than others
top endowments began as early as 1970s and so can
invest in some top alternative funds that have since
closed
so such strategy can not be easily copied due to
implementation constraints (eg, capacity of alternative
funds.)
top endowments invest twice the average in alternative
assets
2. Adopt a contrarian style: invest in assets that have been
underperforming the broad market
while other endowments use a momentum herding style
top endowments invest more in small growth assets
in aggregate endowment returns are counter-cyclical
(contrarian) with respect to the U.S.stock market.
During 1992-2005, endowments in general are shifting
away from equities and fixed income,invest more into
hedge funds and private equity funds.
equities and fixed income falls from 83% in 1993
to 73% in 2005,
alternative investments goes up from 9% to 18%.
The rich is performing better:
High SAT schools, with Ivy League schools in
particular, have larger endowment sizes, yet they
Comments:
systematically outperform other schools (average

annual return of 14% vs 9%)
such outperformance is most striking during 2000
and 2001 (the post-bubble period when equity
returns suffer)
The relative performance is very persistent
The rich is getting richer:
In 1992, the largest 10% of endowments were 160
times larger than the bottom 10%
In 2005, the largest 10% of endowments were 400
times larger than the bottom 10%
1. Data
Data comes from voluntarily provided holdings and return data
for 1,300+ university endowments.
"Ivy Plus" includes the Ivy League along with Duke, MIT, Caltech
and Stanford.
"Large endowment" are schools with top 25% of endowment size
"High SAT" are schools with top 25% average SAT score
Paper
Type:
Working Papers
Date:
2007-10-16
Categor
y:
Global markets, oil price, asset allocation
Title:
Striking Oil: Another Puzzle?
Authors
:
Gerben Driesprong, Ben Jacobsen and Benjamin Maat
Source:
ABP research paper
Link:
http://www.abp.nl/abp/abp/images/8.%20StrikingOil_tcm108-48527.pdf
Summa
ry:
This paper finds that oil price changes negatively predict stock returns
worldwide.
Key findings:
During 1973-2003, oil price changes negatively predicts stock indices
returns for 12 out of 18 countries and the world market index.
One standard deviation increase in oil prices (a rise of 10.78 percent) in

one month lowers the expected return in the next month to below zero
(-0.1%) for world markets. As a comparison, when there is no oil price
changes over 1 standard deviation, the average monthly return for the
world market index is 0.8%
As the Treasury bill rate for the United States averages 0.0054 (0.54%)
per month over the sample period, any oil price increase higher than
half a standard deviation from the mean forecas ts negative excess
returns.
For a shorter data sample (1988-2003), similar results hold for
emerging markets although less pronounced
The predictability of stock market returns seems to qualify as an
anomaly as a higher oil price risk does not lead to higher stock market
returns.
Comme
nts:
1. Discussions
This is one of the first papers to document the significant predictability of stock
returns using oil price changes. Results in the paper should be interesting for
quant equity as well as asset allocation managers.
One extension will be to see how the oil price sensitivity has changed over the
years (intuitively the sensitivities are going up recent years) and what
styles/sectors are most sensitive. The authors discussed the correlation
between oil price changes and several economic variables (Default spread,
Term structure, Dividend yield). We think it should also be interesting to add
more macro factors (eg., GDP growth, inflation) in the model for higher
predicting power. For example, when inflation rises, expected stock return
should be lower.
Other unanswered questions:
Is the sensitivity the same when oil price goes up and goes
down(seems we have seen more headlines like stock indexes fall as oil
climbs than stock indexes rise as oil falls)
Does there exist a threshold for oil prices that makes the sensitivity
very high?
Other related research include The Stock Market Reaction to Oil Price
Changes
(http://price.ou.edu/academics/cfs/doc/The_Stock_Market_Reaction_to_Oil_Pr
ice_Changes.doc), where it is found that
The negative relationship between daily oil price changes and stock
indices only exist for large oil price changes
No asymmetry in market reaction to oil price increases and decreases
intensive and non intensive industries can both be sensitive to oil price
changes
Oil Price Shocks and Emerging Stock Markets: A Generalized VAR Approach
(http://www.usc.es/economet/reviews/ijaeqs122.pdf), where it is found that t
oil shocks have no significant impact on stock index returns in emerging
economies.
2. Data
1973/09 2003/04 monthly data for 18 developed countries and a world
market index are used in this study. All stock indices are end month value
weighted MSCI reinvestment indices. For 30 developing markets, 1988-2003
data MSCI reinvestment indices.
Oil prices are proxied by Arab Light crude oil. The authors start their analysis
at the beginning of the Yom Kippur War in October 1973, as this is when oil
prices started to fluctuate.
Paper Type:
Working Papers
Date:
2006-08-24
Category:
Value, growth, asset allocation
Title:
Optimal Value and Growth Tilts in Long-Horizon Portfolios
Authors:
Jakub W. Jurek, Luis M. Viceira
Source:
Wharton seminar paper
Link:
http://finance.wharton.upenn.edu/department/Seminar/2005Fall/microFa
ll2005/viceira-micro-090805.pdf
Summary:
An (very) analytical solution to the dynamic portfolio choice problem for

an investor who can chose between value and growth stock portfolios,
bills and bonds.
Comments:
Paper Type:
Working Papers
Date:
2006-06-02
Category:
Asset allocation, VAR, risk
Title:
Using a Value at Risk Approach to Enhance Tactical Asset

Allocation
Authors:
Nigel Lewis, John Okunev, Derek White
Source:
SSRN
Link:
Summary:
This paper presents a simple Tactical Asset Allocation (TAA)

strategy which utilizes assets Value at Risk (VAR). It does not
need estimation of asset return distributions and is shown to
outperform buy-hold strategy in US.
Comments:
1. Why important
The strategy is a simplified and improved version of previous
more scholarly papers. It is unique in that it no longer requires
modeling asset returns. It instead uses a more intuitive
rebalance strategy: tilt more towards asset classes whose VAR
comes down.
2. Discussions
This is an innovative and practical strategy, yet we see three
points that deserve attention:
a.) The paper adds a VAR constraint to the portfolio and assumes
that when an asset depreciates, its VAR will go up. This may or
may not be true.
b.) This strategy should have very strong cor elation with
momentum-style asset allocation method.
c.) The model is tested in US (with two asset classes: SP500 and
10-year US government bond, the VAR of bond being 0). Its
applicability in other markets is yet to be examined.
Paper Type:
Working Papers
Date:
2006-04-07
Category:
Asset allocation, risk
Title:
Asset Allocation and Long-Term Returns: An Empirical Approach
Authors:
Stephen Coggeshall, Guowei Wu
Source:
SSRN working paper
Link:
Summary:
This paper 1.) Discusses the traditional approaches of asset

allocation, namely Mean Variance Optimization (MVO) and the
maximization of utility function. 2.) Studies the actual return and
risk profile of bond and stock. 3.) Proposes a short-fall risk
approach of asset allocation.
Comments:
1. Why important
What seems most interesting to us is the study of the actual
return/risk profile of the bond and stock. Indeed, the three key
observations of the paper (1. bonds are riskier than stocks for
holding period of 15+years, 2. short-term stock returns show fat
tails while long-term stock returns not, 3. stocks show mean
reversion while bonds exhibit opposite) are very
thought-proactive for all asset allocations.
Discussions in Section 2 (about the risk definition) and in Section
3 (about the random-walk-ness of stock and bond returns) are
also helpful for modeling asset classes returns.
We are not very enthusiastic, however, about the short-fall risk
approach that this paper proposes. The monumental work of
Kahneman and Tversky is critical for explaining investors
behavior, but not for prescribing rational asset allocation
strategy. A rational strategy may well run counter to investors
intuitive preference but should benefit them financially.
Paper Type:
Working Papers
Date:
2006-03-22
Category:
Asset allocation, bond-equity yield ratio
Title:
Dynamic Asset Allocation between Stocks and Bonds Using the

Bond-Equity Yield Ratio
Authors:
Pierre Giot, Mikael Petitjean
Source:
CORE discussion paper
Link:
http://www.core.ucl.ac.be/econometrics/Giot/Papers/BEYR5.pdf
Summary:
This paper proposes a short-term asset allocation strategy. It

uses the Bond-Equity Yield Ratio (BEYR) to dynamically allocate
capital between equities and bonds. The result is shown to
deliver higher risk-adjusted returns than the equity yield
method.
Comments:
1. Why important
One of the most widely used measures in allocating capital
between stocks and bonds is equity yield. This paper is important
because it shows that the BEYR measure can potentially enhance
this strategy as it delivers higher.
One contributions of this paper is definitely that the authors find
a valid long term co-integration relationship between stock index
prices, earnings (or dividends) and bond yields in most countries
studied. This mean-reversion suggests that the BEYR can be
potentially very useful in asset allocation. Intuitively, one can
long (short) stock when the BEYR is over(below) of the
2-standard deviation range.
2. Data
Country stock and bond market data are from DataStream

Paper Type:
Working papers
Date:
2010-11-22
Category:
Calendar effects, January effect, index of consumer sentiment
Title:
A New January Barometer: The Index of Consumer Sentiment
Authors:
Zhongdong Chen, Phillip Daves
Source:
MFA conference paper
Link:
http://www.mfa-2010.com/papers/A%20New%20January%20Baro
meter.pdf
Summary:
The January Index of Consumer Sentiment (ICS) changes are

predictive of market returns over the subsequent 11 months. ICS
has more consistent predictive power than the commonly used
January return indicator
Background of January effect and ICS
"(In US) as goes January so goes the rest of the year": the
so-called other January effect (or OJE, or January
Barometer) is that the 11-month holding period return
following positive Januarys was significantly higher, than the
11-month holding period return following negative Januarys
No international evidence: Earlier study
(
64
) shows that OJE is statistically insignificant in 22
countries, and diminishing in the US market too during the
post-discovery period 1975-2006
University of Michigans Monthly Index of Consumer
Sentiment (ICS) are based on survey conducted by
telephone regarding peoples view on current and expected
household financial situations
Not surprisingly, ICS changes forecast concurrent monthly
returns for some months (January, February, August and
September, per page 10 and Table 2)
Janurary ICS changes predicts following 11months returns
(During 1978 2008) CRSP value-weighted index returned
18.08% in the 11 months when January ICS change is
positive. When January ICS changes is negative, 6.74%
Spread is 11.34% (p-value= 0.049) (Table 5)
A one unit increase in the ICS change is approximately
associated with a 2% increase in the 11-month holding
period return (Table 6)
January ICS change more persistent compared with the
well-known January return effect
January ICS effect is more persistent than the OJE across

both the market and time
E.g., ICS change is a better predictor for
equal-weighted returns
The January ICS effect persists in raw and excess
S&P 500 returns, and different portfolios across size,
book-to-market measures
When one effect is controlled for, the other effect becomes
insignificant
Discussions
In a related paper, What is the best way to trade using the
January
Barometer?(
https://www.joim.com/abstract.asp?ArtID=373
, abstract only), it is found that the best way to use the
January Barometer is not to long(short) stocks following
positive(negative) Januarys, but to be long following positive
Januarys and invest in t-bills following negative Januarys
Data
January 1978 to December 2008 data of the University of
Michigans Monthly Index of Consumer Sentiment (ICS) is
from the website of the Federal Reserve Bank of St. Louis
Stock market returns, including the S&P 500 index returns
are from the Center for Research in Security Prices (CRSP)
1 year and 10 year T-bill rates are from CRSP. Monthly yield
of Baa-rated corporate bonds is obtained from FRB database
Paper Type:
Working papers
Date:
2010-05-11
Category:
Calendar effects
Title:
An Anatomy of Calendar Effects
Authors:
Stefan Grimbacher, Laurens Swinkels and Pim Van Vliet
Source:
SSRN working paper
Link:
Summary:
Stocks of local firms (i.e., firms that own property, have

operations, clients or markets in fewer states) have average returns
that exceed the returns on stocks of geographically dispersed firms
(those with properties/operations/clients in more states) by 70 basis
points per month (8.4% annually)
Intuition: local firms are smaller and riskier, hence demands higher
returns
Truly local stocks have lower recognition and smaller
investor base, which justifies the higher returns on them
Definitions: counting number of state names mentioned in 10-Ks
Extracting state name counts from 10-K filings, which
mention states where companies own property, have
operations, clients or markets
Local firms: firms in the lowest quintile, typically mention
less than two state names in their annual reports
"Dispersed" firms: firms in the highest quintile
Local-ness correlates with other factors
Smaller firms tend to be less geographically diverse
This metric is positively related to size (ME), the
book-to-market ratio (BEME), liquidity measures (SPREAD),
and idiosyncratic volatility (VOL) and negatively related to
liquidity (AMI) and momentum (MOM) (Table 2)
Local stocks outperform dispersed stocks
Both on equally-weighted and value-weighted basis
Average monthly return on the Local - Dispersed
long-short portfolio is about 56 (40) basis points for
equally(value)-weighted portfolios (Table 3)
When measured using 5-factor alphas
Based on Fama-French 3-factor model plus
Momentum plus Liquidity
Alphas are higher for local firms (Table 4)
Long-short alphas are significant in both equal and
value weighted terms, even excluding the microcap
firms
When using cross-sectional regressions
Geographical dispersion is negatively and significantly
related to future one-month returns, confirming
previous findings (Table 5)
Double sorting dispersion with density
For each stock, density is the number of other stocks from
the same state
Rationale: investors limited attention
If local stocks have lower recognition, then investor
recognition should be more prominent in states
where there are not many publicly traded companies
A portfolio that is long local + high density stocks and
short local + low density earns an average 5-factor
adjusted alpha of 0.58% (8% annually) (Table 6)
Long local short dispersed portfolio alphas are higher
in high-density states (Table 6, Panel B)
Robustness to industry effect and different definitions of dispersion
The effect is not driven by a particular industry (Table 8)

Data
The effect is also robust to alternative definitions of

geographic dispersion (Table 9)
1994 2008 10-K reports are from SECs EDGAR (Electronic
Data Gathering, Analysis, and Retrieval System)
geographic dispersion is the number of different
states mentioned in these four sections
Stock returns, stock prices, and data on volume traded are
from CRSP. Accounting variables are from Compustat
Paper
Type:
Working papers
Date:
2009-08-03
Category
:
Calendar effects, the January effect
Title:
Whats the Best Way to Trade Using the January Barometer?
Authors:
Michael Cooper, John McConnell and Alexei Ovtchinnikov
Source:
SSRN Working Paper
Link:
Summar
y:
This paper finds that in U.S. stock market from 1857 to 2008 (152 years), a
positive/negative January predicts the positive/negative
Number of
years
Non-January
returns
During 1857-2008, years with

positive
January returns
100
11%

negative
January returns
52
2.84%

positive
January returns
3(2004, 2006,
2007)
8.75%

negative
January returns
2(2005, 2008)
-13.63%
February-December performance. A profitable strategy is to hold stocks (Treasury

bills) when January return is positive/negative
Comparing five strategies:
(1) Long only: long stocks all the time

(2) Long/short: long stocks in all Januaries and long (short) stocks during
February-December when the return for January is positive (negative);
(3) Long/t-bill: long stocks in all Januaries and long stocks (Treasury bills) during
February-December when the return for January is positive (negative);
(4) T-bill only: Long Treasury bills in all months
(5) January-plus-t-bill: long stocks in Januarys and long Treasury bills in other
months
Strategy (5) works best, not (2). The graph below is from the paper:
Paper Type:
Working Papers
Date:
2009-02-01
Category:
Earnings, calendar effects
Title:
14-week quarters
Authors:
Rick Johnston, Andrew Leone, Sundaresh Ramnath and Ya-wen Yang
Source:
SSRN Working Paper
Link:
Summary:
The paper shows that buying and holding stocks in 14-week

quarters result in positive abnormal returns, because firms generate
higher earnings in 14-week quarters than in 13 week ones.
Some firms define their fiscal year in terms of weeks
rather than as a full 12-month period
A normal fiscal year for these firms consists of 52
weeks, and every fiscal quarter comprises 13 weeks,
which leaves out one day (two days) in a normal
(leap) year
Because of the calendar effect, once every 5 years
one fiscal quarter lasts for 14 weeks instead of 13
Earnings and revenues are shown to be higher on
14-week quarters
Market doesnt seem to realize this artificial increase
and show positive reaction to better accounting
performance
14-week quarters show higher average standardized
unexpected revenues (SUR), standardized unexpected
earnings (SUE) and buy-and-hold abnormal returns:
SUEs are defined as the income minus income 4

quarters before and normalized by market value of
the firm 4 quarters ago
SURs are defined as the revenues minus revenues 4
quarters before and normalized by market value of
the firm 4 quarters before
Abnormal returns are defined as size-adjusted
returns cumulated from 2 days after the earnings
announcement for the previous quarter to one day
after the current quarters earnings announcement
date
Analysts forecast errors for both earnings and
revenues are also higher for 14-week quarters
Buy-and-hold profits on stocks in 14-week quarters
bring positive abnormal returns of 2.9% per quarter
Concerns
The abnormal returns are only for a small part of the
sample 886 out of 20,584 firm-observations. Also
most of these 14-week firm-quarters are the same
firms repeating themselves in the sample, which
highlights the possibility of selection bias in this
study.
The earnings surprises of 14-week quarter firms are
on average less than the other firms, which is
counter-intuitive
The fact that the effect only works positively on
returns is also surprising. Longer quarters can also
result in greater losses and the results only suggest
positive surprises.
Data
The data covers 1994-2006, and uses SECs Edgar
Database to identify consecutive quarter ending dates
that are 14 weeks apart, uses CRSP and COMPUSTAT
for firm level return and accounting variables, and
uses IBES for analyst forecasts
Paper Type:
Journal Papers
Date:
2009-01-30
Category:
Future/currencies, momentum, calendar effects
Title:
Day-of-the-Month Effects in the Performance of Momentum Trading

Strategies in the Foreign Exchange Market
Authors:
Richard D. F Harris; Evarist Stoja; Fatih Yilmaz
Source:
The Journal of Trading, Winter 2009
Link:
http://www.iijournals.com/JOT/default.asp?Page=2&ISS=25238&SI
D=715864
Summary:
This article documents

a very strong day-of-the-month effect in the
performance of momentum strategies in the foreign exchange
market
. It shows that this seasonality in trading strategy
performance is attributable to seasonality in the conditional volatility
of foreign exchange returns, and in the volatility of conditional
volatility. Indeed, a two-factor model employing conditional volatility
and the volatility of conditional volatility explains as much as 70% of
the intra-month variation in the Sharpe ratio. The article further
shows that the seasonality in volatility is in turn
closely linked to the
pattern of U.S. macroeconomic news announcements, which tend to
be clustered around certain days of the month.
Paper Type:
Working Papers
Date:
2008-12-20
Category:
Earnings announcement drift, Friday, calendar effects
Title:
Investor Inattention and Friday Earnings Announcements
Authors:
Stefano Dellavigna and Joshua Pollet
Source:
AFA meetings 2009
Link:
http://www.afajof.org/afa/forthcoming/3665.pdf
Summary:
For earnings announcements on Fridays, there is smaller

immediate stock price response to and higher delayed drift
afterwards.
An investment strategy that uses the post-announcement
drift after Friday announcements brings abnormal
risk-adjusted returns. (4.84% per month Carhart 4-factor
alpha compared to 2.18% per month for non-Friday
announcements)
The proposed reason is the investor inattention compared to
other days of the week.
Due to investor inattention the trading volume on Fridays is
8% lower than the rest of the week.
Paper Type:
Working Papers
Date:
2008-11-30
Category:
novel strategy, calendar effects, Future/currencies
Title:
Segmentation and Time-of-Day Patterns in Foreign Exchange Markets
Authors:
Angelo Ranaldo
Source:
Swiss National Bank working paper
Link:
http://www.snb.ch/n/mmr/reference/working_paper_2007_03/source/worki
ng_paper_2007_03.n.pdf
Summary:
Domestic currencies exhibit a time-of-day effect where they depreciate

during domestic working hours, and appreciate during foreign working
hours. A trading strategy based on this finding makes significant profit, even
after trading cost.
Reasons:
Domestic-currency bias: "traders located in one country tend
to hold assets denominated in the currency of that country"
For example, US investors usually hold US Dollar
denominated assets, and trade foreign currency
opportunistically only when they need to
(international trade or speculation)
Domestic-time bias: "investors have a tendency to trade
mainly in their countrys working hours"
Consequently, during domestic trading hours, local traders
buy foreign currencies, which results in a selling pressure
that pushes the domestic currency down.
Empirical study confirms such time-of-day pattern:
Exchange rate movements over 4-hour periods:
Example: for Swiss Franc(CHF)/USD:
Similar observations for other currency pairs, all statistically
significant
Zero-investment strategy yields economically and statistically
significant profits.
For instance a strategy that is long (short) USD against Swiss
Francs during the peak European (American) 4-hour trading
period yields an annualized mean return of 12.38%
Even incorporating transaction costs yields sizeable returns
Day-of-the week effect: Thursday trading profits tend to be
higher
Data:
The database provided by Swiss-Systematic Asset

Management SA, Zurich and includes spot exchange rates
for: CHF/USD, DEM/USD, EUR/USD, JPY/EUR and JPY/USD.
Different sample periods for different currencies that span
January 1993 - August 2005.
Tick-by-tick FXFX Reuters midquote price (the average price
between the representative ask and bid quotes).
Paper Type:
Working Papers
Date:
2008-09-25
Category:
calendar effects, Microstructure, closing price manipulation
Title:
The prevalence and underpinnings of closing price manipulation
Authors:
Carol Comerton-Forde and Talis Putnins
Source:
2008 EFMA paper
Link:
http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20M
EETINGS/2008-athens/Putnin%C5%A1.pdf
Summary:
This paper claims that during 1997-2005 in US market, about 2% of

market closing prices may be the result of manipulation.
How to detect closing price manipulation
Manipulation is detected by measuring the abnormal
price changes at the end of the day caused by
abnormal trading volume by a single broker
It occurs when traders aggressively trade to push the
stock level at an artificial level at the end of the
trading day.
Most likely candidates for price manipulation
Stocks with high information asymmetry (defined by
the number of analysts covering the stock and the
inclusion dummy to a broad market index) and mid
to low levels of liquidity are most likely to be
manipulated by closing price
Closing price manipulation mostly occurs on month-end
quarter-end days
On average only 1 in 400 manipulation instances are
detected or prosecuted
Current detection rates is only around 0.05%
Yet this paper found that a 1.4% to 2.4% of closing
prices are manipulated
Paper Type:
Working Papers
Date:
2006-10-20
Category:
Daily stock return patterns, turn of the month, calendar effects, size
Title:
Equity Returns at the Turn of the Month
Authors:
Wei Xu and John McConnell
Source:
SSRN working paper
Link:
Summary:
This paper documents that for stocks worldwide, almost all market
excess returns occur during the first 3trading days of a month
the average daily excess return for these first 3 days is
0.14%
the average daily excess return for other trading days is
0.01%
This concentration is found in both large/small cap stocks, in 30 out
of 34 stock markets worldwide, and in all months (not just year end
or quarter end). Interestingly, return variation is not higher during
these 3days, and treasury/corporate bonds do not exhibit such
effects.
Comments:
1. Why important
The conclusion in the paper, if true, may help practitioners choose
their portfolio rebalance timing. The positive return in first 3 trading
days suggest that the out performance of "good" stocks is
concentrated in these 3 days, so it may be a good idea to long
stocks right before month end
This pattern also suggests that the underperformance of "bad"
stocks seems to be evenly spread throughout month, so to certain
extent it does not matter much when to short these stocks.
2. Data
2005 US daily stocks returns are from CRSP, 19 2006 international
stock returns are from
3. Discussions
What causes this turn month effect? The authors exclude
explanations based on "payday", risk factor, trading volume, and net
flows to mutual funds. Our guess is that it may be driven by the

psychological nature of investors. People tend to be more optimistic
at the beginning of a month (quarter, year), as it is time to close an
old chapter and turn on a new one. Indeed, Table 3 seems to
support this point, as end months show a lower excess return than
quarter end months, which in turn has a lower return than year end
months.
Paper Type:
Working Papers
Date:
2006-07-27
Category:
Back testing methodology, reference date, calendar effects
Title:
Reference-Day Risk and the Use of Monthly Returns Data: A Warning Note
Authors:
Daniella Acker, Nigel W. Duck
Source:
University of Bristol working paper
Link:
http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp04557.pdf
Summary:
This paper documents that the widely-used month-end reference day

methodology may have a serious impact on the result of empirical back
testing, and in some cases may even reverse the results. As an illustration,
an earning surprise based event study may give completely reversed
conclusion depending on the reference dates used.
Comments:
1. Why important
It is a very common practice for quant researchers to do their back testing
based on stocks monthly returns. Yet in reality portfolio managers would
rarely rebalance their funds on month-ends. What we learnt from this paper
that we should not take the month-end date for granted, and the reference
date may have a larger impact on back-testing results than we thought.
2. Data
Stock data are from DataStream.
3. Discussions
Our guess is that reference date may have a higher impact on high volatility
stocks, the reason being that their daily price change is a higher proportion
of their monthly returns. Some times even a one-day shift in reference date
may lead to a very different monthly return.
Whats a good way to test when stock returns are subject to the reference
date impact? Since in most cases quant managers are studying the relative
performances of different stocks, we perhaps can look at whether the stock
return correlation (or return difference) changes significantly when
reference dates change.
In our view, this paper is yet another illustration that, since "We only have
one history of capitalism" (Nobel laureate Paul Samuelson), all empirical
test results should be viewed with caution. One way to enhance our
confidence in any strategy is to divide this "one history" into different
segments: by time (in-sample, out-sample), by style (value/growth/core),
by sector and by reference dates, etc. Though we dont expect a strategy to
work in all the sub-segments, a consistent performance is definitely a
encouraging sign.
Paper
Type:
Working Papers
Date:
2006-07-13
Category:
Strategy, calendar effects, September
Title:
The September Swoon
Authors:
Mark Haug, Mark Hirschey
Source:
2006 FMA conference paper
Link:
http://www.fma.org/SLC/Papers/SeptemberSwoon.pdf
Summary:
This paper documents that, in the US market for the past century, most
Septembers yield negative returns for both large-cap and small-cap stocks, in
both value weighted and equally-weighted portfolios.
Comments
:
1. Why important
This paper provides a solid statistic analysis of returns in Septembers. It may
help practitioners develop promising strategies similar to various January
strategies used in many funds.
We in fact find a few more international evidences on "Sell in May", a more
general form of "September Swoon". According a State Street research
http://www.bizjournals.com/boston/stories/2002/05/27/newscolumn7.html
),
this "Sell in May" pattern holds for all 18 markets covered in MSCI World Index
back to 1969.
2. Data
For large cap stocks, 203 years of data are from Schwert (1990, 1802-1926
data) and CRSP (1927-2004). For small cap stocks, 7 years of data are from
CRSP (1927-2004).
3. Discussions
Data-snooping is a serious issue for many calendar-effects related papers.
When studying the monthly returns of long period, it is not surprising that some
months will show more positive/negative returns. After all, "We only have one
history of capitalism" (Nobel laureate Paul Samuelson)
One can do two things to address the data-snooping concern: 1.) Check
statistic robustness and 2.) Propose convincing behavioral pattern to support
the result.
The statistics issue was, in our view, very carefully studied in the paper. One
illustration is the 6 questions the author raised in designing the statistic test
(Footnote 4).
The second issue is always up for debate. The author discussed the possible
impact of large loss in daylight, the end of summer, and the onset of the
winter blues", which may all contributes to the increase in investor risk
aversion.

Paper Type:
Journal Papers
Date:
2009-01-30
Category:
Title:
Day-of-the-Month Effects in the Performance of Momentum

Trading Strategies in the Foreign Exchange Market
Authors:
Source:
Link:
http://www.iijournals.com/JOT/default.asp?Page=2&ISS=25238
&SID=715864
Summary:

a very strong day-of-the-month effect in
the performance of momentum strategies in the foreign
exchange market
. It shows that this seasonality in trading
strategy performance is attributable to seasonality in the
conditional volatility of foreign exchange returns, and in the
volatility of conditional volatility. Indeed, a two-factor model
employing conditional volatility and the volatility of conditional
volatility explains as much as 70% of the intra-month variation
in the Sharpe ratio. The article further shows that the seasonality
in volatility is in turn
closely linked to the pattern of U.S.
macroeconomic news announcements, which tend to be
clustered around certain days of the month.
Paper Type:
Working Papers
Date:
2009-01-12
Category:
Future/currencies, predictive regressions, statistic methodology
Title:
Predictability and Good Deals in currency markets
Authors:
Richard M. Levich and Valerio Poti
Source:
SSRN Working paper
Link:
Summary:
The paper documents that there is strong predictability pattern

for exchange rates of major currency pairs at monthly
frequencies, even after controlling for transaction cost.
"Good-deals" are investment opportunities that offer

"unduly" high Sharpe ratios
In an efficient market, predictability should never
exceed a no good deal bound
The paper compares the explanatory power of
predictive regressions with the theoretical no
good deal bound
It examines how predictability has varied over
time, and contrast predictability patterns with
historical patterns
Intuitively, this is one type of "moving-average strategy"
on pairs of foreign exchanges.
The predictive regressions only use AR and ARMA
models without any macroeconomic variables as
predictor variables.
For daily returns AR(5) turns out to be the optimal
model (the intuition is that lag 5 captures the time
series persistence the best for the currencies)
For monthly returns ARMA(5,2) is the best model
Out of sample forecasts are calculated with rolling
estimation windows (252 days for daily data, 60
months for monthly data)
Daily frequency is not suitable for a profitable trading
strategy because of high transactions costs.
Monthly frequency makes a highly profitable trading
strategy possible
Such predictability peaked in the 1970s, but it is still
present in the final part of the sample period.
(1971-2006)
Paper
Type:
Working Papers
Date:
2008-11-30
Categor
y:
Title:
Author
s:
Angelo Ranaldo
Source: Swiss National Bank working paper
Link:
http://www.snb.ch/n/mmr/reference/working_paper_2007_03/source/working
_paper_2007_03.n.pdf
Summa
ry:
Domestic currencies exhibit a time-of-day effect where they depreciate during

domestic working hours, and appreciate during foreign working hours. A
trading strategy based on this finding makes significant profit, even after
trading cost.
Reasons:
Domestic-currency bias: "traders located in one country tend to
hold assets denominated in the currency of that country"
opportunistically only when they need to (international
trade or speculation)
Domestic-time bias: "investors have a tendency to trade mainly
in their countrys working hours"
Consequently, during domestic trading hours, local traders buy
foreign currencies, which results in a selling pressure that pushes
the domestic currency down.
Similarobservationsforothercurrencypairs,allstatisticallysignificant
Zeroinvestmentstrategyyieldseconomicallyandstatisticallysignificantprofits.
Forinstanceastrategythatislong(short)USDagainstSwissFrancsduringthepeak
European(American)4hourtradingperiodyieldsanannualizedmeanreturnof12.38%
Evenincorporatingtransactioncostsyieldssizeablereturns
Dayoftheweekeffect:Thursdaytradingprofitstendtobehigher
Data:
ThedatabaseprovidedbySwissSystematicAssetManagementSA,Zurichand
includesspotexchangeratesfor:CHF/USD,DEM/USD,EUR/USD,JPY/EURand
JPY/USD.
DifferentsampleperiodsfordifferentcurrenciesthatspanJanuary1993August2005.
TickbytickFXFXReutersmidquoteprice(theaveragepricebetweentherepresentative
askandbidquotes).
Paper Type:
Working Papers
Date:
2008-07-20
Category:
Future/currencies
Title:
Overconfidence in currency markets
Authors:
Thomas Oberlechner and Carol Osler
Source:
SSRN working paper
Link:
Summary:
This paper finds that foreign exchange dealers

underestimate uncertainty and overestimate their own
abilities
Yet overconfident dealers are not driven out of the market
over time
In 2002, 416 North American foreign exchange dealers
were asked to provide exchange rate forecast with level
of confidence for two dates (one shortly after survey, the
other 6 months after survey). The miscalibration in
dealers confidence and real change in exchange rate is
defined as overconfidence.
Paper Type:
Working Papers
Date:
2008-06-27
Category:
Commodity futures, momentum, tactical allocation,

Future/currencies
Title:
Tactical Allocation in Commodity Futures Markets: Combining

Momentum and Term Structure Signals
Authors:
Ana-Maria Fuertes, Joelle Miffre, Gergios Raliis
Source:
Link:
Summary:
This paper finds that a novel double-sort strategy in commodity

future that combines momentum and term structure earns 21%
annual abnormal return.
Definition:
Momentum strategy is to buy past winner and short
past loser
Term Structure strategy is to buy backwardated
commodities (highest roll return) and short
contangoed commodities ( lowest roll return)
Stand-alone strategy works:
Comments:
The momentum and term structure strategies earn

10.14% and 12.66% abnormal return individually.
Combining two strategies works best:

Compute roll-return of all commodity futures at the
end of each month; split in three portfolios - High,
Medium, Low (1/3 break points)
Divide High portfolio into 2 portfolio based on mean
return of the commodities over the past R months call them High-Winner and High-Loser
Similarly, sort the commodities in Low portfolio in
two sub-portfolios based on their mean return of past
R months - call them Low-Winner and Low-Loser
Buy High-Winner and Short Low-Loser and hold for a
month
Low correlation, robust to transaction cost:
The return of the Double Sort Strategy is only weakly
correlated with the returns of traditional asset
classes; good for diversification
Considering transaction cost the Double Sort
Strategy earns 20.71% return
1. Discussions
This paper presents an interesting strategy on commodities
futures. The paper profit looks fairly attractive. It would also be
interesting to expand the study to currency futures.
Our concern is, like all other quant research, the environment will
be changing for futures trading. For example, Future CFTC
(Commodity Future Trading Commission) or Senate regulations
might impose restrictions on institutional investors of commodity
futures (New York Times, June 12).
2. Data
Datastream International and Bloomberg for the period of January
1, 1979 to January 31, 2007; consists of daily closing prices on the
nearby, second-nearby and distant contracts of 37 commodities.
Paper Type:
Working Papers
Date:
2007-11-18
Category:
Calendar effect, January Effect, index futures, Future/currencies
Title:
Is the January Effect Still Alive in the Futures Markets?
Authors:
Juan Rendon, William T. Ziemba
Source:
Financial Markets and Portfolio Management, Vol. 21, No. 3, pp.

381 396, 2007
Link:
http://www.springerlink.com/content/n337572751314182/
Summary:
As known by many, small capitalization stocks tend to

outperform large capitalized stocks in January. This paper finds
that such January effect is still alive in the indices futures
markets.
A strategy that long Russell 2000 (or "Value Line stock
index") and short S&P 500 future generate significant
returns from 1993/04 to 2004/05.
The caveat is that Value Line stock index futures contract
is not liquid enough, though Russell 2000 is better
Paper
Type:
Working Papers
Date:
2007-10-16
Categor
y:
Future/currencies, high frequency strategies, intraday
Title:
Exploitable Arbitrage Opportunities Exist in the Foreign Exchange Market
Authors: Ben R. Marshall, Sirimon Treepongkaruna, Martin Young

Source:
University of New South Wales seminar paper
Link:
http://wwwdocs.fce.unsw.edu.au/banking/seminar/2007/exploitablearbitrage
Marshall_Sept13.pdf
Summar
y:
This paper finds that a (minute-level) high frequency strategy triangular

arbitrage, e.g. sell GBP/USD, buy EUR/USD, and sell EUR/GBP) can take
advantage of an exploitable arbitrage opportunity in the foreign exchange
market.
Key findings:
The average profit per arbitrage opportunity is ~0.02% involving the
CHF and JPY, ~0.04 involving the on average there are 106 169 such
opportunities every hour.
When more number of quotes comes to the market, the average
profitability is lower but number of opportunities goes up.
When the bid ask spreads are higher, the arbitrage profits is higher
This strategy does not involve fundamental risk, noise trader risk,
synchronization risk, or margin costs, and short sales are not required.
Commen
ts:
1. Discussions
We think the authors did a solid job to address the implementability of this
strategy. E.g., they only record an arbitrage opportunity when there are three
quotes within a two-minute interval that are divergent enough to create
arbitrage profits. Another important fact is that The EBS data used in this
study is binding quote data and any arbitrage opportunity found can be
implemented with near certainty up to a maximum of one million units of the
base currency.
Our concerns:
The capacity of the strategy sounds limited. (~0.02% profit * $1Mn
notional size per trade * 106 opportunities per hour * 24 hours/day *
365 days/year = $185mn)
The soundness of the strategy critically depends on the quality of the
database they use, which has been less studied.
2. Data
Foreign currency data for the year of 2005/01 2 005/12 is from EBS, which is
binding quote data (meaning one could trade realistically with near certainty
up to a maximum of one million units of the base currency)
EBS is now the major marketplace for spot foreign exchange transactions with
an average daily volume of USD145 billion in 2006.
Paper Type:
Working Papers
Date:
2007-09-23
Category:
Future/currencies
Title:
The Returns to Currency Speculation
Authors:
Craig Burnside, Martin Eichenbaum, Isaac Kleshchelski, Sergio Rebelo
Source:
NBER Working Paper
Link:
http://www.kellogg.northwestern.edu/faculty/rebelo/htm/returns_curr
ency_speculation.pdf
Summary:
This paper claims tat one can use tree profitable currency speculation
strategies to take advantage of
the forward-premium puzzle
(Currencies tat are at a forward premium tend to depreciate)
Strategy
Sharpe ratio (with

bid ask spread
impact considered)
Carry trade
0.81
Currency
momentum (for
momentum
winners only)
0.43
International
stock market
momentum (in
US$ terms)
0.81
In reality price impact (currecy prices are increasing function of net

order flow) may greatly reduce the paper profits.
The authors claim Sharpe ratios can be further improved by:
Dynamically weights different strategies
Dynamically estimates of the variance covariances matrix of the
three strategies
Diversify with other asset classes (such as commodity based
strategies)
Comments:
1 Discussions
Like many papers, authors here study only the average performance
for the past 30 years, and did not look at recent performance of the
strategies. As most the money managers may agree, one of the key
challenges is how to design consistently performing strategies,
especially in todays market condition. For example, the recent
performance of momentum hardly agrees with its 30 year average.
An extension of this study is The Returns to Currency Speculation
in
Emerging Markets
(
http://www.kellogg.northwestern.edu/faculty/rebelo/htm/Emerging_m
arkets5_working_paper_Craig.pdf
), where the same authors compare
carry trade strategies for a portfolio with only developed country
currencies and another portfolio with both developed countries and
emerging markets. The key findings are:
Including emerging market currencies increases Sharpe ratio on

paper, but bid ask spreads are 2 4 times higher than in
developed countries.
Both the currency portfolios are uncorrelated with U.S. stock
market.
2 . Data
1976.1 - 2007.6 monthly currency and stock data for 24 Countries
(Australia, Austria, Belgium, Canada, Denmark,Finland, France,
Germany, Greece, Hong Kong, Ireland, Italy, Japan, New Zealand,
Netherlands, Norway, Portugal, Singapore, South Africa, Spain,
Sweden, Switzerland, U.K., and U.S.) are from DataStream.
Paper Type:
Working Papers
Date:
2007-09-09
Category:
Future/currencies, Commodity futures
Title:
Can Commodity Futures be Profitably Traded with Quantitative

Market Timing Strategies
Authors:
Ben Marshall, Rochester Cahan and Jared Cahan
Source:
SSRN working paper
Link:
Summary:
This paper tests 7,000+ quantitative trading rules constructed

from 5 rule families (Filter, Moving Average, Support and
Resistance, Channel Breakouts, and On Balance Volume) for 15
types of commodity futures contracts (cocoa, coffee, cotton, etc)
during 1984 .
It finds that, adjustment for data snooping bias,
these quant strategies are not reliably
in trading commodity
futures.
There is a possibility that such rules may help some
other trading strategy.
Paper Type:
Working Papers
Date:
2007-09-09
Category:
Future/currencies, Commodity futures
Title:
Can Commodity Futures be Profitably Traded with Quantitative
Market Timing Strategies

Authors:
Ben Marshall, Rochester Cahan and Jared Cahan
Source:
SSRN working paper
Link:
Summary:
This paper tests 7,000+ quantitative trading rules constructed

from 5 rule families (Filter, Moving Average, Support and
Resistance, Channel Breakouts, and On Balance Volume) for 15
types of commodity futures contracts (cocoa, coffee, cotton, etc)
during 1984 .
It finds that, adjustment for data snooping bias,
these quant strategies are not reliably
in trading commodity
futures.
There is a possibility that such rules may help some
other trading strategy.
Paper Type:
Working Papers
Date:
2006-11-03
Category:
Volatility, future/currencies
Title:
Foreign Exchange Rates Dont Follow a Random Walk
Authors:
Hui Guo, Robert Savickas
Source:
St. Louis Fed working paper
Link:
http://research.stlouisfed.org/wp/2005/2005-025.pdf
Summary:
This paper finds that: for most G7 countries, industry or firm

level stock idiosyncratic volatility (IV) can predict the value of its
currency: the higher the IV, the higher the future currency
value.
Comments:
1. Why important
This result may interest quant managers who are using foreign
exchange as an enhancing overlay. It is also provoking as IV
(which has been a "buzz word" recently) seems be informative in
many senses: from forecasting stock returns on individual and
aggregate level, to the valuation of foreign exchange.
2. Data
Quarterly nominal exchange rate data are from IFS
(International Financial Statistics). For Euro countries period
covered is 1973:Q1 to 1998:Q4 (when Euro was introduced); for

non-Euro countries, 1973:Q1 to2004:Q2. Daily market and stock
returns are from the CRSP database and DataStream.
Paper Type:
Working Papers
Date:
2006-07-13
Category:
Strategy, Future/currencies, Foreign Exchange Risk
Title:
Foreign Exchange Risk and the Cross-Section of Stock Returns
Authors:
James W. Kolari, Ted C. Moorman and Sorin M. Sorescu
Source:
Texas A&M University working paper
Link:
http://wehner.tamu.edu/finc.www/ssorescu/forex.pdf
Summary:
The authors found that, from 1973-2002 in US market; stocks

most sensitive to foreign exchange risk generate lower returns.
This sensitivity factor can improve the explaining power of
existing asset-pricing models.
Comments:
1. Why important
The author in effect proposed a new asset pricing factor, which is
always important to quant practitioners.
2. Data
Stock data from 1973-2002 (excluding financial firms) are from
CRSP. The stable aggregate currency (SAC, equlas to the Special
Drawing Right basket of IMF) is used as the benchmark for US
dollar returns.
3. Discussions
Higher FX sensitivity, lower return is a puzzle to us.
The key conclusion of the paper relies heavily on the results in
Table 1 (Raw Returns of 25 Portfolios Formed on Foreign
Exchange Sensitivity). Two observations raise concerns:
1.) The FX premium were based on the difference between the
average of portfolio 1 and 25 (the most negative/positive
sensitive stocks) and the average of other 23 portfolios. This way

of grouping somehow is arbitrary, and we note the returns in
other 23 portfolios seem close and not correlated their
sensitivities. If one applies the 3-segment (as opposed to 25
segments) methodology as Fama-French do, the result can be
very different.
2.) The size of stocks in portfolio 1 and 25 is one order smaller
than the average of other 23 portfolios, so the FX premium at
least has a large market-size component in it.
A practitioner will want to know whether a trading strategy
based on the FX sensitivity will be profitable. This remains to be
tested, although the result in Table 1 shows that the
risk-adjusted result will not be as large due to the correlation
with company size.
We are also very curious about the year-by-year results. The
impact of globalization on US companies business should
continue to increase. Consequently the impact of FX on stocks
return will be more significant.

Paper Type:
Working Papers
Date:
2015-03-26
Category:
Asset allocation, use global growth to predicting returns
Title:
The End-of-the-year Effect: Global Economic Growth and

Expected Returns Around the World
Authors:
Stig V. Mller and Jesper Rangvid
Source:
SSRN
Link:
Summary:
Level of global economic growth at the end of prior year predicts

many asset class returns the next year
Definitions and methodology
Global industrial production growth (GIPG) is the equally
weighted average of quarterly OECD industrial production
growth in 12 developed untries
For the 12 OECD countries, use data from 1970 - 1989 as
in-sample, 1990 2013 as out-sample
For other 18 countries, use recent 20 years data
Lagging economic growth data by three month to account
for publication lag (Table A1)
Lower end-of-year GIPG, higher future returns for most asset
classes
Works in most equity markets: Significant strong negative
relationship for 28 of 30 country stock markets (Table 5)
The t-statistics range from -1.4 in Italy to -4.1 in
the Netherlands (Panel A of Table 5)
GIPG during other quarters does not predict (Panel
A of Table 5)
Works for world equity indices: a 1% higher fourth
quarter GIPG predicts a 3.1% lower next-year world
equity market real return (Table 3)
Works for foreign exchange, 19 commodities, U.S.
corporate bonds: Relatively strong fourth quarter GIPG
indicates relatively low next-year real returns
Does not work for global government bond: GIPG is not a
significant predictor of global government bond real
returns
Better than most other predictors: In terms of average
absolute error for out-of-sample annual stock market
return forecasts, GIPG is better than historical mean
returns, global dividend-price ratio, short-term interest
Data
rate (U.S. Treasury bill yield) and U.S.

consumption-wealth ratio
Similar patterns when using December-only (instead of
fourth quarter growth), and when using the GDP rather
than industrial production
970 through 2013 data for global industrial production
growth are from OECD
Annual total returns for 30 country, two regional and
world stock indexes, currency spot and one-year forward
exchange rates relative to the U.S. dollar, spot prices on
19 commodities, total annual returns for a global
government bond index and a U.S. corporate bond index,
and country inflation rates are from DataStream
Paper
Type:
Working Papers
Date:
2012-12-31
Catego
ry:
Quality measures, accruals, global evidence
Title:
Global Return Premiums on Earnings Quality, Value, and Size
Author
s:
Max Kozlov and Antti Petajisto
Source: SSRN Working Paper

Link:
Summa
ry:
Quality factor produces a higher Sharpe ratio than the market, size, or value
factors, and works in the period since 2005 despite its popularity. A composite
quality strategy yields even better performance and generates a monthly
three-factor alpha of 65 (64) bps in the global (U.S.) market
Background
Prior studies show that quality (e.g., accruals) works in US markets
This study serve as an out-of-sample test with almost a decade of new
data across all developed markets
Constructing quality portfolios
Define quality as the popular accruals measure
Construct earnings quality portfolio (cash-minus-earnings, CME) by

double sorting stocks on accruals and size
Quality factor has limited correlations with value and size factors (Table
III)
E.g., global CME has a negative correlation (-32%) with HML
Quality portfolio earns the highest Sharpe ratio
Highest Sharpe ratio (Table IV)
Annual
excess return
Annualized
volatility
Sharpe
ratio
Market
4.0%
16%
0.25
Value
4.9%
9%
0.56
Quality
2.8%
4%
0.69
Size
-0.1%
8%
-0.06
Combining value and quality greatly helps (Table IV)

A combined equal-weighted (risk-weighted) portfolio has a
Sharpe ratio of 0.91 (0.99), a significant improvement over the
Sharpe ratio of either factor alone
Decent performance in recent 5 years (Figure 1)
Suggesting that globally, quality hasnt been arbitraged away
despite its popularity
Industry-adjusted quality-, value-, and size-portfolios improve Sharpe

ratios (Table VI)
Sharpe ratio improved to 0.8 (0.97, 0.1) for CME (HML, SMB)
Mostly due to the reduced volatility, though it also slightly
reduces its average return
U.S. findings similar to results from global data (Figure 2 and Table VII)
U.S. market (value, quality, size) factor yields annual excess
return of 5.5% (4.9%, 3.4%, 2.6%), with annual Sharpe ratio of
0.35 (0.44, 0.58, 0.22)
Works in long-only and large cap stocks (Table IX and Figure 4)
Cap-weighted large-cap stocks and long-only
Combining value and quality earns the highest return, which
outperforms index by 3.9% (5.8%) per year among large(small-) cap stocks
Composite quality factors even better than individual quality factors
Alternative quality factors are:
Return on equity (ROE)
CF/A (cash flow to assets)
D/A (debt to assets)
Data
Composite quality metric by either (1) averaging raw score

(averaging), or (2) summing score ranking (mix)
Mix quality factor works best (Table VIII and Figure 3)
Mix factor earns a three-factor alpha of 65 bps per month
(t=9), higher than any of its components
By contrast, the average factor has an alpha (29 bps)
Similar results for U.S. stocks (Table VIII)
Mix (average) portfolios generate significant alphas of 64 (34)
bps with t = 9.1 (9.7)
The mix portfolio has similar negative loadings on market,
small size, and value
7/1988 - 6/2012 data for 23 developed markets (from four regions:
North America, Europe, Japan, and Asia Pacific) are from
Worldscope/Barra
7/1963 - 6/2012 U.S. stock data are from CRSP and Compustat
Paper
Type:
Working Papers
Date:
2012-07-29
Category
:
Novel strategy, value premium, global strategy
Title:
Adding Value to Value: Is There a Value Premium among Large Stocks?
Authors:
Sandro C. Andrade and Vidhi Chhaochharia
Source:
University of Miami Working Paper
Link:
http://moya.bus.miami.edu/~sandrade/Andrade_Chhaochharia_AVV_June20
12.pdf
Summary
:
Using an alternative scaling variable and a different sampling technique, the

authors show that there exists value premium among large developed
market stocks. A long-short strategy earns 87 bps per month, compared to
just 14 bps of Fama-Frenchs (2012) global HML
Background
Recent study
by Fama and French (2012) shows that standard HML
book-to-market has performed poorly in the last few decades,
especially among large stocks
Among big US stocks from 1963 - 2012, the return is 20 bps
(t-stat =1.5)
Within North America large cap stocks, HML earned just a

monthly excess returns of 1 bps during 1990 - 2012
Within Global big stocks, such return is just 14 bps (t-stat
=0.79) per month
This paper proposes a new factor using an alternative scaling variable
and a different sampling technique
A new HML factor based on 3 modifications
Use analysts earnings forecasts, instead of book value of equity
Market prices tend to be better aligned with earnings yields
derived from forward-looking earnings
Sort stocks every month, instead of annually
Because investors tend to value stocks based on timely
available information
Create global, instead of regional value breakpoints
Regional break points in global strategies places the additional
restriction that strategies must be "region-neutral"
Constructing Portfolios
Step 1, classify global stocks into "big" or "small" at the end of June of
each year
Step 2, each month for each size group, sort stocks into three
earnings yields groups: low (bottom 30%), medium (mid 40%), and
high (top 30%)
Analysts forecasts are the average of earnings forecasts for
fiscal years t, t+1, and t+2
Step 3, form 6 portfolios (2 size groups*3 earning yields groups),
rebalance monthly
Significant value premium in large cap stocks
HML strategy for big North American stocks earns monthly excess
returns of 49bps (t-stat = 2.05) from 19902012
Among big stocks globally it earns 87 bps (t-stat = 3.16) per month
Outperforms the classic definition: the average excess return
of new (old) global HML strategy is 87 (14) bps per month with
a t-stat of 3.16 (0.79) (Panel B of Table II)
Consistent better performances over time (Figure 1)
Combining big and small stock outperforms too
Excess return of 95 bps per month with t-stat =3.89
Nearly three times larger than that of the standard HML
strategy
Robust to global one-, three-, and four-factor models (Table III)
Works in all four regions while standard HML does not (Table IV)
Better performance in US: Average returns of 66 bps vs. 27
bps for the standard HML (Appendix Table A.1)
Using sector-dependent break points reduces noise: similar returns
but much lower standard deviation of monthly excess returns (282
bps vs. less than the 354 bps)
Source: the paper

Data
June 1990 to March 2012 data for 24 global markets (local currency
end-of-month price, return index, and market capitalization time
series) are from Datastream
Analyst forecasts data are from I/B/E/S, which are matched to
Datastream
Paper
Type:
Working Papers
Date:
2009-02-25
Category:
Liquidity factor, Global markets, novel strategy
Title:
A look at the liquidity factor in GEM2
Authors:
MSCI Barra
Source:
MSCI Barra white paper
Link:
http://www.mscibarra.com/resources/pdfs/research/RB_Liquidity_Factor.pdf
Summary: The paper shows that the liquidity factor in the Barra Global Equity Model
(GEM2) can strongly predict stock returns
Definition of liquidity
Liquidity is measured as turnover ( the ratio volume to the
number of shares outstanding)
Three different turnover measures are used: at monthly,
quarterly and annual frequencies
Liquidity can predict stock returns
Barrafactorselectionmethodology:Everyweekcrosssectionofreturnsareregressedon
factorsandthesignificanceofcoefficientestimatesareanalyzed
Liquidityfactorhasasignificantcoefficientestimatefor53%oftheweeks
Performanceoftheliquidityfactorisafunctionofmarketconditions
Theliquidityfactorseemstoperformbetterthantheworldindex
inbearmarkets
(Figure
1)
Liquidityexplainsreturnsverywellwhentheworldmarketdoesverywellandverybadly
(19%and37%perannumonaverage,respectively)
Discussions
Likesomeotherfactors,liquidityhereshowsacounterintuitivepositiveriskpremium.
Illiquidityisknowntopossessapositiveriskpremiumonthecrosssectionofstocks.
Thisperhapsshouldnotbetoosurprisingasrealitysometimesdoesnotobeyfinancial
rules.Wehavediscusssimilarfactorsbefore,suchashighvolatility,lowreturns.(The
VolatilityEffect:LowerRiskwithoutLowerReturn,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=980865)
Data
Thepapercoversthe19922008period.MSCIworldandcountryindicesarefromMSCI.
Datastreamisusedforstocklevelinternationaldata.
Pape
Working Papers
r
Type:
Date: 2009-02-25
Categ
ory:
Title:
Dispersion effect in International Stock Returns
Auth
ors:
Sourc
e:
CFF conference paper
Link:
http://www.campus-for-finance.com/fileadmin/docs/docs_cfp/Paper_2009/Leippo
ldl_and_Lohre_-_The_Dispersion_Effect_in_International_Stock_Returns.pdf
Sum
mary
:
The paper shows that, on average, dispersion in analysts earnings forecasts

negatively predicts returns for US and European stocks. But such performance is
not consistent: it worked during 2000-2003, but after 2003 completely reversed
in US and has been volatile in Europe
Definitions of dispersion in analysts earnings
Dispersion is the standard deviation of earnings forecasts over the
absolute value of its mean.
In larger stock markets the paper ranks the stocks into quintiles
In smaller markets, stocks are ranked into terciles using the last
months dispersion.
Varied performance in different time periods
On average, high dispersion, low returns
Veryprofitableduring2000to2003,mainlyduetoshortportfoliowhichworkedextraordinarily
wellinthistime
Didnotworkwellinothertimes(PerFig.1).Itcanbeusedasanegativesignalbefore
19982000andsince2003inUS,whileithasbeenvolatileinEurope.
Thestrategyisstrongestforstockswithlowinformationqualityandlowliquidity
Lowanalystcoveragestocks
Smallcapstocks(nosucheffectforlargecapstocks)
Highvolatilitystocks
Highlyilliquidstocks
Comparedtohighdispersionportfolios,thelowdispersionportfolioshave
disproportionallyloweranalystforecastdispersion(0.66vs.55.32inUSand2.39vs.
101.82inEurope),muchlowerbetas(0.77vs.1.30inUSand0.87vs.1.28inEurope),
lessvolatile(returnstandarddeviationsof4.32%vs.6.71inUSand3.96%vs.5.68%in
Europe)
Concerns
Performancenotconsistentacrosstime,asdescribeabove.
Notethatfortheperiodsotherthan20002003,highdispersionpredictshighreturns.
Thisstillsuggesthigherrisk,higherreturn:highdispersionssuggestlargerdifferenceof
opinionsandhencehighuncertainty(risk).
Data
Thesamplecoversdatafor15EuropeanMarketsandtheUSmarketforthetimeperiod
19872007.EarningsrevisionsdataarefromIBES.Stockreturnsandtbillreturnsare
fromDatastream.

Paper Type:
Working Papers
Date:
2009-02-01
Category:
Asset allocation, US bond liquidity, Global markets
Title:
Flight-to-liquidity and global equity returns
Authors:
Ruslan Goyenko and Sergei Sarkissian
Source:
McGill University Working Paper
Link:
http://web.management.mcgill.ca/Sergei.Sarkissian/papers/flight.pdf
Summary:
The paper shows that US Treasury bond illiquidity is a negative

predictor of stock returns in 46 different international markets.
Definition of US bond illiquidity
Illiquidity is defined as the average percentage bid-ask
spread of off-the-run US Treasury bonds with
maturities of up to one year
Proposed reason: the flight-to-liquidity/quality in international
portfolio flows
When investors are pessimistic about stock market,
they chase safest and most liquid securities such as US
treasuries and by doing so improving US bonds
liquidities
When the US bond is very liquid, that means investors
are shifting money away from stock markets. Since
such shifting usually last for some time, it predicts
lower returns for stock indices
The more an asset is exposed to flight-to-quality, the
higher should be its expected return
Illiquidity predicts stock market returns in international
markets
US treasury bond illiquidity predicts future and
contemporaneous returns negatively
The effect of US Treasury bond illiquidity on returns
works through the effect on stock market liquidity
Bondilliquidityalsopredictsstockmarketilliquiditybothatthecountrylevelandworldwide
Theproxyforstockmarketilliquidityisvalueweightedproportionofdailyzeroreturnsinagiven
monthineachmarket
USTreasurybondilliquiditycanbeaddedtoaninternationalassetpricingmodel
Bondilliquidityrisknotsubsumedby,andonlyaddsto,allotherglobalandlocalfactors
Themodelholdsinthewholesampleaswellasforthedevelopedandemerging
marketsseparately
Theaverageannualpremiumattributedtoflighttoliquidityriskisbetween0.35%and
0.75%.
Ourconcerns
Intuitively,thisfindingperhapsarebasedontwowellknownfacts:1)USmarketand
internationalmarketsareincreasinglymorecorrelated2)wheninvestorsarepessimistic
aboutstockmarket,theyaremoreliketobuyUStreasury.
Regressionsresultsinthepapershowthatitismainlyafactorforemergingmarket
returns,whereasthepapertriestodevelopaninternationalassetpricingmodeloutofit
Data
Thestudycovers19772006,indexreturnsanddividendyieldsdataforUStreasury
and46stockmarketsarefromDatastreamandIFC.
USTreasurybilldataisextractedfromCRSPdailyTreasuryQuotesfiles.
Paper Type:
Working Papers
Date:
2008-11-30
Category:
Title:
Implied Cost of Capital Based Investment Strategies-Evidence

from International Stock Markets
Authors:
Florian Esterer and David Schroeder
Source:
Bonn Graduate School of Business
Link:
http://www.affi.asso.fr/images/cnf_18_doc_765.zip
Summary:
The paper presents a trading strategy based on the "implied cost

of capital" (ICOC), which is based on equating stock prices to
analysts forecast future cash flows.
Definition of ICOC:
ICOC is the internal rate of return that equates
expected discounted payoffs per share to the
current price
Payoffs are defined as the expected cash flows
from equity analysts ( the paper uses the term
"expected cash flows", which in our understanding
should be dividends )
In other words, stock price = sum of( (expected
cash flows for year t) / ( 1 + ICOC) ^t)
The analysis combines analyst forecasts for
different horizons, such as short-, mid- and
long-term growth projections
ICOC is set to be the same for short-, mid- and

long-term horizons
ICOC is estimated using two alternative discount models
The dividend discount model (DDM): it assumes an
initial high dividend growth period of 5 years,
followed by a transition period of 15 years and a
perpetual stable growth period (which continues
forever with a constant growth rate)
The Residual Income Model (RIM): the stock prices
equals to the "invested capital" (book value) plus
the "expected residual income from future
activities". In other words, ICOC is that rate that
satisfy
Price = book value of equity per share +
sum(E(R(t))/(1+ICOC)^t)
where E(R(t))=(E(return on equity(t))-ICOC)*Book
value per share (t-1)
The RIM method estimates the book value of
equity in the future as well as the future earnings
An investment strategy based on ranking the stocks by
the ICOC works in many countries
The returns (capital gains and dividend yields) on
8 different portfolios based on different holding
periods over 1 to 24 months.
Across US and international stocks ICOC predicts
higher future expected returns.
The return predictability is the highest for 1 month
holding period, i.e. the performance of portfolios
decrease with holding period.
Comments:
1. Discussions
It is great to see the new evidences and new measures of
stocks cheapness (value-ness). But we had a hard time
to think of any intuitive reason why ICOC can add extra
value to the existing value factors.
High ICOC firms systematically show low loadings on the
momentum and high loadings on Book-to-market factors
between 1995 and 2006. The validity of ICOC as an
additional factor is therefore questionable.
Both Discount models require important assumptions to
estimate the ICOC figures
DDM is based on three different states in firms
growth cycle, and it produces a single constant
discount rate. As we know, it is well documented
that discount rates vary with the changes in the
riskiness of the company.
RIM requires the estimation of book value of

equity as well as future earnings (the RIM
framework requires the future earnings and book
value of equity), and it also produces a constant
discount rate throughout the sample.
2. Data:
1995-2006 Datastream and Worldscope data are used for US,
Canada, France, Germany, Italy, Japan and UK. IBES is used for
analyst forecasts.
Paper Type:
Working Papers
Date:
2008-11-30
Category:
novel strategy, Leverage, industry, UK, Global markets
Title:
An Empirical Analysis of Capital Structure and Abnormal returns
Authors:
Gulnur Muradoglu and Sheeja Sivaprasad
Source:
Cass Business School working paper
Link:
20MEETINGS/2008-athens/Muradoglu.pdf
Summary:
The paper confirms previous findings that low leverage implies

higher expected returns, and further shows that in UK market,
abnormal returns increase with average industry level leverage.
Definitions:
Firm level leverage is defined as (market value
of total debt) / (market value of equity)
"Average industry level leverage" is defined as the
average leverage levels of the individual firms in
an industry
Empirical findings contradict text-book theory of
Modigliani and Miller (1958)
This theory implies a positive relationship between
leverage and expected returns, because high
leverage increases firms riskiness
But previous study and this study find the opposite
in empirical study
At stock level, high leverage suggests lower future return
in most cases
Across all stocks in all industries

, high leverage
firms have much lower abnormal returns (-0.99%
per year) compared to low leverage firms (6.28%
per year).
Within most industries, high leverage means lower
returns.
Only oil&gas and basic materials industries
show a positive leverage spread of returns:
the high-low portfolio return for basic
materials is 3.91% per annum and for
oil&gas it is 8.82% (Table 2).
At industry level, average industry level leverage predicts
higher expected returns
It is tested as
return(stock i) = average industry
leverage(industry which stock i belongs to) + stock i leverage
+ common risk factors + error terms
Across all stocks in all industries, average industry
leverage significantly predict positive future returns, while
firm level leverage is significantly negative for
cross-sectional returns (1.14 vs -0.22)
For technology, telecommunications, industrials,
consumer services and consumer goods industries, higher
average industry level leverage means significantly
positive returns.
Only for basic materials and healthcare sectors, the
average industry level leverage affects returns negatively.
Data
1965 - 2004 data for stocks listed in London Stock
Exchange are from Datastream.
Paper Type:
Working Papers
Date:
2008-11-30
Category:
novel strategy, UK market, stock split, Global markets
Title:
The UK Equity Market Around The Ex-Split Date
Authors:
Elena Kalotychou, Sotiris K. Staikouras And Maxim Zagonov
Source:
European FMA 2008 working paper
Link:
20MEETINGS/2008-athens/ZAGONOV.pdf
Summary:
UK stocks experience statistically significant abnormal positive

returns on the day of a stock split (or the day after the split)
Positive abnormal returns on split day (or in the case of
2:1 splits on the day after the split)
Between 6.1% (5:2 splits) to 0.8% (2:1 splits) for
various split categories
Larger split factors, lower post-split share prices
(relative to the market average), lower stock-price
volatility
Likely reason: higher liquidity attracts individual investors
Possibly reflecting a liquidity effect due to an
expanded shareholder base because of an increase
in small shareholders which find the lower priced
stock more attractive
Post-split period shows an increase in the number
of trades but the share volume does not change in
a statistically significant way, implying a drop in
the average shares per trade.
Such lower shares-per-trade suggests more
involvement from individual investors.
Data:
January 1990 - May 2007 period, firms based in
the UK and listed in the London Stock Exchange
Daily bid, ask and closing adjusted prices, market
capitalization, trading volume, number of trades
and market indices from Thomson DataStream
Paper Type:
Working Papers
Date:
2008-11-05
Category:
Momentum and Value strategies, asset classes, Global markets
Title:
Value and Momentum Everywhere
Authors:
Clifford Asness, Tobias Moskowitz and Lasse Pedersen
Source:
NYU working paper
Link:
http://pages.stern.nyu.edu/~lpederse/papers/ValMomEverywhere.pdf
Summary:
The paper shows that value and momentum strategies generate

profits across different asset classes: international stock markets,
government bonds, currencies and commodities.
Value and momentum profits are correlated within and across

asset classes
A long-short value (momentum) strategy in one asset
class is positively correlated with value (momentum) in
other asset classes
Value is negatively correlated with momentum both in
its own asset class and in other asset classes
These patterns across different asset classes and
geographic locations suggest the presence of global
factors
Stand-alone value/momentum strategies works, and so does a
combo strategy:
Long-short momentum and value portfolios are created
each month across different equity markets,
government bonds and commodities
Book value of stocks are the past six months BM
ratios for stocks
Book value of commodities, currencies and
government bonds are the price of the asset
from 5 years ago
Momentum portfolios are created by the past
12-month cumulative raw returns on the assets.
The combo strategy goes 50-50 on value and momentum
(which is diversified with respect to liquidity risk) in different
asset classes and countries
An aggregate strategy that

combines value/momentum
in different asset classes and
countries correlates with
major economic factors
Value and momentum
both load positively on
long-run consumption
growth
They also load
negatively load on a
global recession
indicator
Value loads
significantly on global
liquidity risk and
momentum is
negatively correlated
with global liquidity
Comments:
Paper
Type:
Working Papers
Date:
2008-11-05
1. Discussions
The paper is very useful in documenting the
profitability of momentum and value strategy in
different countries and for different asset classes.
To us, the omni-presence of these two strategies
may be related to investors certain behavioral
patterns, which can be as old as mountains.
The combo strategy is meaningful because it has
very low loading on liquidity risk. We already
know that momentum has negative loading on
liquidity factor and value has positive loading,
therefore the combo strategy is hedged against
liquidity.
We found the book value measure for
commodities, currencies and government bonds
intriguing, and have a hard time to understand
its economic reason. Why are the price of the
asset 5 years ago a good measure of the book
value?
2. Data:
CRSP and COMPUSTAT for US data for the
period 1973-2008
BARRA and Worldscope for international
stocks (UK, Japan and Continental
Europe) during the time period
1985-2008.
Bond returns are taken from Datastream
and Bloomberg (1990-2008)
Currency data is taken from Datastream
and IBOR (1980-2008)
Commodities data is from London Metal
Exchange, Intercontinental Exchange,
Chicago Board of Trade, New York
Mercantile Exchange and Tokyo
Commodities Exchange (1980-2008)
Macroeconomic data for US is from NBER,
for other countries it is from Economic
Cycle Research Institute
Catego
ry:

Title:
Author
s:
Xi Dong
Source
:
Link:
Summ
ary:
Definitions
indices.
Data:
2001 - Dec. 31, 2006

Date:
2008-09-25
Category:
Idiosyncratic Volatility, Global markets
Title:
Idiosyncratic Volatility and Stock Returns: A cross country analysis
Authors:
Nuttawat Visaltanachotti, Kuntara Pukthuanthong-Le
Source:
FMA Working paper
Link:
http://www.fma2.org/Texas/Papers/IdiosyncraticRiskandStockReturnsACr
ossCountryAnalysis.pdf
Summary:
Comments:
This paper documents different idiosyncratic volatility (IV) premium

in different markets.
Positive risk-premium for IV (high IV, high returns): US and
Philippines
Nagative risk-premium for IV (high IV, low returns):
Australia, Canada, Finland, France, Hong Kong, India,
Japan, Mexico, Singapore and UK
Insignificant risk-premium for IV: the rest of the 38
countries tested
Methodology:
For each country stock-specific IV is estimated using CAPM
model and the results are robust to Beta non-linearity
problems.
Concerns:
The results do not control for other pricing factors such as
size and BM, or international factors such as exchange rate
exposure.
Paper
Type:
Working Papers
Date:
2008-09-25
Category:
novel strategy, Trading Volume, US and East Asian market, Global markets
Title:
Institutional Ownership, Market States and the High-Volume premiums
Authors:
Zhaodan Huang, James B. Heian, Ting Zhang
Source:
FMA working paper
Link:
http://www.fma2.org/Texas/Papers/High_volume_premium_US_Int_08.pdf
Summary:
Higher trading volume, higher returns in US and East Asian stock

markets.
The strategy is to long (short) the high (low) trading volume
stocks
Rebalance every week, and the profit is 65 bps per week
during 1963-2007.
Significant positive excess returns only during the first
month of the holding period.
Stocks with the lowest volume happen to be small stocks.
Robust check
Profitability is robust to size
Profitability gets stronger for stocks with high institutional
ownership.
Why institutional holdings matter: institutional ownership is
related to high trading volume, and they also tend to be
more rational and informed traders compared to individual
investors.
Profitability a function of market status and geographic regions
Stronger in down-markets compared to up-markets.
In East-Asian markets the volume-premium only exists for
large stocks, contrary to US market
Comments:
Paper
Type:
Working Papers
Date:
2008-09-03
Category:
risk, Forecasting macro factors, industry returns, US and UK markets,

Global markets
Title:
Sources of Systematic Risk
Authors:
Igor Makarov, Dimitris Papanikolaou
Source:
Link:
http://www.kellogg.northwestern.edu/faculty/papanikolaou/htm/sys_risk.p
df
Summary:
The paper
develops four factors to explain U.S. industry returns using the
heteroscedasticity of stock returns. The factors can predict future
macroeconomic factors
.
The four mutually orthogonal factors are
Factor 1: highly correlated with market, similar loadings on

all industries
Factor 2: stocks producing investment goods minus stocks
producing consumption goods
Factor 3: cyclical stocks minus non-cyclical stocks
Factor 4: industries producing input goods minus the rest of
the market
Results better than principal components and static factor analysis
Accounting for heteroscedasticity improves factor stability
The extracted factors can predict future macroeconomic variables as
well as investment opportunity set in the economy (up to 24 months
ahead).
Macro-economic factors
Predicting factors
future inflation
Factor 4 have the most

explanatory power (Table 8).
future industrial production

and employment
Factors 2 and 3 explains

most of the variation (Table
9)
future GDP and productivity
Factor 1 has great

explanatory power
future consumption and

investment
Factor 1 and 2 have

significant explanatory power
Predicting equity market index returns and industry portfolios

For 1-month CRSP-value weighted index, the predictive
regressions use Factor 4 (negative coefficient estimate)
obtain R-squared values as high as 6% (Table 13).
For long horizon (up to 24 months ahead) CRSP-value
weighted index, the predictive regressions also use Factor 4
(negative coefficient estimates) and obtain R-squared values
as high 1.7% (Table 14).
For monthly individual industry portfolio returns, Factor 4 has
again significantly negative coefficient estimates (Table 16).
Similar results in UK
The paper also produces the same results in UK market to
show the sample-independence of the model.
The paper develops a new cross-sectional factor model that is based on
different sources of systematic risks in the economy and has time varying
volatility structure.
2. Data
For the time period of 1963-2004 industry portfolios are taken from
Kenneth Frenchs webpage as well as CRSP returns. UK market variables
are taken from LSPD database.
Paper Type:
Working Papers
Date:
2008-09-03
Category:
statistic methodology, Predicting Power Of Macro Factors, Global

markets, Short Term Interest Rate, Term Structure
Title:
Predicting Global Stock Returns
Authors:
Erik Hjalmarsson
Source:
SSRN working paper
Link:
Summary:
This paper finds that in

developed markets,
short term interest
rate and the term spread
have some power in predicting index
returns. In emerging market returns,
dividend-Price and
Earnings-Price ratios
are useful in predicting index returns.
Based on a large data set:
One of the strengths of this study is its coverage:
40 countries (24 developed and 16 emerging) and
over 20,000 monthly observations.
Improved methodology using an estimator based on
recursive demeaning.
Recursive demeaning mitigate the effects of small
sample autoregressive bias
Fixed effects are characteristics of panel data (i.e.
combination of time series and cross section data).
Specific country attributes can be fixed effects.
E.g., Brazil will have some specific characteristics
that are different from some of Frances
characteristics and Brazil will continue to have
these attributes over time. Fixed effect estimation
considers these country specific attributes.
Comments:
The paper shows that inferences would be different

based on non-robust estimators
Short interest rate has predictive power for developed
countries, as does the term spread.
1% change in short term interest rate predicts a
-1.4% to -4.3% stock market index return in the
first year in Canada, Germany, Netherlands, New
Zealand, Spain, Switzerland and USA.
Term spread is the difference between short term
and long term interest rates
1% change in term spread predicts a 2.9 % to
10.2% annual stock market index return in France,
Germany, New Zealand, Norway, Italy, Spain,
Switzerland, USA and Netherlands respectively.
For emerging markets, Dividend-Price and Earnings-Price
have predicting powers.
1% change in Earnings-Price ratio predicts
0.041%, 0. 025%, 0.020% annual stock market
return in Argentina, Jordan and South Africa
respectively.
1% change in Dividend-Price ratio predicts 0.019
%, 0.013%, 0.037% annual stock market return in
Chile, Jordan, and Mexico respectively.
On average, Dividend-Price ratio has limited predictive
power though the results are somewhat stronger than the
Earnings-Price, which has at best weak predictive power
(and only for emerging markets in that case)
1. Discussions
Most researchers use panel data (time series data for various
countries) when using macro-economic factors to forecast
country returns. This paper may be helpful because of recursive
demeaning estimator it developed. Previous literature focuses on
time series data.
2. Data
From Global Financial Data database, the study uses monthly
total returns (including dividends) on market wide indices in 40
countries. Additionally the study uses dividend- and
earnings-price ratios and measures of the short and long interest
rates. Data series vary in range (based on availability) and go
back to as far as 1935 / 18 for some countries.
Paper Type:
Working Papers
Date:
2008-09-03
Category:
Index future Trading Volume, UK, Asian markets, Global markets
Title:
The Predictability Power of Trading Volume Volatility in Stock

Index Futures Markets
Authors:
Noor Azlinna Azizan
Source:
Journal of Derivatives Markets
Link:
Summary:
This paper examines whether trading volume of the stock

index futures can be used as a tool to predict the volatility
in Malaysia, Singapore and UK.
London market exhibits bidirectional relationship between
volume and volatility, but not Singapore and Malaysia. In
other words, this means that volume predicts volatility
and vice versa in UK Market but not in Singapore and
Malaysia.
The speed of adjustment when the volume crosses the
non-arbitrage border is faster in UK than in the other two
markets. This means that London market is more efficient
in price adjustment.
Paper Type:
Working Papers
Date:
2008-08-13
Category:
emerging markets, statistic methodology, Global markets
Title:
Technical Analysis Around the World: Does it Ever Add Value?
Authors:
Ben R. Marshall, Rochester H. Cahan, Jared M. Cahan
Source:
Link:
Summary:

once data snooping bias is accounted for,
technical analysis is not consistently profitable in the 49
countries that comprise the Morgan Stanley Capital Index.
Large number of trading rules considered
This paper considers 5,806 of the technical trading

rules in four families:
Filter Rules, Moving Average Rules, Support and
Resistance Rules and Channel Break-outs
Technical Analysis works better in emerging markets
The mean daily return of 0.11% for emerging
markets versus 0.05% for developed markets
The average standard deviation across the
emerging markets is 1.70% versus an average of
1.27% for developed markets
All the markets in the study have gained over the
2001-2007 period.
Columbia is the best performing while the USA is
the 8 worst performing.
Turkey is the most risky market, based on
standard deviations, while Malaysia is the least
risky.
How data-snooping is accounted for
Its done by way of adjusting the statistical
significance (p-value) of the most profitable
trading rule to account for the universe of rules
from which it is selected.
As the size of the universe increases, the snooping
adjusted p-value declines.
The most profitable rules are tested first to give
the best performing rule the most chance of
remaining profitable as the rule universe
increases.
Comments:
1. Discussions
The results perhaps is not very surprising given the booming of
hedge funds which can virtually everywhere and given that these
technical rules now can be found in textbooks
2. Data:
23 developed markets and 26 emerging markets that comprise
the MSCI from Datastream for the period 1/1/2001
31/12/2007
Paper Type:
Working Papers
Date:
2008-08-13
Category:
Title:
Authors:
Source:
Link:
Summary:

2001-2007 period.
risky.
increases.
Comments:
1. Discussions
2. Data:
31/12/2007

Paper
Type:
Working Papers
Date:
2008-07-20
Category: Value, small cap stocks, emerging markets, Global markets

Title:
Consistency of the Value Premium across Asset Classes
Authors:
Yijie Zhang
Source:
Arrow Street Capital White Papers
Link:
http://www.arrowstreetcapital.com/pdf/Consistency_of_the_Value_Premium.
pdf
Summary
:
Definition of value premium:

Value premium defined as return of a portfolio that is long
value stocks and short growth stocks (VmG portfolio). Value
and growth stocks are determined based on some common
screens as book to price ratio, the earnings yield, and the
dividend yield.
Value premium do exist in other asset classes
Including small stocks and emerging markets.
The value premium is present both in large and small stocks,
and both in developed and emerging markets. The global
annual value premium is 2.15%.
Expanding value strategy to other asset classes can lower risks
Including these asset classes in a portfolio reduces the
variation (risk) in value premium.
Value premiums tend to be positively correlated among asset
classes and markets. The correlations are weaker in emerging
markets than in developing markets.
Variation in value premiums can be reduced by restricting the
global VmG (long value and short growth) portfolio beta. This
also reduces the correlation between asset classes.
The analysis is based on data that covers 1996 through March 2008.
Paper Type:
Working Papers
Date:
2008-06-08
Category:
asset allocation, Equity premium, European stocks, Global

markets
Title:
The Implied Equity Risk Premium- An Evaluation of Empirical

Methods
Authors:
David Schroeder
Source:
University of Bonn Working Paper
Link:
http://www.uni-bonn.de/~dschroed/ImpliedERP.pdf
Summary:
The paper compares two methods of stock value estimation: (1)

Dividend discount model (DDM) and (2) Residual income model
(RIM).
The results suggest that for European stocks, DDM has
superior predictive power to RIM.
In short DDM tries to estimate the expected return by
using the dividend rates and future dividend discount
rates, whereas RIM uses the earnings and future earnings
growth rates.
The paper estimates expected risk premiums of Euro Area
and UK stock markets using the 2-stage and 3-stage DDM
and RIM methods:
2-stage (3-stage) DDM estimates expected UK risk
between 4.83% and 5.08% (6.35% and 6.43%).
2-stage (3-stage) RIM estimates expected UK risk
between 6.78% and 7.19% (7.05%% and 7.75%).
In terms of return prediction of DDM and RIM, as shown
in Table 7:
For all horizons the predictive power of the 2-stage
DDM is the greatest compared to 3-stage DDM and
both RIM specifications.
The slope coefficients on expected returns are
significantly positive for most of the horizons and
models.
Comments:
1. Discussions
Quite some managers use DDM/RIM for the purposes of stock
evaluation and stock/bond allocation. The results in this paper
can be used as an effectiveness of benchmark.
The paper compares two widely used expected return estimation
models on a relatively new dataset, our concerns:
As stated in the paper, one common weakness of both
models is the assumption about constant growth rates in
the future, which is certainly violated once the expected
returns are time varying or if the proxy used in the
literature long-term earnings growth rate from analyst
forecasts- are noisy.
Another drawback of having multi-stage DDM and RIM

models is the underlying assumption about the jumps in
dividend and book-value of equity values, which can
imply confusing book-to-market ratios.
2. Data
The study employs companies that are members of the Euro
Stoxx, Euro Stoxx-50 and FTSE-100.
Current share prices, market capitalizations, last cash
dividends, expected earnings, treasury yields and the
book values of equity capital are taken from Bloomberg
database.
Consensus forecast of long-term earnings growth is
provided by First Call.
Real GDP growth and inflation rate for European countries
are taken from Consensus Economics Inc.
Individual stock returns are taken from Datastream.
Paper Type:
Working Papers
Date:
2008-06-08
Category:
Analysts forecast dispersion, Global markets
Title:
The Dispersion Effect in International Stock Returns
Authors:
Markus Leippold, Harald Lohre
Source:
SSRN working paper
Link:
Summary:
This paper documents that

the European evidence of High
dispersion in analysts earnings forecasts, low returns is unique
only to the internet bubble period, but the US evidence is much
more persistent.
For European stocks, the average hedged return is 5.9%
per year, while the U.S profit is 10.7% per year
Yet in European countries, such dispersion effect only
exists in 3 out of 20 years (i.e., the internet bubble time),
while in US it exists in most years.
Dispersion effect is strongest where
stocks have bad news as reflected by dropped
analyst coverage
stocks have less analyst coverage or high volatility
stocks have idiosyncratic risk
Reason for high dispersion, low returns: stock prices

tend to reflect the view of most optimistic investors
whenever there is disagreement (dispersion), since the
pessimistic investors views are often not reflected due to
short-sale constraints. When uncertainty is removed after
news release, high dispersion stocks will fall more
Reason that only US exhibit such effect: the US effect
may be due to high arbitrage costs, as the authors
suggest that the effect is particularly strong in high
idiosyncratic risk stocks (the stocks that are hard to be
hedged)
Comments:
1. Data
1987 2007 data for 16 equity markets, (15 European markets
+ the U.S.), including I/B/E/S earnings revisions data, are from
Datastream.
Paper Type:
Working Papers
Date:
2008-06-08
Category:
Analyst forecast bias, Reg FD, Global Analyst Research

Settlements
Title:
Conflicts of Interest and Analyst Behavior: Evidence from Recent

Changes in Regulation
Authors:
Armen Hovakimian, Ekkachai Saenyasiri
Source:
SSRN
Link:
Summary:
This paper finds that analysts forecasts were much less biased
after the Regulation FD (October 2000) and Global Analyst
Research Settlements
(December 2002, the settlement is an
agreement between U.S. regulators and 12 major investment
banks to eliminate research analysts conflicts of interest).
Before Regulation FD, analysts on average over-estimated
company earning by 2% of stock prices, and such biases
decrease as earnings release approaches (+3.3% 20
months before, +0.4% 1 month after the end of the
forecasted year.)
Reg FD reduced but does not eliminated forecast bias
forecast bias declines by 0.35% of the stock price
this may be driven by the unexpectedly poor

macroeconomic conditions
The Global Analyst Research Settlements had a much
stronger impact
mean forecast bias falls sharply to +0.6%
median forecast bias disappears
Paper Type:
Working Papers
Date:
2008-05-20
Category:
High dividend yield stocks, UK market, Global markets
Title:
Bank Stock Returns and Economic Growth
Authors:
Janusz Brzeszczynski, Kathryn Archibald, Jerzy Gajdka, Joanna

Brzeszczynska
Source:
SSRN Working Paper
Link:
Summary:
This paper finds that on average high dividend yield stocks in UK

outperform for most of the time.
An annually rebalanced portfolio
(made up of 10 highest yield stocks) generates a higher return,
even after adjusting for transaction costs, taxes and risk).
The high yield portfolio generates 28.2% annual return,
compared with the 6.7% FTSE100 index return.
The return standard deviation for the portfolio is 28.7%,
while the index is 17.2%.
Paper Type:
Working Papers
Date:
2008-04-09
Category:
Analysts, UK markets, global markets, Novel strategy
Title:
Sell side school ties
Authors:
Lauren Cohen, Andrea Frazzini, Christopher Malloy
Source:
Link:
http://faculty.chicagogsb.edu/andrea.frazzini/pdf/malcofrazII.pdf
Summary:
This paper finds that (before Reg-FD) equity sell-side analysts

that share educational backgrounds with firms' board members
have informational advantages.
More specifically, buy
recommendations from school-tied analysts outperform
recommendations from non-school-tied analysts by 5.4%
annually.
Worked for buy recommendations:
A portfolio that is long
on stocks after buy recommendations by school-tied
analysts and short on stocks after buy recommendations
by non-school-tied analysts earns 0.45% per month
(5.4% annually), the risk-adjusted return is 0.40% per
month.
Did not work for sell recommendations:
In the case of sell
recommendations, there is no difference in the raw
returns of portfolios associated with sell recommendations
by analysts with and without school ties.
When the long-short portfolio consists of stock upgrades
only, the profit is 0.35% and 0.30% per month, when the
ties are related with (i) both senior management and
board of directs and (ii) senior management only.
Only worked before Reg-FD:
In the Pre-Reg FD period,
the return premium from school ties is 8.16% per year,
while for the post-Reg FD period, the return premium is
nearly zero and non-significant.
Same pattern in UK:
there is a large and significant
school tie premium associated with buy
recommendations:1.87% and 1.67% per month in raw
and abnormal returns, respectively.
Comments:
1. Discussions
These are very interesting findings, especially when UK market
shows similar pattern. But we are not convinced by the economic
intuition of the story:
Though no one would has statistics, analysts would have
far more opportunity to meet a companys management
than board members.
Even if analysts meet board members, and such board
members know insider operational information, dare the
board members disclose insider information to someone
merely because they went to the same school?
We covered a related paper (whose rationale we do not agree),
The Small World of Investing:
Board Connections and Mutual Fund Returns
(
http://faculty.chicagogsb.edu/andrea.frazzini/pdf/w13121.pdf
),
where the same authors show that portfolio managers tend to
overweight stocks whose corporate board members share
education network, the likely reason is that such portfolio
managers may get more information than public. A strategy that
is long connected stocks held by fund managers, and short
nonconnected stocks generates 8.4% per year.
In a related paper by the same authors, Valuing Reciprocity,
(http://www.econ.yale.edu/~af227/pdf/malcofrazIII.pdf), it is
found that analysts who write good recommendations about the
firm are more likely to get appointed to board of directors of the
same company later on. The positive bias (13% in percentage of
strong buys) in the recommendations and long-term growth
forecasts of board-appointed analysts causes higher (though
limited) abnormal stock returns in the following year (2%).
2. Data
I/B/E/S contains all sell-analysts who provide at leas one
recommendation on domestic stocks.
The analysts' educational backgrounds are obtained from
http://www.zoominfo.com
and BrokerCheck search engine
available on the Financial Industry Regulatory Authority website.
Biographical information for boards of directors and senior
company officers is provided by Boardex of Management
Diagnostics Limited.
Accounting and stock return data is from CRSP/COMPUSTAT. The
sample includes educational background data on 1,820 analysts
issuing a total of 56,994 recommendations on 5,132 stocks
between October 30th, 1993 and December 20th, 2006.
Paper Type:
Working Papers
Date:
2008-03-16
Category:
Short interest; idiosyncratic risk, UK market, Global markets
Title:
Daily short interest, idiosyncratic risk, and stock returns
Authors:
Andrea Au, John Doukas, Zhan Onayev
Source:
SSRN working papers
Link:
Summary:
This paper finds that in UK stock market,

stocks with very high
and stocks with very low short interest levels outperform market,
and idiosyncratic risk plays a major role in the relationship
between short interest (short sales) and stock returns.
The authors use three ratios to measure the degree of
shorting:
SI_Avail (short interest (Shares on loan) divided
by available shares to lend (Shares in CREST));
SI_Float (short interest divided by float);
SI_Shrs (short interest divided by shares
outstanding).
In a value-weighted portfolio,
stocks with low short
interest have significant weekly abnormal returns of
0.15% (relative to the Fama-French market, size and
book-to-market factors), while stocks with high short
interest have weekly positive abnormal returns of 0.07%.
These results contradict US evidence that stocks with high
short interest enjoy negative abnormal returns.
Stocks with low short interest and high idiosyncratic risk
earn an average weekly return of 0.27% and 0.23%,
using equal- and value-weighted portfolios, respectively.
This finding suggests that idiosyncratic risk represents a
deterrent to arbitrage, and thus, short selling activity is
mostly concentrated in stocks with low idiosyncratic risk,
given the lower costs of short selling those stocks.
Comments:
1. Discussion
The inference is drawn from a three-year period, one would
prefer to use a long time horizon to draw a more statistically
meaningful conclusions about the relation of idiosyncratic risk,
short interest and returns. This is especially relevant given the
evidence confirmed in the paper that aggregate short interest
has been increasing over time.
There is some evidence that short interest forecasts negative
subsequent returns, in accordance to the idea that short-sellers
are well informed.
2. Data
2003/09-2006/09 daily FTSE 350 stock lending data is available
from CRESTCo Limited. The two stock loan variables obtained
from CREST dataset are (1) Shares on Loan, which is a proxy for
short interest, and (2) Shares in CREST, which is a proxy for the
availability of lendable stocks.
Data on stock returns, market capitalization, shares outstanding,

float and book-to-market (BM) ratios are from WorldScope and
FTSE.
Paper Type:
Working Papers
Date:
2008-03-16
Category:
Accruals, UK market, Global markets
Title:
The Accruals Anomaly - Can Implementable Portfolio Strategies

be Developed that are Profitable Net of Transactions Costs in the
UK?
Authors:
Nuno Soares, Andrew W. Stark
Source:
SSRN working paper
Link:
Summary:
In short, No. The paper profit disappeared after conservative

estimates of transaction costs are taken into account.
Moreover, accruals strategy profits significantly depend on
long/short relatively small capitalization stocks, where trading
cost and short cost can drastically lower profits
Paper Type:
Working Papers
Date:
2008-02-04
Category:
IFRS, European countries, earnings comparability, Global

markets
Title:
International Earnings Comparability
Authors:
Chirstof Beuselinck, Philip Joos, Sofie Van der Meulen
Source:
London business school working paper
Link:
http://www.london.edu/assets/documents/PDF/07sym60PJ.pdf
Summary:
The paper documents that, in 14 EU countries from 1990-2005,
the introduction of mandatory accounting standard (IFRS) does

not necessarily result in a switch towards similar reporting
behavior.
Instead, reporting incentives still play the most
significant role. Key findings:
In terms of earning trends, overall earnings decreased
over time during this period, similar to the US case,
which has been attributed to the growing
profitability gap between small and large firms in
many industries.
In terms of earning variations, it increased during this
period,
this is due to the increased level of competition
after the disappearance of economic barriers with
the unification of EU.
such earning variation is explained very little by
country factors (4%) or business cycles (3.9%
4.5%), but more by the industry factors (15%)
and company size (10.6%).
Accruals-cash flow correlation which is an important
indicator showing how synchronized the accounting
reporting behavior across firms is varies across countries
and the correlation differences increase over time like the
earnings variation.
EU firms recognize economic losses differently
across different business cycles.
specifically, during economy recession they tend to
be larger, while during economy booming, they
tend to be smaller.
Comments:
1. Discussions
IFRS is expected to make life easier for international quant
managers. This paper brings good insights, and shows that the
changes in economy environment play a more important role on
companies reporting behavior than introduction of a unified
accounting standard.
Concerns we have is related to the statistic treatment of the
paper:
The normality assumption for explanatory variables using
the variance decomposition model can be questionable
given the set of variables used in the paper.
Another issue with the variance component analysis is the
absence of the techniques to provide significance testing
on the estimated coefficients. In other words none of the
results in the paper are reported with any significance
levels.
2. Data
1990-2005 financial statement data from Thomson Worldscope.

Individual company accounting data is collected for 14 of 15 EU
countries; Luxembourg is excluded because of insufficient firmyear observations.
Paper Type:
Working Papers
Date:
2008-02-04
Category:
Emerging Market, Bond Funds, Global markets
Title:
Emerging Market Bond Funds: A Comprehensive Analysis
Authors:
Sirapat Polwitoon, Oranee Tawatnuntachai
Source:
The Financial Review
Link:
http://www.thefinancialreview.org/PDF/Polwitoon-Tawatnuntach
ai-Emerging-Market-Bond-Funds.pdf
Summary:
This paper presents an analysis of emerging market bond funds

and shows that
On average emerging bond funds u
nder-perform
benchmark index
in terms of both total returns and risk
adjusted returns.
This underperformance is greater than expense
ratio.
On average emerging bond funds o
utperform
domestic and global bond funds
in terms of both
total return and risk adjusted returns
Emerging bond funds provide incremental diversification
benefits to all existing bond and equity portfolios and
these benefits are statistically and economically
significant.
Holding the portfolio risk constant, the US
investors can enhance return by 0.97% to 1.5%
per year by adding 20% emerging bond funds into
their existing portfolios.
Comments:
1. Discussions
The author presents a comprehensive analysis of the emerging
market bond funds with special attention to statistical analysis
problems that may rise due to limitation of data such as short
time series and survivorship bias). The presented results are
interesting especially as the considered time period includes

events such as Asian, Russian, Brazilian and Argentinean crises.
On a technical note, the authors try to explain the return
differences between emerging and domestic bond funds and
global bond funds by considering a number of factors such as
exchange rates and "differences in market characteristics".
However, the majority of the emerging bonds that they are
analyzing are denominated in US dollar, so exchange rate is not
a good factor to be considered.
For "market characteristics difference" the authors use the
difference in returns between Citigroup Global Emerging Market
SovereignCapped Bond Index (ESBI) and the emerging bond
funds as explanatory variable and show the substantial increase
in R square. However, this is not an appropriate measure of
difference in market characteristics (such as liquidity) and the
increase in R squared is mechanical.
2. Data
1996-2005 emerging bond fund data are from Morningstar
Principia. The final sample of emerging bond funds consists of 50
funds.
Paper Type:
Working Papers
Date:
2008-01-17
Category:
International Financial Reporting Standards (IFRS), Global

markets
Title:
Mandatory IFRS Reporting around the world: Early evidence on

economic
Authors:
Holger Daske, Luzi Hail, Christian Leuz, Rodrigo Verdi
Source:
Link:
Summary:
This paper founds that adapting International Financial Reporting

Standards (IFRS) has a positive impact on adapting firms
liquidity and valuations.
The introduction of International Financial Reporting
Standards(IFRS) for listed companies around the world is
one of the most significant changes in accounting history.
Comments:
IFRS as a "global accounting language" was initiated by

International Accounting Standards Board (IASB), and
has been adopted (or plan to adopt) by 100+ countries,
mostly in the European Union and many Asian economies.
The U.S. Securities and Exchange Commission (SEC)
announced in 2007/11 that it wouldld allow foreign
companies in U.S. capital markets to report under IFRS,
and its planning allowing domestic firms choose between
reporting under GAAP or IFRS
The paper examines the economic consequences of IFRS
in terms of market liquidity, cost of capital and Tobins q
(ratio of the market value to a firms assets ) in 26
countries.
Aggregate liquidity and equity valuations uniformly
improve with the adaptation of IFRS reporting (compared
to the benchmark portfolio of non adapting companies)
The percentage of days without trades declines by
97 basis points for first time adapters (close to 4%
improvement in liquidity) and total trading costs
and bid - ask spreads both decline by 12 basis
points.
After the adaptation the median Tobins q
increases by 2.1% compared to the sample of
benchmark companies
Cost of capital benefits exist only in countries with strong
enforcement regimes and institutional environments that
provide strong reporting incentives.
This effects are weaker
when local GAAP are closer to IFRS standards
in countries with IFRS convergence strategies
(where countries already adapted regulations
inline with IFRS before)
in industries with higher voluntary adoption rates
for mandatory adopters (While the effects on
liquidity and valuations are statistically significant
they are much higher for voluntary adopters)
1. Discussions
As stated in the paper, many countries in the world have
substantially revised their enforcement, auditing and governance
regimes to support the introduction of IFRS rules, which makes it
hard to claim that IFRS reporting solely affects the observed
patterns.
The sample used in the paper is a relatively short time period
and therefore it is hard to claim that all the effects will be
persistent in the long run.
It is interesting to note that the improvement in liquidity and

decrease in cost of capital are higher for the stocks which adapt
the rules voluntarily in a mandatory IFRS regime.
2. Data
The firm year analyses cover all the firms with fiscal years
ending on or after January 1, 2001 through December 31, 2005.
International company specific data and inflation are from
Datastream. The paper uses Woldscope for international
accounting data. I/B/E/S is employed for analyst forecast data.
The sample includes 37,000 firm-year observations and 3,800
first time adapters
Paper
Type:
Working Papers
Date:
2007-12-26
Category:
UK short interest, Global markets
Title:
Patterns in Stock Lending
Authors:
James Clunie, Yi Wu
Source:
internet
Link:
http://shortstories.typepad.com/globalequities/files/patterns_in_stock_lendi
ng.doc
Summary: This paper founds that (only) for non-dividend paying stocks, the most
shorted quintile UK stocks yield -1.70% abnormal return one month after
the observation date.
For FTSE 10 stocks, the average proportion of shares on loan is
3.90%, whereas for FTSE 250 it is 2.33%
The average percentage on loan increases with the
dividend yield (sug esting that security borrowing is
associated with dividend tax arbitrage and dividend capture
activities)
how active the stocks trades
past performance
On a sub-sample containing only non-dividend paying stocks (thus
eliminating the effect of dividend tax arbitrage), the most shorted
quintile UK stocks yield -1.70% abnormal return one month after the
observation date. Such effects disappeared when using all stocks
There is no weekend effect, and there is also no evidence that stocks

with greater price-to-fundamentals ratios have greater lending
activity.
There is some evidence that borrowers are subject to
short-squeezes in response to predatory trading from other market
participants.
Comment
s:
1. Discussions
This paper documents a significant future under-performance of short-sold
stocks among non-dividend payers. This is meaningful for practitioners since
it may help refine quant strategies as well as understanding the motivations
behind stock borrowing.
Our concerns are:
Although the database available in this study is publicly available
(contrary to some other short- sales studies), the conclusions from
the study are draw on a very short time-series sample
(09/01/2003-09/27/2004) and therefore they are not very reliable.
We also can not infer the statistical significance associated with some
of the results stated above, since the authors do not provide
standard error estimates. It should also be important to estimate the
joint effect of dividend yield, turnover, volatility, past returns, and
valuation ratios on stock lending percentages, to assess the relative
importance of each of those factors.
2. Data
09/01/2003-09/27/2004 daily number and value of shares on loan for each
stock in the FTSE 100, FTSE 250 (mid-cap) and FTSE 350 indexes are
obtained from a commercial database (Data Explores Ltd) based on
information provided by CREST, the organization that makes the settlement
of all trades on the London Stock Exchange.
Paper Type:
Working Papers
Date:
2007-12-26
Category:
Leverage, UK, Global markets
Title:
An Empirical Test on Leverage and Stock Returns
Authors:
Sheeja Sivaprasad, Yaz Gulnur Muradoglu
Source:
SSRN working paper
Link:
Summary:
This paper finds that for

1980-2004 UK non-financial stocks, the
impact of leverage on stock returns varies

among sectors.
In the classic Modigliani & Miller (M&M) theory, expected

stock returns should increase with financial leverage.
When all non-financial firms are included in the regression
analyses, (excess) stock returns
decrease
with financial
leverage.
The regression result varies from sector to sector:
In utilities sector, stock returns
increase
in
financial leverage
In sectors such as industrial, consumer goods and
consumer services, stock returns
decrease
in
financial leverage
Comments:
1. Discussions
The classic Modigliani and Miller theory implies that expected
stock returns should increase in sync with financial leverage.
While it is beautiful theoretically, it is never perfectly in line with
realities all the time and in all the sectors.
This paper shows that the leverage result is not explained by
returns on four Fama-French-Carhart risk factors of market, size,
value and momentum. Therefore, firms financial leverage may
contain additional information about the cross-sectional
distribution of stock returns.
Our concern is, the statistical analyses presented in the paper
are not comprehensive and more work need to be done to reach
conclusive results. Further, the paper does not explore what are
the driving forces behind the mixed relation of stock returns and
leverage in different market sectors are. Does the business cycle
play a role? How about different regulations across different
market sectors? These are open questions that require further
work.
2. Data
1980-2004 UK stock data from DataStream database (Only
non-financial firms are analyzed).
Paper Type:
Working Papers
Date:
2007-12-03
Category:
Liquidity, UK, Global markets, novel strategy
Title:
Cross-Sectional Stock Returns in the UK Market: the Role of

Liquidity Risk
Authors:
Soosung Hwang, Chensheng Lu
Source:
2007 EFM conference paper
Link:
20MEETINGS/2007-Vienna/Papers/0680.pdf
Summary:
This paper examines the role of liquidity on stock return for UK

stocks from1987-2004.
Liquidity is measured using the absolute
change in stock price per unit of turnover (defined as the fraction
of firm market capitalization traded). Key findings:
Liquidity works well in UK
: stocks with highest decile of
liquidity outperform low liquidity stocks by a significant
18% annually on risk-adjusted basis (size, value,
momentum, and macroeconomic factors)
Such liquidity factor is correlated with, but has extra
explanation power to the value factor
Size works opposite to US pattern
: stocks with largest
decile of market cap outperform small stocks by a
insignificant 5.7% on risk-adjusted basis
Value works in UK
: stocks with highest decile of
book-to-market ratio outperform low book-to- market
stocks by a significant 10% on risk-adjusted basis
Comments:
1. Why important
This paper illustrates the point that, although most quantitative
financial studies originate in the US market, one should never
take for granted that all quant factors work universally.
2. Data
1987 2004 UK stock pricing and trading volume data are from
DataStream.
Paper Type:
Working Papers
Date:
2007-11-18
Category:
Overreaction; Price Reversals; Asia Pacific markets, Global

markets
Title:
Abnormal Returns after Large Stock Price Changes: Evidence

from Asia Pacific Markets
Authors:
Pham Vu Thang Long, Do Quoc Tho Nguyen and Thuy Duong T
Source:
2007 Oxford Business & Economics Conference
Link:
http://trintrin.com/obec/Pham%20Vu%20Thang%20Long,%20D
o%20Quoc%20Tho%20Nguyen,%20Thuy-duong%20To.doc
Summary:
This paper finds mixed results of stock price reversal in three

Pacific markets (Australia, Japan and
VietNam) from 2001 to 2005. Key findings:
In the case of large price declines,
Reversal in Australia and Vietnam: the average
cumulative abnormal return (CAR) for 10 trading
days following large price decrease is 1.86% in
Australia, and CAR for 3 trading days is 0.57% in
Vietnam.
These profits are statistically significant and may
be arbitrage opportunities.
Reversal does not exist in Japan, and CAR1 10
shows a 1.19% with a t stat of -1.7
In the case of large price increases,
Reversal in Japan: CAR1 3 is 1.1%
Momentum in Australia: CAR1 20 is 3.5%
Very weak in Vietnam.
"The authors claims that the profit is not worthy to
exploit since it is less than the profit from passive funds
Market conditions, i.e., bear or bull, does not explain the
magnitude of price reversals.
Comments:
1. Why important
In a much earlier paper, it is found that in Asia Pacific markets at
market index level (Australia All Ordinaries Index and Japan
Nikkei 225 Index), indices prices exhibit one day momentum
after a large one-day price change. This study utilizes individual
firm data and provides a different perspective.
Although the authors claim that the profit is not worthy to
exploit since it is less than the profit from passive funds. We
think this strategy may still be useful for short term investors.
Negative autocorrelation in US Markets between high frequency
returns is a known phenomenon, and have been proven by many
to be not a good strategy to make money. This paper takes it to

(arguably less efficient) world markets and lends support to over
reaction hypothesis. We note that negative market returns
happen in clusters. Hence econometrically, the paper will be
better supported if a clustered event study is done for negative
return shocks. Also a benchmark of Fama French 4 factor model
will help give more credence to the results.
2. Data
The sample is large stocks of three different markets, i.e. 100
firms comprising the ASX 100 index (Australia), 300 firms
included in the Nikkei 300 (Japan) and 33 firms trading on the
Ho Chi Minh City Securities Trading Center (Vietnam).
Paper Type:
Working Papers
Date:
2007-10-29
Category:
IPO/SEO, Global markets
Title:
Share Issuance and Cross-Sectional Returns: International

Evidence
Authors:
David McLean, Jeffrey Pontiff, Akiko Watanabe
Source:
SSRN working paper
Link:
Summary:
This paper finds that,

in a sample of 41 countries, stocks with
high (low) past 1-year or 5-year net share
issuance has low
(high) returns in future 1-month to 3-year returns

. Key findings:
A one standard deviation increase in annual issuance
leads to a 0.16% decline in the cross section of monthly
returns.
Both past 1-year and 5-year net share issuance can
predict stock future 1month to 3year returns, most
significantly for 1 month.
Firms with high past returns are more likely to issue
shares.
Yet in sharp contrast with US evidence, value (ie high
book-to-market) stocks more likely to issue shares, and
growth (ie, low book-to-market) stocks are more likely to
repurchase stocks.
Comments:
Regarding stock repurchase (buyback): generally weaker

predictive power than stock issuance, and exists only in
small stocks
1. Discussions
First of all, it is always good to confirm an effect in different
markets.
All regression in the paper is done by pooling all stock data for
25 years and 41 countries, without separating the different
countries and sub-periods. We think its likely the authors will
find different patterns in different countries. This said, we are
cautious of some findings in the paper:
We doubt that outliers or statistic treatment errors lead to
the findings that "value stocks are more likely to issue
stocks and growth stocks do the opposite". Such
conclusion is very counter- intuitive.
The finding that ... issuance effect is generally greater in
the U.S. than in international markets is also a little
surprising, given that arguably there are far more quant
shops invest in US markets using such strategies.
2. Data
1981/07 - 2006/06 data for accounting and stock returns data
are from Thomson Datastream. 41 non-U.S. countries are
covered. Two largest markets are Japan and UK. Share issuance
is measured as the real change in shares outstanding, (ie, its
adjusted for distribution events such as stock splits and stock
dividends)
Paper Type:
Working Papers
Date:
2007-10-16
Category:
Consumer confidence, Investor sentiment, Global markets
Title:
Investor sentiment, herd like behavior and stock returns:

Empirical evidence from 18
Authors:
Maik Schmeling
Source:
EFMA 2007 Vienna Meetings conference paper
Link:
Summary:
This paper finds that consumer confidence (as a proxy for

individual investor sentiment) can
negatively
predict future
stocks market returns in 10 out of the 18 countries studied
Key findings:
Even after controlling for commonly used macro risk
factors, there is a significant impact of investor sentiment
on aggregate stock returns
For Austria, Italy and Japan a two standard deviation
shock of sentiment leads to a decline in returns in the
following month of 0.25%, 0.50% and 1.20%
respectively. For US, it is only 0.12%.
The effect is stronger in countries with less efficient
markets.
The impact of sentiment on stock returns is stronger in
countries in that are culturally more prone to herd like
behavior.
Comments:
1. Why important
Overall, statistical significance is only obtained for 10 of 18
countries, indicating that the negative effect of sentiment on
stock returns does not seem to be a universal phenomenon
across countries. But where it is obtained, consumer confidence
may help refine quant strategies
The findings here echo the notion that retail investors tend to
lose money, and their sentiment can be used a contrarian sign.
We have reviewed several papers covering related topics. For
example, in How to Make Money in a Bear Market: Learning
from Options and Futures Traders (
http://www.d-caf.dk/links.pdf), the authors propose a market
timing strategy that uses "hedging pressure" (futures positions
of retail investor) to optimally allocate assets between stocks
(S&P 500) and gold. The reason is that "hedging pressure"
represents small investors view of markets, and such investors
tend to be wrong in market timing.
From Table 4 and Table 5, we see that estimated coefficients for
the relation between sentiment and value (growth) stocks varies
internationally. The paper shows an impact of a two standard
deviation sentiment movement on value (growth) stocks for the
U.S. of 0.11% (0.13%), for Austria of about 0.40% (0.30%), for
Japan of 1.37% (1.25% ). Interestingly, these numbers shows
that the pricing of the sentiment factor is
not
very different for
value and growth stocks.
2. Data
For the period of 1985/01 2005/12, 18 countries (U.S., Japan,
Australia, New Zealand and 14 European countries) are covered.
For each of the 18 countries a monthly measure of consumer
confidence, monthly returns for (a) the aggregate stock market,
(b) a portfolio of value stocks and (c) a portfolio of growth stocks

has been used for analysis. Stock market data come from Prof.
Kenneth Frenchs web site. For all 14 European countries the
data comes from the Directorate Generale for Economic and
Financial Affairs (DG ECFIN). Confidence indices for the
remaining countries are obtained from Datastream. The Michigan
Survey has been used as an instrument for US consumer
confidence.
Paper Type:
Working Papers
Date:
2007-10-16
Category:
Global markets, oil price, asset allocation
Title:
Striking Oil: Another Puzzle?
Authors:
Gerben Driesprong, Ben Jacobsen and Benjamin Maat
Source:
ABP research paper
Link:
http://www.abp.nl/abp/abp/images/8.%20StrikingOil_tcm108-485
27.pdf
Summary:
This paper finds that oil price changes negatively predict stock
returns worldwide.
Key findings:
During 1973-2003, oil price changes negatively predicts
stock indices returns for 12 out of 18 countries and the
world market index.
One standard deviation increase in oil prices (a rise of 10.78
percent) in one month lowers the expected return in the
next month to below zero (-0.1%) for world markets. As a
comparison, when there is no oil price changes over 1
standard deviation, the average monthly return for the
world market index is 0.8%
As the Treasury bill rate for the United States averages
0.0054 (0.54%) per month over the sample period, any oil
price increase higher than half a standard deviation from
the mean forecas ts negative excess returns.
For a shorter data sample (1988-2003), similar results hold
for emerging markets although less pronounced
The predictability of stock market returns seems to qualify
as an anomaly as a higher oil price risk does not lead to
higher stock market returns.
Comments:
1. Discussions
This is one of the first papers to document the significant
predictability of stock returns using oil price changes. Results in the
paper should be interesting for quant equity as well as asset
allocation managers.
One extension will be to see how the oil price sensitivity has
changed over the years (intuitively the sensitivities are going up
recent years) and what styles/sectors are most sensitive. The
authors discussed the correlation between oil price changes and
several economic variables (Default spread, Term structure,
Dividend yield). We think it should also be interesting to add more
macro factors (eg., GDP growth, inflation) in the model for higher
predicting power. For example, when inflation rises, expected stock
return should be lower.
Other unanswered questions:
Is the sensitivity the same when oil price goes up and goes
down(seems we have seen more headlines like stock
indexes fall as oil climbs than stock indexes rise as oil
falls)
Does there exist a threshold for oil prices that makes the
sensitivity very high?
Other related research include The Stock Market Reaction to Oil
Price Changes
(http://price.ou.edu/academics/cfs/doc/The_Stock_Market_Reactio
n_to_Oil_Price_Changes.doc), where it is found that
The negative relationship between daily oil price changes
and stock indices only exist for large oil price changes
No asymmetry in market reaction to oil price increases and
decreases
intensive and non intensive industries can both be sensitive
to oil price changes
Oil Price Shocks and Emerging Stock Markets: A Generalized VAR
Approach (http://www.usc.es/economet/reviews/ijaeqs122.pdf),
where it is found that t oil shocks have no significant impact on
stock index returns in emerging economies.
2. Data
1973/09 2003/04 monthly data for 18 developed countries and a
world market index are used in this study. All stock indices are end
month value weighted MSCI reinvestment indices. For 30
developing markets, 1988-2003 data MSCI reinvestment indices.
Oil prices are proxied by Arab Light crude oil. The authors start
their analysis at the beginning of the Yom Kippur War in October
1973, as this is when oil prices started to fluctuate.
Paper Type:
Working Papers
Date:
2007-09-23
Category:
Fama French Factors, Global markets
Title:
International Factor Linkages
Authors:
Hyung Suk Choi, Cheol S. Eun and Suzanne S. Lee
Source:
EFA 2007 Lju bljana Meetings conference paper
Link:
Summary:
This paper studies the relationship among country specific Fa

French risk factors. Key findings:
Fama French actors of different stock markets are co
integrated with each other, i.e. they have long run
equilibrium relationships.
During a sudden change (shock) of financial systems,
market and size factors revert to mean(equilibrium state)
much faster than value and momentum factors.
Momentum factor overshoots the equilibrium while other
factors adjust towards the equilibrium values immediately
after the shock.
US market factor and UK size and momentum factors are
strongly co integrated with other economies.
Comments:
1. Why important
Empirical evidence suggests that the domestic version of Fama
French factor model (use different regression model for different
markets) better explains stock returns than the world version
(one regression for all markets). This paper is an important step
to connect the factors for local markets.
2. Data
2000/01 2005/12 Fama French factors and the momentum
factor (UMD) for six major developed stock markets, i.e.,
Canada, Germany, Hong Kong, Japan, UK and USA.
3. Discussions
High worldwide co integration with US market factor suggests
that US investors will have a harder time diversifying away from
US market factor
, and hence the price of US market risk will be
higher than value factor which has no clear dominant nation.
The paper also suggests that investors may try to take positions
betting that market and size factors will be restored to
equilibrium fast. Value factor may take a long time to reach
equilibrium again and momentum will overshoot suggesting
that these might not be good trades for fast returns expected
from stat arb trades.
One possible concern with the paper is that the results are based
upon a relatively small time period. 20002005 has been a period
of rapid integration of economies, and since 2001, a period of
continued economic growth worldwide. However, structural
breaks in economies such as the great depression of 1929, world
wars, oil shocks of 70s, fall of USSR in 1991, Russian default of
1998 could change the results.
Paper Type:
Working Papers
Date:
2007-08-23
Category:
Momentum, trading cost, UK, Global markets
Title:
The Post Cost Profitability of Momentum Trading Strategies:

Further Evidence from the UK
Authors:
Sam Agyei-Ampomah
Source:
2006 EFMA conference paper
Link:
http://www.efmaefm.org/efma2006/papers/697364_full.pdf
Summary:
This paper find that in UK from 1988 2003,

short-term
momentum (up to 6 months) strategy profits largely disappears
after factoring out transaction costs, even for those large and
liquid stocks.
But longer term momentum strategy profits
remains
Paper Type:
Working Papers
Date:
2007-08-08
Category:
Value, growth, style migration, European large cap stocks, Global

markets
Title:
Antti Pirjet, Vesa Puttonen
Authors:
Style Migration in the European Markets
Source:
HSE working paper
Link:
http://hsepubl.lib.hse.fi/pdf/wp/w426.pdf
Summary:
Using a buy hold, no rebalance strategy, this paper finds that

during 2001/12-2006/12, among large
cap European stocks,
value outperforms growth, and the
combination of value and "return on invested

capital(= equity +
debt), ROIC) can greatly boost value strategy.

Key findings:
Comments:
During 2001/12 2006/12, value portfolio has 5%+ higher

raw returns and higher Sharpe ratios, though its volatility
and beta is also higher. Such out performance is not
correlated with market condition(whether market is going
up or going down)
Style migrants (stocks that change from value to growth)
yields highest raw and risk adjusted
returns, and stocks
with high P/BV and ROIC are most likely to migrate.

Combination of value and "return on invested capital (=
equity + debt), ROIC)" can greatly boost
value strategy.
Value stocks have more volatile earnings, higher beta,

lower ROIC (return on invested capital), and
have been
greatly improving operating performance (profitability)
and return on invested
capital.
According to standard Portfolio theory, the MSCI Europe

benchmark index is not as efficient as a value strategy
based on P/BV.
1. Why important
Figure 5 is very telling in that it shows the evolution process of
value/growth stocks for the past 5 years. It's interesting (and
surprising) to see that during the past five years, it's value firms
(not growth firms) that have been greatly improving operating
performance (profitability) and return on invested capital. They
also have higher beta. Growth companies seem not live up to
their "growth" name.
2. Data
2006 data on 500+ largest European stocks are from Thomson
Datastream and WorldScope. MSCI Europe Index is used as
benchmark.
3. Discussions
Migration is an interesting topic. We earlier covered a related
paper, "Style Migration and the Cross Section of Average Stock
Returns
(
)
which studies "style migrants", i.e. stocks with large changes in

their style characteristics (size/book-to-market/momentum) in
the past years. It is found that such stocks seem under valued as
they exhibit a higher return compared with other stocks, and a
higher covariance with the style cohort.
Paper Type:
Working Papers
Date:
2007-06-20
Category:
Liquidity, UK, Global markets
Title:
Sectional Stock Returns in t he UK Market: the Role of Liquidity

Risk
Authors:
Source:
Link:
Summary:
This paper examines the role of liquidity on stock return for UK

stocks from1987 2004. Liquidity is measured using the absolute
change in stock price per unit of turnover (defined as the fraction
of firm market capitalization traded). Key findings:
Liquidity works well in UK:
stocks with highest decile of
liquidity outperform low liquidity stocks by a significant
18% annually on risk adjusted basis (size, value,
momentum, and macroeconomic
Such liquidity factor is correlated with, but has extra
explanation power to the value factor.
Other findings:
Size works opposite to US pattern :
stocks with largest
decile of market cap outperform small stocks by a
insignificant 5.7% on risk adjusted basis
Value works in UK :
stocks with highest decile of book
market ratio outperform low book market stocks by a
significant 10% on risk adjusted basis
Comments:
1. Why important
This paper illustrates the point that, although most quantitative
financial studies originate in the US market, one should never
take for granted that all quant factors work universally.
2. Data
DataStream.
Paper Type:
Working Papers
Date:
2006-12-03
Category:
International Diversification, Global markets
Title:
Is the International Diversification Potential Diminishing? Foreign

Equity Inside and Outside the US
Authors:
Karen K. Lewis
Source:
NBER working paper
Link:
http://www.nber.org/papers/w12697
Summary:
Although people believe that markets have become significantly

more integrated over past 20 years this paper finds that
the
covariance between
foreign markets and the US market have
only
slightly
increased, yet
foreign stocks
listed in
US
are now
significantly more correlated with US market.

Implications on
foreign stocks allocation was discussed.
Paper Type:
Working Papers
Date:
2006-10-20
Category:
Industry effect, developed/emerging markets, Global markets
Title:
The differing importance of sector effects for developed markets

versus emerging markets
Authors:
Jianguo Chen, Andrea Bennett, Ting Zheng
Source:
2006 Asia finance conference paper
Link:
http://asianfa-admin.massey.ac.nz/paper_org/360314_org.pdf
Summary:
In developed markets, sector effects are as important as

country effects
In emerging markets, country effects still dominate

slowing rising sector effects
Paper Type:
Working Papers
Date:
2006-10-06
Category:
International Diversification, size, Global markets
Title:
International Diversification with Large- and Small-Cap Stocks
Authors:
Cheol Eun, Wei Huang and Sandy Lai
Source:
China International Conference in Finance paper
Link:
http://www.ccfr.org.cn/cicf2006/cicf2006paper/20060201092639.pdf
Summary:
For US stock investors, foreign small-cap stock funds are better

option in terms of risk diversification. The reason: for each of the 10
open capital markets studied (Australia, Canada, France, etc), the
large-cap (small-cap) fund has the highest (lowest) correlation with
the U.S.
Paper Type:
Working Papers
Date:
2006-08-24
Category:
Liquidity measure, emerging markets, novel strategy, Global markets
Title:
Liquidity and Expected Returns: Lessons from Emerging Markets
Authors:
Geert Bekaert, Campbell R. Harvey, Christian Lundblad
Source:
Duke University working paper
Link:
http://faculty.fuqua.duke.edu/~charvey/Research/Working_Papers/
W67_Liquidity_and_expected.pdf
Summary:
This paper proposes a liquidity measure for emerging markets based

on the proportion of zero daily stock returns. It is shown that the this
measure can predict future returns better than the alternative
measures (e.g. turnover).
Comments:
1. Why important
More money are moving into international stocks than ever, yet for
quant practitioners, international stock data are notorious for paucity
and low quality. We believe that the simple liquidity measure
proposed in this paper can be of help. The authors also discussed an
asset pricing model, whose factors include liquidity and the market
portfolio, and the model can differentiate between integrated and
segmented countries and time periods.
2. Data
1993-2003 data of stock returns in 19 emerging equity markets (in
local currency) are from the Datastream research, country index
data are from Standard Poors Emerging Markets Database (EMDB).
3. Discussions
By using the zero-return measure to gauge liquidity, this paper
seems to be more useful to international managers who cover not
just large cap universe. Though the paper studies emerging market
countries in S&P/IFC Global Equity Market Indices, such countries
have a large overlap with those covered in the more popular indices
(MSCI emerging markets).
Those more statistics-savvy may like the model developed in the
paper, since it can be applied to markets both integrated and
segmented, reflecting the fact that quite some emerging markets are
going liberalization stage.
Paper
Type:
Working Papers
Date:
2006-06-29
Category:
Modeling, global stocks, momentum, risk
Title:
What Factors Drive Global Stock Returns?
Authors:
Kewei Hou, G. Andrew Karolyi, Bong Chan Khob
Source:
Wharton working paper
Link:
http://finance.wharton.upenn.edu/department/Seminar/2006Spring/micro-
Summary:
The authors test what factors are important for explaining stock returns in
49 various stock markets. Three factors are identified: momentum, cash
flow/price, a global market risk factor. These three factors explain

cross-section of stocks returns on stock, country and industry levels.
Comments: 1. Why important

With investors interest in overseas stocks going up, we are seeing more
quant managers in international arena. This paper may be of help to
factor-picking in building an international stock model.
2. Data
Data of stocks in 49 countries from 1981 to 2003 period are from
DataStream International and Worldscope. Sector/Industry classifications
are based on FTSE Global Classification system.
3. Discussions
Can we improve such an all-inclusive model? Here are potential things one
can consider:
1.) Different modeling universe for different stocks some stocks are better
modeled on country-by-country basis, while some may be on sector-basis
(eg markets where there is cross-border integration (like EU)).
Practitioners need to judge what the best modeling universes are.
2.) Different factors for different stocks
The difference can be significant. Sector-based models are promising in our
view. Country-based models may also be feasible, now that the paper
shows a different (stronger) impact of B/M, momentum, cash flow/price in
developed countries than emerging market.
3.) A "contemporary" model
It should best reflect the current situation, as opposed to a model that is
statistically significant based on a 20-year history. After all, practitioners
want to predict what will happen next quarter.
4.) Adding extra factors, such as liquidity as mentioned in the paper.
Paper Type:
Working Papers
Date:
2006-06-02
Category:
Strategy, value, UK, Global markets
Title:
Dimension and Book-to-Market Ratio Again: The English Case
Authors:
Pedro Rino Vieira, Jos Azevedo Pereira
Source:
Link:
http://www.fma.org/Stockholm/Papers/DimensionnBooktoMarketR
atioAgain.pdf
Summary:
Applying the Fama-French model to UK stock market, this paper

found that the book-to-market effect work the opposite in UK than
in US, and the market factor (beta) of Fama-French model is the
only factor that can explain the UK stocks returns. It also finds
that in US higher volatility will lead to lower return.
Comments:
1. Why important
Free lunch in UK! Thats our first impression after reading this
paper. We find it intriguing since it directly tests a classic model in
UK market and presents rather surprising results - and quant
researchers like to be surprised by such findings. The result of the
paper seems to show that in UK those stocks with higher return do
not necessarily bear higher risk.
2. Data
The UK stock data are from DataStream and covers the period of
December 1982 to June 2002.
3. Discussions
To support the efficient Market Hypothesis (EMH), Fama-French
(1993) (had to) state that size and book- to-market are proxies of
risk. Book-to-market was claimed to proxy companies
distress-ness. The higher this ratio, the riskier a stock is since it is
more sensitive to certain business cycle. If this logic is right, then it
should be applicable to stocks worldwide, which is shown clearly
not the case in UK. The evidence presented in this paper reminds
us that we still need to know more about the risk-return
relationship in stock markets.
Can we build a profitable strategy based on this paper? Assuming
that the documented patterns will repeat themselves, then two
obvious possibilities are: 1.) long (short) UK stocks with low (high)
book-to market 2.) Long (short) US stocks with low (high)
volatility.
We should note that the assumption above is a bold one, especially
for people with a shorter term focus. Year 2003 is a great example
where all stocks with high volatility outperform their low-volatility
counterparts. This said, a quant manager, like it or not, needs a
macro-level view of the stock market to help enhance next month
or next quarters performances.

Paper Type:
Working Papers
Date:
2006-07-13
Category:
Strategy, style, value, momentum
Title:
Style Migration and the Cross-Section of Average Stock Returns
Authors:
Hsiu-Lang Chen, Russ Wermers
Source:
SSRN working paper
Link:
Summary:
This paper studies "style migrants", i.e. stocks with large

changes in their style characteristics (size/bookto-market/momentum) in the past years. Such stocks seem
under-valued as they exhibit a higher return compared with
other stocks, and a higher covariance with the style cohort.
Comments:
1. Why important
We are living in a "style" world - all stocks were labeled various
styles, and all mutual funds (in US) are required to reflect their
style in their fund names. The prototype of quite some investors
is that stocks in the same style segment should behave similarly
and generate similar returns.
The key contribution of this paper, in our view, is that it
documents investors over-emphasis on styles. As a result, those
"style migrants" seem under-valued.
2. Data
Compustat, this study covers all NYSE/AMEX/Nasdaq stocks with
necessary data.
3. Discussion
How is the Style Migrants different from high volatility stocks?
We note that the three style characteristics
(size/book-to-market/momentum) can all be driven by large
price changes. Is the "high style risk" merely another name for
"high price volatility stocks"? A quant manager would also need
to look at the Sharpe ratio and recent performance (given the
changing volatility environment these past 3 years).
We note that the style-migrants return results are the equal
weighted returns of all stocks under the sun. A value-weighted
result for recent years will definitely be helpful.
Paper Working Papers

Type:
Date:
2014-10-22
Categ
ory:
Momentum, information processing, industry shocks
Title:
Product Market Momentum
Auth
ors:
Gerard Hoberg and Gordon Phillips
Sourc
e:
SSRN Papers
Link:
Sum
Momentum strategies based on past returns of firms product market peers can
mary: generate monthly alphas of 1% - 2%
Intuition
Firm momentum can be driven by the slow transmission of information
from less visible industry links
The text-based network industry classification (TNIC) identifies industry
peers based on how similar their products are to each other
TNIC offers more precise industry classifications that can significantly
differ from traditional SIC or NAICS industry classifications
Less investors are aware of such links, hence stronger momentum returns
The uniqueness measure assesses the degree to which any firm can be
replicated in the product market
Based on the optimized weighted average product offerings of
available rival firms
Disparity is a measure of the extent to which TNIC industries do not
overlap with SIC-3 peers
Disparity = 1 (total sales of peers in the intersection of TNIC-3
and SIC-3 industry peer groups / the total combined sales of
peers in the union of TNIC-3 and SIC-3 peer groups overall)
Excess stock returns are decomposed into systematic and idiosyncratic
components
Systematic return is the predicted value from regressing excess
stock returns on the stock returns of the market factor, HML, SMB,
and UMD
Idiosyncratic return is the monthly excess stock return minus the
systematic excess stock return in the same month
Strong returns comovement between own-firm returns and TNIC peer returns
Only TNIC peer returns continue to predict own-firm returns after two
months (not SIC based peer returns) (Table 3)
The higher the disparity, the longer the comovement between TNIC peer
returns and own-firm returns and the higher momentum returns (Tables
4, 10)
The comovement between TNIC peer returns and own-firm returns is
weaker but longer for more unique firms, generating higher momentum
returns (Tables 4, 11)
Idiosyncratic peer returns create less initial comovement, but are priced
slowly and still predict own-firm returns after three months (Table 5)
TNIC peer returns from the previous 3, 6 and 11 months better explain
own-firm current returns than own-firm and SIC-3 peer past returns
(Tables 6, 7)
More similar TNIC peers generate more significant long-term momentum
(Table 8)
TNIC peer returns are significant for the full sample and the pre-crisis
period (Tables 5 - 11)
Portfolio formation
In each month t, sort firms into quintiles based on a given momentum
variables return (TNIC-based, SIC-3-based, or own-firm-based) from
month t-12 to t-2
Go long into highest quintile firms and short the lowest quintile firms
Hold for one month
TNIC-based momentum generates highest returns, particularly for high disparity
firms
Monthly momentum alphas for different strategies:
Source: Table 12
TNIC-based momentum strategies generate the strongest cumulative
abnormal returns over time:
Source: Figure 1
Data
U.S. firm data from Compustat
Business descriptions from the SEC Edgar website (10-K annual filings)
Paper
Type:
Working Papers
Date:
2014-07-21
Category
:
Price reversal, industry momentum, overreaction hypothesis
Title:
Simultaneous Reversal and Momentum Patterns in One-month Stock Returns
Authors:
Marc William Simpson, Axel Grossmann
Source:
Financial Management Association Paper
Link:
http://www.fma.org/Nashville/Papers/SimRevandMom.pdf
Summar
y:
A strategy of buying
losing stocks in the winning industries
and selling
winning stocks in the losing industries
can yield a monthly market adjusted
return of 2.82%
Intuition
Many fund managers tend to invest in recent winning industries and

then adjust individual stock holdings within each industry
As a result, losing stocks in the winning industries and winning stocks
in the losing industries tend to experience higher reversal
Portfolio construction (Dual Effects strategy)
Industry level
Stocks are grouped into 17 industry portfolios (based on SIC
codes) which are ranked based on the equally-weighted
industry return in each formation month
Select three worst (best) performing industries
Stock level
Within each industry, stocks are sorted into quintiles based on
their returns in each formation month
Bottom (top) quintile stocks are grouped together as the loser
(winner) stocks
Buy the losing stocks in the winning industries (Worst of the Best)
and short the winning stocks in the losing industries (Best of the
Worst)
Hold for one month
Comparable strategies:
Market-wide overreaction strategy: hold (short) losing
(winning) quintile of stocks in the overall market
Industry momentum: hold (short) stocks in the best (worst)
performing industries
Dual Effects strategy outperforms market-wide overreaction strategy and
industry momentum
source: the paper
Significant abnormal returns persist after controlling for market-risk,
size, book-value, January effect, and longer-term momentum effects
(Table 9)
Data
U.S. stock data from the Center for Research in Security Prices (CRSP)
Paper
Type:
Working Papers
Date:
2014-06-12
Category: Industry rotation, industry interdependencies

Title:
Industry Interdependencies and Cross-Industry Return Predictability
Authors:
David E. Rapach, Jack K. Strauss, Jun Tu, Guofu Zhou
Source:
SSRN Papers
Link:
Summary
:
Lagged industry returns are powerful predictors of individual industry

returns. A long-short industry-rotation portfolio based on predictive
regression forecasts can yield an annualized alpha of 7.82% - 12.28%
Intuition
Industry interdependencies imply that a positive cash-flow shock in
one industry has implications for cash flows in other industries
Information processing limitations prevent investors from
immediately working out the full implications of the cash-flow shock
for equity prices in other industries
This pattern results in cross-industry return predictability
Methodologies: Three types of predictive regressions
Method1 (Principal components): Extract information from 30
industries lagged returns into three factors
Method2 (Target-relevant factors): Extract a target-relevant factor
from the 30 industry returns that is maximally correlated with a given
industrys return in the subsequent month
Method3 (Adaptive LASSO): Estimate predictive regression models
that include lagged returns for all 30 industries as predictors
Lagged industry returns predict
Relationship is robust to all three strategies (Tables 2-6)
Lagged industry returns retain predictive power when controlling for
various economic variables used to predict industry returns (Tables 3,
5)
Industry-rotation portfolio construction
Generate a set of 30 industry excess return forecasts for the following
month (based on the predictive regression forecasts)
Sort industries in ascending order according to the excess return
forecasts and form equal-weighted decile portfolios
Create a long-short zero-investment portfolio that goes long (short)
the top (bottom) decile portfolio
Rebalance monthly
The strategy yields significant annualized alphas
Source: the paper
Results are robust to accounting for industry momentum (Table 7)
Industry-rotation portfolios perform particularly well during recession
periods (Table 7, Figure 2)
Data
30 industry portfolios from Kenneth Frenchs Data Library

Data range: 1960 - 2012

Type:
Date:
2013-08-02
Categ
ory:
Novel strategy, sin stocks, alcohol/defense/gambling/tobacco industry
Title:
Can it be Good to be Bad? Evidence on the performance of US sin stocks
Auth
ors:
Anders Karln and Sebastian Poulsen
Sourc
e:
Ume School of Business and Economics Working Paper
Link:
http://umu.diva-portal.org/smash/get/diva2:634943/FULLTEXT01
Sum
Sin stocks (stocks in alcohol/defense/gambling/tobacco industries) on average
mary: beat the market by 5.8% annually, a pattern that holds in past 50 years as well
as in the most recent five years. Tobacco industry has the highest abnormal
return
Background
The influence of societal norms on investment decisions has increased in
the last decades
Socially responsible investing (SRI) mutual funds now manage more than
11% of the total assets in the US in 2012
Some large institutional investors abstain from certain sin industries
such as alcohol/defense/gambling/tobacco
Define a SINDEX (Sinful Index) as value weighted indices of all the stocks
from these four sin industries
Sin stocks generate significant positive alphas
All industries have a positive mean return over the market (Table 4,
Figure 8)
The average annual excess return for SINDEX is 3.9 %
Tobacco Index (TINDEX) has the highest annual excess return of
8.0% (Table 11)
Alcohol Index (AINDEX), Defense Index (DINDEX) and Gambling
Index (GINDEX) has an annual excess return of 2.6%, 4.1% and
1.7% (Table 11)
SINDEX produces 5.7% annual alphas in Fama-French 3-factor
regressions (Table 6)
Low beta: the market coefficient slopes between 0.6 and 0.7
Indicating SINDEX is less volatile than the market
Decent performance in recent years (Table 7)
2007 - 2012 annual 4-factor adjusted alpha is 8.8%
Consistent out-performance (Figure 7)
10-year rolling alpha ranges from a low of 0.2% to a high of 0.9%
with an average of 0.5%
Source: the paper
Data
Equally weighted SINDEX outperforms even more (Table 13)

Abnormal returns range from 10.0% to 13.0% annually for CAPM,
3-factor model, and 4-factor model and all significant at the 1%
level
1973 - 2012 stocks data are from Datastream
The final sample includes 159 stocks, of which 76 were still actively traded

Paper
Type:
Working Papers
Date:
2013-04-30
Categ
ory:
Low beta/risk strategy, industry neutral
Title:
Low-Risk Investing Without Industry Bet
Autho
rs:
Cliff Asness, Andrea Frazzini, and Lasse H. Pedersen
Sourc
e:
Yale University working paper
Link:
http://www.econ.yale.edu/~af227/pdf/Low-Risk%20Investing%20Without%20In
dustry%20Bets%20-%20Asness,%20Frazzini%20and%20Pedersen%20(2013).p
df
Sum
Low-risk investing is not driven by industry exposures. An industry-neutral
mary: strategy performed even stronger, and works in each of 49 U.S. industries and
most global industries
Background
Many doubt that profit of low-risk investing is driven by industry or value
exposures
Since seemingly it longs stodgy (but profitable) industries
This study explicitly test how much of low-risk strategys returns comes
from industry selection vs stock selection
Constructing three low-risk portfolios
Porfolio1: Regular Betting-Against-Beta (BAB) portfolio
Step1: estimate beta using the product of rolling 1-year daily
standard deviation and the rolling 5-year 3-day correlations
Step2: each month, rank all stocks by estimated beta. A stock is
high(low) beta if its beta is below (above) its country median
Step3: long(short) Low- (high-) beta stocks, weighted by the beta
ranks
Porfolio2: Industry-neutral BAB portfolio
Step1: within each industry, assign stocks with betas above
(below) their country median to the high-beta (low-beta)
Step2: within each industry, construct a long-short portfolio
Step3: aggregate industry BAB portfolios into one industry-neutral
BABs
Porfolio3: Industry BAB portfolio
Step1: calculate betas of value-weighted industry portfolios
Step2: long (short) low-beta (high-beta) industries
Regular BAB profit comes mostly from industry-neutral BAB
All BAB portfolios (standard, industry-neutral, and industry BAB) for U.S.
and global stocks have significantly positive returns and alphas (Table III)
Regress regular BAB profit on industry-neutral BAB profit, industry BAB
profit, and standard risk factors
Loading on the industry neutral BAB factor is about 3 times that of the
industry BAB (Regressions (2)-(4) of Table II)
Suggesting that regular BAB is more about stock selection, less
about industry selection
Industry-neutral BAB has high alphas and small value loadings
More evident in U.S. market, where industry-neutral BAB is the stronger
than industry BAB, and regular BAB (Table III and Figure 3)
Data
Consistency: U.S. (global) industry-neutral BAB portfolio earns positive

returns in each 20-year period since 1929 (in each decade since 1985)
(Table V)
Low-risk investing works within almost every industry (Figure 4 and 5)
For U.S., each industry sees positive Sharpe ratio, and 26 of 49
have significant positive alphas
For global industries, BAB factor delivers positive returns in 61 of
70 industries
Small or even negative value loadings (Table IV)
1926/1 - 2012/3 U.S. data and 1985/1 - 2012/3 global data (covering 20
markets from MSCI developed universe) are from CRSP and Xpressfeed
Global database
U.S. stocks are assigned to one of 49 industries based on their primary

SIC code
Global stocks are assigned to one of 73 industries based on the Global
Industry Classification Standard (GICS) industries from Xpressfeed
Pape
r
Type
:
Working Papers
Date
:
2013-04-30
Cate
gory
:
Novel strategy, industry lead-lag, cross border industry prices
Title: Cross-Border Links and the Global Flow of Industry News

Auth
ors:
Ben Ranish
Sour
ce:
Harvard working paper
Link: http://www.people.fas.harvard.edu/~branish/papers/IndustryNews.pdf
Sum
mary
:
Cross border industry news is only gradually diffused to stocks in other countries.
A related strategy generates an annual return of 8%. Such profit however is
declining in recent years
Intuitions
Industry news is typically relevant in several countries
However, cross border industry news is only gradually incorporated into
stock prices in other countries
This study covers 47 industries in up to 55 countries over a period of 25
years
Significant profit for global industry momentum portfolio
Constructing portfolio
Step1: buy industry portfolios in each country, weighted by the
amount by which the industry has recently outperformed in foreign
markets
Step2: similarly, short industries which underperformed in foreign
markets
The annual return is 7% (63bps per month) (Table 9)
Similar effect in smaller markets
Equal weight (as opposed to value weighte) each market yields raw
returns averaging 8% versus 7% per month (Table 9)
Effect last for 1-2 months
The first few trading days accounts for roughly half of the total
response
Robust to local industry momentum
Profits remain a significant 4.5% per year (Table 9)
Stronger effect in relatively homogeneous industries, such as computer
software, steel, and various mining industries
No such effect in some local service industries, such as entertainment and
health care
Source: the paper

Profit halved in the past years
Since 2003, the global momentum has yielded returns of only about 2.5%
per year, after controlling for local industry momentum and Fama French
factors
Data
1986-2010 US stock data are from CRSP/Compustat
SIC codes from Compustat are used to sort the stocks into the Fama
French industry portfolios
Currency exchange rates from Global Financial Database
Paper
Type:
Working Papers
Date:
2013-02-28
Categ
ory:
Novel strategy, political beta, industry rotation
Title:
Political Sentiment and Predictable Returns
Autho
rs:
Jawad M. Addoum, Alok Kumar
Sourc
e:
University of Miami working paper
Link:
http://bus.miami.edu/docs/UMBFC-2012/sba-ecommerce-50a1018711854/PolPr
edict4_(3).pdf
Summ
ary:
In US, policies of Democratic and Republican parties are usually favorable to

different industries. A trading strategy based on political beta yields an
annualized risk-adjusted return of 6%
Intuitions
In US, democratic and Republican party policies usually have a different
impact on different industries
Republican polices are more likely to be favorable to Tobacco,
Pharmaceuticals, and Finance-related industries(Table 1)
Democratic polices are more likely to be favorable to Health-care
and Construction industries (Table 1)
Such political sensitive industries/stocks account for 17-27% of the total
Before and after elections, investors identify industries that may benefit
from the policies of winning parties, such demand shifts may have a
strong impact on stock returns
Define political beta
Step1: each month for each industry, regress industrys monthly returns
on a Presidential Party indicator and election year indicator
Where the Presidential Party indicator (RepubDummy) variable is 1

(0) when the Presidential Party was Republican (Democratic)
The term-period indicators are set to 1 during each August - July
period of a four-year Presidential term
Note that this methodology is similar to using the UBS/Gallup
Optimism Survey, which surveys the optimism levels of Republicans
and Democrats(Table 9)
Step2: define industries with large positive (negative) coefficient as
Republican (Democrat) industries
Step3: if the presidential party for the current month is Republican
(Democrat), long top 5 Republican (Democrat) industries, and short top
5 Democrat (Republican) industries
Portfolios are value-weighted using industry market capitalization
Significant profits from industry strategy
Long portfolio earns an average

Works in 54 out of 73 years (in the graph below, dark line=long portfolio,
light line=short portfolio, dark dotted line = market index, light dotted
line = risk free)
Portfolio returns increase monotonically with political betas (Table 2)

Sharpe ratio changes monotonically with political betas
Similar pattern when sorting stocks (instead of industries) (Table 3)
Long-Short portfolio earns an annualized risk-adjusted return of 3.9%
Mostly comes from 1981 to 2011 period, where annual return is 6.6%
Similar pattern for Sharpe ratio (Panel B, Table 3)
Similar pattern when using characteristic-adjusted returns
Stronger pattern when the challenger party won
Especially during transition from the Democratic to the Republican Party
(Table 4 Panel A)
The average monthly returns for the incumbent and challenger victories
are 0.22% and 0.78%, respectively
Stronger during high attention periods (Table 10)
I.e., the months surrounding the elections, and years one and
four of the Presidential term
Data
Stock data are from the Center for Research on Security Prices (CRSP)
Pape
r
Type
:
Working Papers
Date: 2013-02-28
Cate
Novel strategy, supply-customers, industry/country rotation
gory:
Title: Trade Linkage and Cross-country Stock Return Predictability
Auth
ors:
Tae-Hoon Lim
Sour
ce:
Cornell working paper
Link:
http://taehoonlim.com/Tae-Hoon_Lim_JobMarketPaper_Jan2013.pdf
Sum
mary
:
A strategy of long (short) industry whose trade-linked industries had high(low)

returns yields an annualized return of 12% in US and international markets. Such
strategy is free of small-cap bias
Background
To identify customer-supplier relationship, earlier studies used firms
major customer disclosure information from Compustat
Such results are mostly driven by small stocks
This study, however, uses a new data source (GTAP), which is relatively
free of small stock problems
GTAP is widely used in international trade literature but never in
finance literature
GTAP provides data on cost spent on imported/exported goods by
industries around the world
E.g. quantities of iron and steel products imported from Japan to
Korea, and amounts of this iron and steel consumed by Korean
industries
As such, GTAP describes customer/supplier relationships among industries
across countries
Define international customer and supplier returns
Each month for each country/industry, calculate customer returns as
where
Rjd (return of industry j in country d) is weighted by
- Vijd (proportion of cost spent by industry j in country d on imported

good i to cost spent on imported good i by all industries in country
d)
and then by
- Wic,d (proportion of exported good i to country d from country c
to all of exported good i from country c)
Supplier portfolio is similarly defined
Value-weight industry portfolios
Significant returns
Sort stocks on customer and supplier returns
Long-short portfolio yields monthly excess returns of 1.09% when sorted
on customer industry returns, and 1.06% when sorted on supplier industry
returns (Table 1)
Top quintile portfolio yields the most significant returns
Hence this strategy doesnt depend on short positions
Similar findings in regressions: coefficients on lagged customer industry
returns are significant
Distinct from industry momentum: magnitude of regression coefficients is
much greater than the coefficient on momentum (0.182 vs 0.098 in panel
B, Table 2)
Consistent performance, including in recent periods (graph below is based
on customer portfolios)
Source: the paper

Data
1990 to 2009 stocks data are from Datastream

Only include countries in the Morgan Stanley Capital Index (MSCI)
World Index or MSCI Emerging Markets Index
For international countries, use of disaggregated commodities and services

by disaggregated industries from the GTAP
For US, use the Benchmark Input-Output Surveys of the Bureau of
Economic Analysis (BEA)
Paper
Type:
Working Papers
Date:
2013-01-31
Catego
ry:
Novel strategy, industry rotation, large cap stocks with extreme returns
Title:
Trading On Coinciden
Author
s:
Alex Chinco
Source
:
Link:
https://bepp.wharton.upenn.edu/bepp/assets/File/AE-S13-Chinco.pdf
Summ
ary:
Investors pay more attention to the ten large cap stocks with the highest/lowest
returns, and consequently buy/sell other stocks in the same industry. A trading
strategy that buys/sells industries of past winner/losers generates 11% excess
return annually
Intuition
It is impossible for any investors to digest the vast amount of
information available
So investors may pay far more attention to stocks whose returns are
highest/lowest
Investors then choose to buy/sell stocks in the same industries as those
winner/losers, driving their returns up/down
E.g., Apple and Dell realized top ten returns from October to
December 2005, while Ford, GM, and Toyota are among the ten
stocks with the lowest returns
Consequently, by January of 2006 investors buy computer
hardware stocks and sell auto stocks
Such pattern is called coincidence co-movement
Step1: Set the parameters - suppose investors care about top/bottom 10
stocks (within S&P500 universe) with extreme returns over the last 3
months, look for at least 2 stocks from the same industry, and hold
portfolio for 1 month
Step2: If at least 2 stocks from same industry were in the group of

top/bottom 10 stocks, then in next month long/short an equally
weighted portfolio of all stocks in such industry except for the stocks with
highest returns
E.g., in Jan 2006 this strategy would be long all computer
hardware stocks except for Apple and Dell, and short all
automotive stocks except for Ford, GM, and Toyota
When no such industry to buy/sell, then buy/sell risk-free assets
Significant profits
A long/short strategy yields a 10.91% per year excess return
Annualized Sharpe ratio is 0.59, almost double that of the market index
0.32
When regressioning strategy return on classic risk factors (size, value,

momentum), the strategy yields an abnormal return of 10.56% per year
(Table 2)
Not driven by momentum: the correlation with momentum profit is only
0.24 (Table 2)
Works best for fresh coincidence industries:
For fresh coincidences industries (those that had 2 extreme
stocks in the previous month, but not the month before), the
alpha is 1.86% per month
For stale coincidences, its just 0.32% (Table 7)
Not sensitive to ranking window length: similar findings for 3-12 months
(Table 3)
Holding window length matters: returns decreasing from 1 to 12 months
holding period, only 4.68% annual abnormal return for 12 month holding
period
No such effect when define the 10 top/bottom stocks among all stocks
As opposed to limiting the top/bottom stocks within the S&P 500
Since there are many small firms that traders are unlikely to
notice
Data
1965-2011 stock data are from CRSP

Exclude the bottom 30% of stocks and those stocks with less than $1 per
share
Define industry groups using the 49 industry classification
Paper
Type:
Working Papers
Date:
2012-12-02
Categ
ory:
Intra-industry reversals, contrarian strategies, industry momentum
Title:
Industries and Stock Return Reversals
Autho
rs:
Allaudeen Hameed and G. Mujtaba Mian
Sourc
e:
SSRN working paper
Link:
Sum
Intra-industry reversal strategy generates significant excess return that is higher
mary: than the conventional reversal strategy. It works in large and liquid stocks,
works consistently over time including recent years, and is robust to common
risk factors
Intuition
Stock prices sometimes deviate from fundamental values, mostly due to
liquidity reasons
Compared with conventional reversal strategy, intra-industry strategy
yields higher returns since its long/short pairs are in same industry and
have similar fundamentals
Decompose reversal profits
Decompose reversal profits into (1) an intra-industry reversal profits and
(2) an inter-industry reversal profits
Inter-industry reversals may earn negative profits, given momentum in

industry portfolios
Intra-industry reversal strategies generate significant returns
Constructing portfolios: long (short) stocks that are losers (winners)
within same industry in the past month, and hold the portfolio over the
next month
Higher returns than the conventional reversal strategy (Table 2)
Monthly 4-factor risk-adjusted return is 0.94%, compared to the
0.63% from the conventional reversal strategy
Such return difference comes from the significant inter-industry
momentum (item2 above, about -0.30% per month)
Hence an intra-industry reversal strategy improves by isolating the
short-term reversals from across-industry momentum
Robust to various checks, while traditional reversal fails
Works even among the large cap stocks, while unconditional one not
Yield significant 4-factor alpha of 0.47% per month for large stocks
While unconditional strategy has an insignificant 0.12% (Panel A of
Table 6)
Works in every industry (Figure 1)
Works in each of the 17 industries
With the exception of Consumer Durables and Oil, intra-industry
reversal is better than unconditional reversal returns
Not driven by extreme returns
Excluding the top/bottom 5% extreme returns, risk-adjusted
return for the intra-industry reversal strategy is 0.71% (vs. only
0.38% from unconditional strategy (Panel A of Table 3)
Robust to bid-ask bounce effects, while unconditional strategy does not
Skip a day between formation and holding months to account for
bid-ask effects
4-factor risk-adjusted monthly return for the intra-industry
(unconditional) reversal strategy is significant (insignificant)
0.57% (0.27%) (Panel B of Table 3)
Significant in January and non-January months
Both intra-industry and unconditional strategies yield significant
returns during January (2.7% vs. 2.36%) and non-January (0.81%
vs. 0.47%) (Panel C, Table 3)
Profitable when value-weighting stocks, while unconditional reversals do
not (Table 4)
Persistent across time and generate a significant 0.94% monthly alpha
during the recent period of 2000-2010, while traditional one does not
(Table 5 and Figure 2)
Source: the paper

Data
1968/1 to 2010/12 data for US stocks are from CRSP
Classify stocks into 17 industry groups based on four-digit SIC code
Paper Type:
Working Papers
Date:
2012-12-02
Category:
Novel strategy, R&D spill-over effect, industry selection
Title:
R&D Spillover and Predictable Returns
Authors:
Yi Jiang, Yiming Qian, and Tong Yao
Source:
SSRN Working Paper
Link:
Summary:
A small group of firms substantial R&D increases have positive

spillover effects on the performance of other firms in the
industry, particularly those firms with little R&D increase and
with less investor attention
Intuition and Definition
Intuition: investors under-estimate the benefits of R&D
spending to the investing firms as well as to other firms in
the same industry
Define firms as R&D Leaders

Such Leaders must rank among the top decile of
the R&D growth rates; and their industry must
rank among the top quintile across industries
Define Peers as those in the same industry but do not
have substantial R&D increases
From 1975 - 2008, the average R&D growth rate is
163% for the former and 13% for the latter
Define Non-event firms as those in other industries
(those with little R&D increase)
From 1975-2008, total 143,867 firm-year
observations, 1,610 are R&D Leaders, 28,336 are
Peers, and 113,921 are non-event firm-year
observations
Leaders and peers are mostly from R&D intensive
industries: medical equipment, computers,
pharmaceutical, etc.
R&D peers tend to be small firms, growth firms, past
return losers (Table 3)
Both Leaders and Peers see significantly alpha and earning
surprises
Equal-weight portfolio and monthly rebalance
R&D leaders has a monthly four-factor alpha of 0.79%
Peers has a monthly alpha of 0.48% (Table 3 )
Robust to known risk factors
Similar findings in regressions that control for
firms own R&D increase, past industry returns,
size, book-to-market ratio, and firms own past
returns (Table 4)
Leaders and Peers experience significant positive
announcement returns and earnings surprises
Confirmed in regressions with earnings surprise or
earnings announcement return as the dependent
variable (Table 6)
R&D Leaders experience an average abnormal
return of 0.53% around each of the four quarterly
earnings announcements (a total of 2.12% for the
year)
Peers experience an abnormal return of 0.22%
around each quarterly earnings announcement (a
total of 0.88% for the year)
Leaders and Peers also see positive abnormal operating
performance
Measured in terms of sales growth rate, gross profit
margin, and gross ROA
Both Leaders and Peers experience substantially better
operating performance during the subsequent three
years, relative to firms in industries without an R&D

increase event
Robust to various firm characteristics and in particular, a
firms own R&D increase (Table 5)
For peers, lower investor attention predict higher returns
Measures of investors attention using 1) institutional
investors joint holdings of the R&D Leaders and the Peer;
2) the joint holdings by actively managed equity mutual
funds; 3) joint coverage of R&D Leaders and the Peer by
brokerage-firm analysts
Same operating performance by Peers receiving low and
high investor attention (Panels A, B, C of Table 9)
Low investor attention predict higher stock returns
When attention is measured as common mutual
fund holdings, Peers with low attention experience
a monthly alpha of 0.73% while those with low
attention is just 0.23% (Table 7)
Data
1975 2008 stock data are from CRSP/Compustat
Paper
Type:
Working Papers
Date:
2012-04-22
Category:
Novel strategy, legislators and constituent industries, industry returns
Title:
Legislating Stock Prices
Authors:
Lauren Cohen, Karl Diether and Christopher Malloy
Source:
Rothschild Caesarea Center 9th Annual Academic Conference
Link:
https://portal.idc.ac.il/en/main/research/CaesareaCenter/about/Academic%
20conference%202012/PID-135.pdf
Summary: Legislation may have significant impact on returns of related industries. A

strategy that long (short) an industry after the passage of positive
(negative) legislations yield significant risk adjusted returns
Intuition
Companies revenues and earning may be greatly impacted by
legislatures
In US, legislators (Senators) tend to protect and promote the
interest of industries (firms) in their home state
Focus on industries rather than firms: because legislators rarely

specify individual firms
Investors do not understand the impact of legislatures (Panels B, C
of Table III)
No run-up effect: in terms of firm returns in the 6- (or 12-)
month period prior to the bills passage
No announcement effect: zero abnormal returns in the month
that the bill is passed
Step1: assign each bill to one (or more) of the 49 industries by
parsing and analyzing the full bill text
Step2: identify relevant Senators: these whose home state are the
headquarter of at least one firm the industry in question
Step3: identify important industries as those that rank in the top 3
for each state in terms of size (sales and market cap)
Step4: identify interested Senators as those who have important
industries that are relevant to a legislation
Step5: define Interest-Based Signing Measure(IBSM): if the ratio
of positive votes by interested Senators is greater than that for
uninterested Senators, then this is a positive bill for the industry in
question
Form a Long portfolio that buys the firms in each industry assigned
to a bill where the IBSM is positive, and likewise for a Short
portfolio
Weight stocks by market capitalization, monthly rebalance
Large abnormal returns
A long-short portfolio earns abnormal returns of over 0.9% per
month following the passage of positive legislation, or 11% per year
(Panel A of Table III )
Similar patterns in terms of excess returns, CAPM alphas,
3-factor alphas, or 4-factor alphas
Most returns from the short side
Abnormal returns to the short portfolio are 0.7-0.8% per
month (Table III)
Suggesting that bills opposed by interested Senators but
ultimately passes is a bad sign for relevant industries
Similar findings in regressions: the impact of Bad Bill on future
industry-level returns is -0.8% per month (t=2.86) (Column 1, Table
IV)
Robust to different measures of industry momentum, industry-level
measures of size, book-to-market, investment, and R&D
expenditures, capital expenditures (CAPEX), and book equity
Robust to sub-periods: the effect is stronger over time. In the more
recent period, the magnitudes of the return effects are 15-20%
larger
Stronger effect for Concentrated Interests
Data
The intuition is that focusing on Senators that have concentrated

interests in a particular industry should amplify the effects
When focusing on interested Senators who are impacted by the most
important industry (No. 1 ranked industry by size) in the bill, the
long-short portfolio returns rise to 1.30% per month (t=2.78) (Panel
B, table VI)
When focus on the most important industry who are headquartered
in interested legislators states, the long-short portfolio has returns
of 1.8% per month (t=1.89)
Though this reduces the sample size greatly
1989 to 2008 complete legislative record of all Senators and all
Representatives on all bills from the 101st through 110th
Congresses are from the Library of Congress Thomas database
Paper Type:
Working Papers
Date:
2012-04-22
Category:
Novel strategy, Text-based Network Industry Classifications

(TNIC), GICS
Title:
Categorization Bias in the Stock Market
Authors:
Philipp Kruger, Augustin Landier, and David Thesmar
Source:
SSRN Working Paper
Link:
Summary Conventional
Summary:
Conventional industry classification can be improved. Those

stocks whose official industry peers out-performed
(under-performed) fundamental peers earn large negative
(positive) returns over the next month. A long-short strategy
yields a monthly abnormal return of 1.5
7%
Intuition: conventional industry classification may be problematic
The conventional industry classification may mislead
investors
E.g., unders SIC classficiation, both Rock-Tenn
(which does paperboard food packaging) and
Schweitzer-Mauduit (which produces cigarette
paper) are in paper and allied products" industry
So both will likely be impacted by a news shock for
paper and allied products"
Yet such news shock is less relevant to

Schweitzer-Mauduit, whose earnings depends
largely on cigarette sales that impact Tabacco
industry
Consequently Schweitzer-Mauduit tend to first
over-react to their official industry shocks and
subsequently revert
This study shows that such divergence between official
industry classification and fundamental industry
classification may lead to return reversals in 2-3 weeks
Identifying fundamental peers using a Text-based Network
Industry Classifications (TNIC)
For every possible pair of firms, compute product
similarity by parsing business description" section of
their 10K forms
Firms that use similar words to describe their
products are likely to operate in the same product
market
Such firms are called fundamental peers
For each firm, calculate returns of its official" peers
(defined by standard SIC classification), and those of its
fundamental" peers
Define firms official industry return = equally weighted
average of the returns of all firms belonging to the same
SIC2 (two digit SIC) category
Define firms fundamental industry return = the equally
weighted return of a portfolio consisting of all
fundamental" peers
At the beginning of each week t, sort firms according to
the industry return differential (official industry return fundamental industry return) in past 6 weeks
So for firms in the first (fifth) quintile, Q1(Q5),
fundamental industry return strongly exceeds
(underperform) that of its official industry
Categorization bias yields significant abnormal returns
Reversal starts in the first week: the first week four-factor
alpha spread is 37 bps (annualized return 19%) and is
highly significant (t-stat=5.66)
Persistence in 1 month
Q5 revert fully within a weeks time
Q1 take much longer to revert completely: from
28 bps in the first to about 16 bps in the sixth
week
Portfolio analysis at the monthly level yields identical
conclusion (Table A.I)
Stronger effect in mid- and small-caps
Significant alpha for long-short portfolios

consisting in small (154 bps with t=4.25) and mid
cap firms (119 bps with t=2.39)
No significant alpha for large cap firms (Table IV)
Regression confirm results from the above portfolio
analysis (Table VII)
Using Global Industry Classication Standard (GICS) or
SIC3 level yield similar results
Stronger effect for Closer followers
Double sort stocks based on (1) the official-fundamental
divergence and, (2) how close the return of a stock has
been to official industry return
A long-short strategy for closer followers yields a
monthly abnormal return of 1.57 % (18% annually) with
a t-stat of 4.1 (Table V)
Data
Text-based Network Industry Classifications (TNIC)
information are from
http://www.rhsmith.umd.edu/industrydata/index.html
Historical SIC code is from Compustat (SICH)
1997 and 2009 stock return data are from CRSP
Paper Type:
Working papers
Date:
2011-03-03
Category:
Novel strategies, industrial electricity consumption, predict NBER

cycles, predict market/industry returns
Title:
Electricity Consumption and Asset Prices
Authors:
Zhi Da and Hayong Yun
Source:
Notre Dame Working Paper
Link:
http://www.nd.edu/~zda/Electricity.pdf
Summary:
Industrial electricity usage is a reliable measure of economic

activity that can predict NBER cycle fluctuations, and predicts
future stock excess returns for both the aggregate market and
for several industriesElectricity is good measure of current
economic activity
Electricity is a good proxy for industrial production,

residential and commercial consumption
All of which consumes electricity
Electricity cannot be easily stored, so it can

measure current economic activity
Per Table 1 row 4, the correlation between
industrial electricity consumption and excess
market returns averages 33%
Monthly electric use data are available publicly from 1960
to the present, by state and by user type
Electricity usage is correlated with other consumption measures,
but less volatile
Such as growth rate in personal expenditure on
nondurable goods and services
The correlation is in the range of 53 - 63% (Table
3)
These consumption measures vary in volatility
(Table 2, Figure 2)
Electricity consumption has a lower volatility compared
with other consumption measures
Electricity consumption is a better consumption measure
given its high correlation and lower volatility
which suggests that electricity consumption
behaves more like the smoothed
seasonally-adjusted consumption
Fama-McBeth Regressions shows that electricity
consumption growth is better than both NIPA
expenditure growth and garbage growth in
capturing consumption risk (Table VI)
Similar findings in both US and 10 European
countries
Industrial electricity is a timely predictor of NBER business cycle
with decent precision
December to December industrial electricity consumption
growth has high correlation (57%) with an annual NBER
business cycle variable (defined as the fraction of each
year spent in non-recession) (Panel A of Table IX)
Yet NBER announces the recessions dates with a delay of
multiple months, the electricity usage data is available
with minimum delay and can capture the business cycle
much faster
Industrial electricity growth predicts next year excess return for
market and several industries
Regression methodology
Next years market or industry returns = alpha +
beta * (Industrial electricity growth) + beta * (list
of control variables)
Control variables are those that are known to have
significant predictive power: book-to-market ratio
(b/m), investment to capital ratio (i/k), net equity
Data
expansion (ntis), percent equity issuing (eqis),

consumption wealth ratio (cay), dividend yield(dy),
earnings price ratio (ep), the annual garbage
growth rate, and year-on-year fourth quarter
expenditure growth
December to December industrial electricity consumption
growth has a significantly negative co-efficient (Panel B,
Table IX)
So lower industrial electricity growth in the current
period, higher excess returns over the following
year
Suggesting a countercyclical premium
Industrial electricity growth significantly predicts
returns for the nondurable (R2=19.2%), durable
(R2=17.5%), manufacturing (R2=14.3%),
chemical (R2=17.9%), shops (R2=20.5%), and
money (R2=17.1%) (Panel C, Table IX)
Monthly U.S. electricity consumption data are collected
from Electric Power Statistics (19601978) and Electric
Power Monthly (19792009)
State-level (annual) electricity consumption from the EIA
State Energy Data System from 1960 to 2009.
Corresponding annual state population data are obtained
from Surveillance Epidemiology and End Results (SEER)
and U.S. Census Bureau population estimates
The electricity consumption data are from the European
Network of Transmission System Operators for Electricity
(ENTSO-E)
U.S. stock returns and one-month Treasury bill returns
from CRSP
Paper
Type:
Working papers
Date:
2010-09-24
Category:
Novel strategies, government spending, industry rotation
Title:
Government Spending, Political Cycles and the Cross Section of Stock

Returns
Authors:
Frederico Belo, Vito D. Gala, and Jun Li
Source:
SSRN working paper
Link:
Summary: Industries with high exposure to government spending outperform

(underperform) those with low exposure during the Democratic
(Republican) presidencies. A long-short strategy that exploits this finding
generates annual abnormal returns of up to 7%
Background and intuition
Earlier US evidence ("The presidential stock market puzzle",
http://www.personal.anderson.ucla.edu/rossen.valkanov/Politics.pd
f
) show that annual market return is about 9 percentage points
higher under Democratic than Republican presidencies, after
adjusting for market risk
This paper finds that this ruling party effect is concentrated in
industries with high exposure to government spending
Typical industries with highest exposure: Aircraft, Defense,
Shipbuilding and railroad equipment, Electronic equipment,
Construction
Typical industries with lowest exposure: Tobacco products,
Candy and soda, Beer and liquor, Apparel, Food products
The differences in government policies impact the profitability of
firms (especially those with high government spending)
yet the market fails to take this into consideration
Industry exposure to government spending is available information
from the Input-Output Accounts publicly available and updated
approximately every five years
Construct government exposure portfolios
Sort stocks based on their exposure to government spending into
five portfolios
Rebalance each June (year t), then hold the value-weighted
portfolio for a year
Because of the updates in the Input-Output Accounts
(approximately every five years), some industries move
across government exposure portfolios
The government exposure portfolios are very stable, so the
investment strategies have low turnover costs
Significant difference in returns of the five portfolios
Especially the Low (1st portfolio) and High (5th portfolio)
portfolios: 1.51% versus 29.58% (Table 4 and Figure 1)
High-minus-low combined portfolio earns an average of
-0.58% in all years
During Democratic years, the high-minus-low portfolio earns
a statistically significant annual average of 6.18%
During the Republican years, the high-minus-low portfolio
earns a statistically significant average return of -4.78%
The difference between the Democratic and Republican
presidencies is more pronounced in portfolios of stocks with
high government spending: especially 4th portfolio and Hi

portfolio
Similar findings using Fama-McBeth Regressions
The results are robust after controlling for Size, Book-to-Market and
Momentum effects
A one standard deviation increase in the exposure to
government spending (about 11.2 percentage points)
increases on average a firm annual excess return by about
2.31 percentage points
For Republican periods, the government spending factor is
negative but insignificant (Panel A)
Robust to Business cycle related variables (the dividend yield (DIV),
the default spread (DEF), the term spread (TERM), and the
short-term Treasury bill rate (TB))
The Democratic presidency factor is significant and positive
Thus business cycles do not explain the Democratic
presidency effect
A long-short strategy that is reversed when the presidency changes from
one party to the other
During Democratic presidencies, use high-minus-low portfolio
During Republican presidencies, use low-minus-high portfolio
Average excess return is about 5.32%, with an annual statistically
significant Sharpe ratio of 0.4 (Table 9)
Both unconditional and conditional asset pricing model results yield
statistically significantly positive alphas, confirming the positive
results above
Data
1947 - 2002 Industry exposure to government spending are from
the Benchmark Input-Output Accounts released by Bureau of
Economic Analysis, which list the proportion of each industrys total
output being purchased by the government sector accounting for
multiplier effects
This study covers July 1955 to December 2009 covering six
Democratic and nine Republican presidential terms
Stock data are from CRSP/COMPUSTAT: Utility sector (SIC codes
between 4900 and 4940) and financial sector (SIC codes between
6000 and 7900) excluded
Paper Type:
Working papers
Date:
2009-08-03
Category:
Novel Strategies, Pharmaceutical Industry, Demand forecasting,

industry-specific strategies
Title:
Demographic Change and Pharmaceuticals Stock Returns
Authors:
Manuel Ammann, Rachel Berchtold and Ralf S
Source:
SSRN Working Paper
Link:
Summary:
The paper develops a profitable strategy by predicting drug

demand changes using demographic information. Across 60
pharmaceutical stocks, this strategy generates 6-8% per annum
from 1986-2008
Intuition: Demographic changes affect revenue, profits and
returns of pharmaceutical stocks
Fluctuations in populations of different age groups
influence the demand changes for age-sensitive drugs
(e.g. Antibacterials and antidepressants)
The relationship between age group population
changes (e.g., 0-19, 20-29, etc) and the demand of
different pharmaceutical drugs is the focus
One can predict future demands for certain drugs
by predicting the future demographic changes
Investor over-react to such information, hence the return
productivity
Long-term (5-year) forecasted demographic
increase predicts positive returns in stock prices
Short-term(1-year) forecasted demographic
increase predict negative returns in stock prices
The return predictability depends on the age-consumption
patterns of 34 specific drugs
The paper estimates the future demand in 3 steps
Step1: Forecast population of each age group
Step2: Forecast consumption patterns of each age
group using the medical expenditure panel survey
Step3: For each pharmaceutical company, forecast
demand growth using the age-consumption
patterns and their corresponding yearly expenses
The forecasted increase in consumption growth is
positively related to contemporaneous return on equity
(ROE)
The regression: ROE = a + b (forecasted
consumption growth)
Investors over-react to short-term consumption growth,
but under-react to longer-term consumption growth
Abnormal returns are defined by the CAPM alpha for
each stock
The regression:
Future 1-year alpha(t) = a +b(forecasted

consumption growth (t to t+2) +
c(forecasted consumption growth (t+2 to
t+5)
The coefficient estimate for b and c are
negative and positive, respectively
Long (short) on top(bottom) 30 firms that have higher
(lower) than median forecasted long-term demand growth,
and hold for 1 year
Risk adjustment
CAPM
alpha
FF 3
factors
Carhart 4
factors
Strategy returns per

month
0.50%
0.50%
0.70%
Data
1900-2040 demographic data, forecasts and medical

expenditure survey are from US Census Bureau
Data on pharmaceutical companies is from
Evaulatepharma Database for 1986-2008
1986-2008 profits and returns of individual companies are
from Datastream
Discussions
Limited dataset: These 60 firms are a limited subset of all
pharmaceutical stocks, and are selected given their the
data availability from Evaluatepharma Database
This is because the strategy only applies to pharmaceutical
companies that sell age-sensitive drugs
Paper
Type:
Working papers
Date:
2009-07-06
Category: Novel strategies, industry rotation, style rotation

Title:
How Predictable are Components of the Aggregate Market Portfolio?
Authors:
Aiguo Kong, David Rapach, Jack Strauss, Jun Tu, and Guofu Zhou
Source:
SSRN working paper
Link:
Summary
:
2 key findings: (1) This paper presents an profitable industry/style rotation

strategy that uses macro-economic factors and lagged industry returns. This
strategy consistently outperforms the nave strategy of forecasting returns
using historical returns
(2) 14 economic variables and lagged returns for 33 industries can better
forecast industry/style returns than in overall U.S. stock market
(industry/style refers to 33 industries, 10 market capitalization deciles, and
10 book-to-market ratio segments)
Definitions:
The 14 economic variables are (page 7): Dividend-payout ratio, Stock
variance, Default return spread, Long-term bond yield, Long-term
bond return, Inflation, Term spread, Treasury bill rate, Default yield
spread, Dividend-price ratio, Dividend yield, Earnings-price ratio,
Book-to-market ratio, Net equity expansion
The 33 industries definition are provided by the website of Kenneth
French
Predicting effectiveness in different stock industries/styles
33 industries
10 market
capitalization
deciles
10
book-to-market
ratio segments
14
economic
variables
Significantly
predict for 23
out of 33
industries
Variables that
works best:
returns on
long-term
government
bonds, inflation,
term spread,
treasury bill rate,
dividend yield,
and net equity
expansions
Significantly
predict for 23 out
of 33 industries
Variables that
works best:
returns on
long-term
government
bonds, inflation,
term spread,
treasury bill rate,
dividend yield,
and net equity
expansions
Significantly
predict returns
for all
book-to-market
portfolios
Little difference
across the ranges
of
book-to-market
ratio
Variables that
works best:
returns on
long-term
government
bonds
Lagged
returns for
33
industries
Significant
predict for 16 of
33 industry
portfolios
Predictability is
strongest for
construction,
textiles, apparel,
Significantly
forecast returns
for the 7 smallest
market
capitalization
portfolios
Better
predictability for
Lagged
industry returns
significantly
forecast returns
for the two
highest
book-to-market
ratio portfolios
furniture,
printing,
automobiles and
manufacturing
smaller size
portfolios
Results are remarkably consistent across the out-of-sample

evaluation period
Lagged industry returns are better predictors than economic
indicators
Regression to test predicting effectiveness
The authors essentially run this regression
Returns of industry/size/book-to-market segments = alpha + predicting
factors (i.e., economic factors or lagged industry returns) + error
A predicting regression that combines 14 macro-economic factors and
lagged industry returns can better forecast than individual predictive
factors
The industry/style rotation strategy
The new strategy seeks to beat the benchmark (which is the nave
strategy that uses the historical industry/style returns)
Step1: forecast industry/style returns using 14 macro factors and 33
lagged industry returns
Step2: allocate the portfolio to the industry/style portfolio with the
highest forecasted return for the next month
Compared with benchmark strategy that uses historical returns, this
rotation strategy generates higher returns and lower volatility
Data
14 economic indicators and industry/size/book-to-market return data
are from 1945 to 2004
Comments
A better benchmark should include usual quant factors used by quant
managers (e.g., those using industry value, momentum, aggregate
accruals, etc), rather than the nave strategy that uses the historical
industry/style returns
As implied in the portfolio construction process, this strategy calls for
shifting all investment into the portfolio with the highest expect
returns. A natural by-product is high turnover and high transaction
cost
Not surprisingly, Sharpe ratios is not very impressive (per table XIX,
Sharpe ratio ranges from 0.12 to 0.22)
Paper
Type:
Working papers
Date:
2009-07-06
Category
:
Novel Strategies, customer-supplier industries, industry rotation,

Title:
Return Predictability along the Supply Chain: The International Evidence
Authors:
Husayn Shahrur, Ying L. Becker and Didier Rosenfeld
Source:
FMA-Europe Meetings 2009
Link:
http://www.fma.org/Turin/Papers/Return_Predictability_along_the_Supply_C
hain.pdf
Summar
y:
Thispaperdevelopsanindustryrotationstrategythatbuys(sells)thesupplierindustries
withthehighest(lowest)laggedcustomerindustryreturn.Anequalweightedstrategy
brings15%annualabnormalreturnin22developedstockmarkets
Notethatthisisanindustrylevelstrategy,CohenandFrazzini(2008)studiesU.S.
firmlevelcustomersupplierdata
Intuition:returnsoncustomerindustriesleadreturnsofsupplierindustries
Thismaybeduetoslowdiffusionofinformationfromcustomertosupplierindustry
ThispaperextendsthestudyofCohenandFrazzini(2008)whichshowthesimilar
effectwithUSstocks
Definitionsofthecustomersupplierlink
Thecustomersupplierlinkagesisdeterminedessentiallybystudyingthe
"percentageofoutputsoldtofinalusers"
Inthispaper,customersuppliermappingarecopiedfromtheUSdata:theauthors
identifycustomersupplierlinkagesusingthebenchmarkinputoutput(IO)accounts
fortheU.S.economy,andassumesthatthesamecustomersupplierrelationship
holdsinallcountries
Thestrategy:rankingsupplierindustriesbytheirrespectivelaggedcustomerindustry
returns
Foreachsupplierindustry,therespectivecustomerindustryreturn(CUST)isthe
averageofcustomerindustryreturnsweightedbytheIndustryPercentageSold
(percentageoftheoutputofthesupplierindustrythatissoldtocustomerindustry.)
Eachmonthindustryportfoliosarerankedbytheir(CUST)into5portfolios
ThehighestCUSTportfoliooutperformsthelowestoneinriskadjustedtermsand
equalweightedreturns
Performance
permonth
Low
CUST
High
CUST
Highlow
CUST
CAPMalpha
0.30
%
0.98%
1.28%
Carhart4factor
alpha
0.27
%
0.95%
1.23%
Findingsinsubsetandrobustness
Leadlageffectsarestrongerforsupplierindustriesthathavemoredispersedsales
Reason:theleadlageffectisduetotheslowdiffusionofinformation
amongeconomicallylinkedfirms
Leadlageffectsarestrongerforsupplierswithstrongereconomiclinkswiththeir
customers
UsingtheR&Dintensityofsuppliersasaproxyofassetspecificity,itfinds
thatsupplierindustriesthatarelikelytoundertakespecializedinvestments
exhibitastrongerreturnpredictability
Robusttosizeandliquidity
PerTable4,suchfindingisrobusttosmallandilliquidcompanies.Similar
findingswhenremove(i)stockswithabeginningofmonthpricelessthan
$5(ii)stockswithabeginningofmonthmarketvalueofequitylessthan
the10thpercentileand(iii)stockswithanaveragedailyturnoverlessthan
the10thpercent
Data
Thispapercoversdataof14,407uniquefirmsbetween1995and2007in22
developedstockmarkets(Australia,Austria,Belgium,Canada,Denmark,Finland,
France,Germany,Greece,HongKong,Ireland,Italy,Japan,Netherlands,New
Zealand,Norway,Portugal,Singapore)
Worldscopeisusedfor19952007accountinginformation
Datastreamisusedforstockreturns
Comments
Statisticsignificanceforvalueweightscenario:Pertheauthoronpage17,"equally
weightedportfolioreturns,whicharecomputedbyfirstcalculatingtheaverage
returnforeachsupplierindustry,andthencalculatingtheaveragereturnforall
industriesincludedinthequintile",whilethe"valueweightedquintileportfolios,
wheretheweightsrepresentthestocksmarketcapitalizationsatthebeginningof
themonth"
PerTable2,theresultsareonlysignificantforequalweightedreturnsandnotfor
valueweightedportfolioreturns.Consequentlytheeffectmightbeonlydueto
somesmallstocks
Limitedapplicability:Thereturnpredictabilityhighlydependsonthesupplychain
linkagesbetweenindustries.Forcertainindustriestherearenocustomer
industries,hencethestrategyislimitedtoasubsectionofstockuniverse
Paper Type:
Journal Papers
Date:
2009-04-20
Category:
mutual funds, industry concentration
Title:
Industry Concentration and Mutual Fund Performance
Authors:
Marcin Kacperczyk, Clemens Sialm and Lu Zheng
Source:
Journal of Investment Management, First Quarter 2007
Link:
https://www.joim.com/abstract.asp?IsArticleArchived=1&ArtID=
222
Summary:
We study the relation between the industry concentration and

the performance of actively managed U.S. mutual funds from
1984 to 2003. O
ur results indicate that the most concentrated
funds perform better after controlling for risk and style
differences using factor-based performance measures.
This
finding suggests that investment ability is more evident among
managers who hold portfolios concentrated in a few industries.
Paper Type:
Journal Papers
Date:
2009-04-20
Category:
Novel strategy, order flow, industry returns, currency/future
Title:
Marketwide Private Information in Stocks: Forecasting Currency

Returns
Authors:
Rui Albuquerque, Eva de Francisco, Luis B. Marques
Source:
The Journal of Finance
Link:
http://www.afajof.org/journal/abstract.asp?ref=0022-1082&vid=
63&iid=5&aid=1398&s=-9999
Summary:
Wepresentamodelofequitytradingwithinformedanduninformed
investorswhereinformedinvestorstradeonfirmspecificandmarketwide
privateinformation.Themodelisusedtoidentifythecomponentoforder
flowduetomarketwideprivateinformation.Estimatedtradesdrivenby
marketwideprivateinformationdisplaylittleornocorrelationwiththefirst
principalcomponentinorderflow.Indeed,wefindthat
comovementin
orderflowcapturesvariationmostlyinliquiditytrades.Marketwideprivate
informationobtainedfromequitymarketdataforecastsindustrystock
returns,andalsocurrencyreturns
.
Paper Type:
Working Papers
Date:
2009-04-14
Category:
Title:
Authors:
Source:
SSRN Working paper
Link:
Summary:

that month
better
returns
recommendations
Comments:
Discussions:
This is because
9)

Data:
industry
Paper
Type:
Working Papers
Date:
2009-04-14
Category
:
Momentum, industry momentum
Title:
Momentum in Weekly Industry Portfolio Returns
Authors:
Ding Du
Source:
Northern Arizona University working paper series
Link:
http://www.franke.nau.edu/Faculty/Intellectual/workingpapers/pdf/Du_Mome
ntum_0908.pdf
Summar
y:
This paper finds momentum in short term (one week to 6 months) industry
portfolio returns.
This finding is related to the Evidence to the Contrary: Weekly Returns Have
Momentum (http://home.business.utah.edu/finea/Weekly_02242006.pdf)
paper we covered before, where it finds robust momentum in weekly stock
returns: following extreme weekly returns, stock price on average will reverse
for two weeks. Such reversal is later more than offset by return momentum
over the coming 12 months.
Constructing the industry momentum portfolio
Short-horizon momentum is measured as industry return in the

previous week
Long-horizon momentum is measured as industry return in the
previous 6 months
Long-short portfolio that buys winner industries and sells loser
industries. Industry weights are based on the portfolio weights: wi,t-1
= 1/N (ri,t-1 - rm,t-1) where rm is the market (equally-weighted)
return and N is the number of assets (Equation 1)
The portfolio is held over various periods: from 1 week to 6 months.
Raw momentum returns are reported as well as risk-adjusted returns
using two benchmark models, the CAPM and the three factor model of
Fama and French.
Industry momentum exists over the next week to the next 6 months (Table
1)
Raw return of about 30 basis points per week, risk adjusted returns
are similar
Positive and statistically significant momentum profits (up to 6
months)
Results based on long-horizon momentum are qualitatively the same
Short term momentum is not just a manifestation of long term
momentum
This is evidenced in regression: one-week return has significant
explanatory power for the future return even after controlling
for the return over the past six months (Table 2)
Some reversals during 1- to 3-year period:
Both short-horizon and long-horizon momentum show some reversals,
for 1-year to 3-year periods
Weaker reversals for short-horizon series
No such pattern in 1985-2006: both short-horizon momentum and
long-horizon momentum do not exhibit reversals in this period
Commen
ts:
Concerns:
Since the strategy is based on industry portfolios, in reality people
may construct the portfolio using industry ETFs. An ETF-based test on
paper will be useful
Transaction cost? 30bps for weekly rebalanced industry profits may
not be enough to justify the turnover
Strong size bias? The industry portfolio are based on equally weighting
underlying stocks
Data:
30 industry portfolio returns from July 1, 1963 to December 29, 2006
available from Kenneth Frenchs website. The portfolios are
constructed by equally weighing the underlying stocks. Weekly
portfolios are constructed from Wednesday to Wednesday.
Fama-French factor data for the same period is from the same site

Paper Type:
Working Papers
Date:
2009-02-25
Category:
Novel Strategy, productivity, manufacturing stocks, industry

selection
Title:
The influence of Productivity on Asset Pricing
Authors:
Laurence Booth, Bin Chang, Walid Hejazi and Pauline Shum
Source:
NFA-2008 conference
Link:
http://www.northernfinance.org/2008/papers/66.pdf
Summary:
The paper shows that industry level productivity can predict

industry expected returns
The productivity factor is created using industry level
productivity data
NBER and CES publishes productivity data from
various manufacturing industries
The high productivity stocks are defined as the
stocks that have high OLS-factor betas for the
productivity factor.
Limited data availability: In 2002 only 16% of
number of firms in CRSP is from manufacturing
industries (34% of the total market capitalization).
High productivity, high returns
During 1963 2002, the productivity factors yields
up to 2.41% per annum
Performance better since 1990
Robustness: robust to size and B/M portfolios
(Table 5), though productivity factor has a bigger
impact on small firms and high growth firms.
Data
1963 2002 US manufacturing company
productivity data are from the Manufacturing
sector Database of NBER and the U.S. Census
Bureaus Centre for Economic Studies (CES)
This database includes three- and four-digit SIC
industry total factor productivity estimates. This
paper adopts the five-factor productivity measure.
Paper Type:
Journal Papers
Date:
2009-01-30
Category:
Size, value, industry
Title:
Style Investing and Institutional Investors
Authors:
Kenneth Froot and Melvyn Teo
Source:
Journal of Financial and Quantitative Analysis
Link:
http://depts.washington.edu/jfqa/abstr/abs0812.html
Summary:
This paper explores

the importance and price implications of
style investing by institutional investors in the stock market.
To
analyze styles, we assign stocks to deciles or segments across
three style dimensions: size, value/growth, and sector. We find
strong evidence that
institutional investors reallocate across style
groupings more intensively than across random stock groupings.
In addition, we show that own segment style inflows and returns
positively forecast future stock returns, while distant segment
style inflows and returns forecast negatively. We argue that
behavioral theories play a role in explaining these results.
Paper
Type:
Working Papers
Date:
2009-01-12
Category: Industry rotation, inflation sensitivity, macro factors, novel strategy

Title:
Inflation and Industry Returns-A Global Perspective
Authors:
Junhua Lu
Source:
S&P research paper
Link:
http://www2.standardandpoors.com/spf/pdf/index/Inflation_Timing_Paper.p
df
Summary
:
Thepapershowsthat
aglobalinflationtimingstrategycanoutperformthe
S&P1200worldindexby6%peryearonaverage
Theintuition:inflationisanegative(positive)predictorforshort(long)
termstockreturns
Inflationimpactsindustryearningsandstockreturnsinthree
ways
Reducingthesupply(productioninputs)
Reducingthedemand(consumptionbehavior)
Increasingthefinancingcostofboththesupplyand
demand
Differentindustrieshavedifferentinflationsensitivities
Inflationsensitivitydefinitionandstats
Inflationsensitivityisthecoefficientderivedfromregressing
industryreturnonaworldCPIindex(ameasureofinflation)
Suchsensitivitiesvariesfrom1.13to3.42across46global
industries
Negativepredictorforshortterm:
the1monthoutofsample
predictivecoefficientofinflationonfuturereturnsisnegativefor
40outof46industries
Positivepredictorforlongterm:
the12monthpredictive
coefficientofinflationonfuturereturnsisnegativefor22outof
46industries
Portfolioconstruction:sortindustriesbasedoninflationsensitivity
Theauthorcreatesa"globalCPIcompositeindex"tomeasure
worldwideinflation.RegionsrepresentedinglobalCPIarethose
mostheavilyweightedinS&PGlobal1200:Europe(17%),Asia
(13%),UnitedKingdom(13%)andUnitedStates(57%)
Everymonthindustriesarerankedbytheirinflationsensitivities
inthepastthreeyears
Highinflationtimer(HIT)andlowinflationtimer(LIT)portfolios
arecreatedusingthe15mostand15leastinflationsensitive
industries,respectively.
TheinflationtimingstrategybeatstheS&P1200globalindexinvarious
marketconditions
Ourconcerns
Thispaperdidnotconsiderotherknownfactorsthatdrive
industryreturns(suchasmomentumandvalue).Inflation
sensitivityofdifferentindustriesisestimatedwithaunivariate
regressionofindustryreturnsoninflationrate.Thereforethe
inflationsensitivitiesmightbebiased
10yearinaninflationstudyisrathershort.Forrobustnessthe
resultsshouldbereplicatedonalongersample.
Turnoverissueisnotaddressed.Amonthlyrebalancedstrategy
mayincurhighturnover
Aninterestingextensionistotwowaysortindustriesbasedon
longtermandshorttermsensitivities,knowingthatinflationisa
negative(positive)predictorforshort(long)termstockreturns
Anotherextensionistorepeatthestudyonsinglecountry
markets
Data
FromFactset,46globalGICSindustryreturnsinS&Pglobal
1200indexfortheperiodof19982008
UsingCapitalIQ,theauthorcreatedaglobalcompositeCPIindex
basedonindividualcountryCPIandcountryweightsinS&P
global1200index.
Paper Type:
Working Papers
Date:
2009-01-12
Category:
Style, Share issuance, style rotation, industry rotation, IPO/SEO
Title:
A Corporate Arbitrage Approach to the Cross-section of Stock

Returns
Authors:
Robin Greenwood and Samuel Hanson
Source:
Harvard Working Paper
Link:
http://people.hbs.edu/rgreenwood/corporate_arbitrage_122308.pdf
Summary:
The paper shows that one can forecast style factor (e.g., B/M)
returns using spread of such factor (e.g. difference of B/M) between
equity issuing and equity repurchasing firms.
For example, when issuing firms have larger market-cap than
repurchasing firms, large firms subsequently underperform in
coming 12 months.
Proposed reason: factor spread between
issuers/repurchasers reflect factor mispricing
Firm characteristics e.g., having a high
book-to-market ratio, high sales growth, paying a
dividend, or being in a particular industry may at
times be favored and hence mispriced by investors
Managers of companies with such favored
characteristics detect the mispricing and successfully
time the market with share issues (repurchases)
So the factor spread between recent
issuers/repurchasers can be used to infer which
characteristics are mispriced
Since mispricing will be corrected, such spread can
forecast factor returns
Definitions and portfolio construction:
Net stock issuance is defined as the change in log
split-adjusted shares outstanding
Each December firms are divided into issuers,

repurchasers and others by their net stock issuance
in the previous year.
Issuers have net stock issuance of greater than 10%
Repurchasers have net stock issuance of less than
0.5%
Factor spread is significant between most
issuers/repurchasers
Spread is defined as the average characteristics
decile of issuers minus the average characteristics
decile of repurchasers. (based on Table 3)
Lagged factor spread can predict factor portfolio
returns
Such spread significantly forecast returns in six cases:
book-to-market, size, nominal share price, distress, payout
policy, profitability, and industry
Decomposing factor spreads
Such spread can be decomposed along dimensions of
prudence, growth" and profitability (Principal
Components method)
Likely reason is that investors categorize stocks
according to these "themes"
"Prudence" factor can be interpreted as investors
favoring old, high price, low-, low volatility, and
dividend paying stocks
"Growth" factor can be interpreted as glamour
factors, such as high sales growth and high accruals
stocks
Data
COMPUSTAT and CRSP datasets are used for the period
1962-2006.
Paper
Type:
Working Papers
Date:
2009-01-12
Categ
ory:
Industry-Specific Human Capital, labor income growth, idiosyncratic

volatility(IV), novel strategy
Title:
Industry-Specific Human Capital, Idiosyncratic Risk and the Cross-Section of

Expected Stock Returns
Autho
rs:
Esther Eiling
Sourc
SSRN Working paper
e:
Link:
Summ
ary:
The paper shows that higher exposure to "industry specific human capital
returns" (i.e., industry average labor income growth) corresponds to higher
expected returns.
Such factor can explain the idiosyncratic volatility (IV) puzzle
and can greatly improve CAPMs ability to explain stock returns.
We at AlphaLetters find the theory proposed in the paper not very
straight-forward, but we think that "industry average labor income growth" is an
interesting new factor because (1) it makes economic sense (2) the empirical
study in this paper show that it can predict stock returns.
Definitions
"Industry specific human capital returns" is defined as the growth
rate in labor income in a certain industry
Proposed reasons
Industry specific human capital returns affect investors optimal
portfolio choices
The labor income is important for the optimal portfolio choice of
individuals
The industries used in this study are goods producing,
manufacturing, service, distribution and government (as defined
by the Bureau of Economic Analysis.)
Labor income growth can explain the IV puzzle
Previous study show that stocks with high IV have higher
expected returns
After controlling for labor income growth, the IV premium
disappears
In the table below, labor income beta is the coefficient of
regressing industry returns on labor income growth
Labor income growth improves 3 asset pricing models
Industry specific human capital returns increases the
cross-sectional R-squared values for all the models.
Data
CRSP and COMPUSTAT data are used for the sample period of
1959-2005
Labor income data are from National Income and Product
Accounts (NIPA) tables published by the Bureau of Economic
Analysis. Such labor income data are typically published with a
one-month delay
Paper Type:
Working Papers
Date:
2008-12-20
Category:
Value, momentum, country industry indices, Black-Litterman
methodology, tracking error

Title:
Exploiting Predictability in the Returns to Value and Momentum

Investment Strategies: A Portfolio Approach
Authors:
Elton Babameto and Richard Harris
Source:
SSRN working paper
Link:
Summary:
The paper shows that a Black-Litterman style

investment
strategy that combines Value and Momentum factors generates

positive returns with given tracking error. This investment
universe is the 177
country industry indices
in US, UK and Japan
Basics of Black-Litterman methodology
The traditional mean-variance framework yields
portfolio weights that may not be reasonable and
that may be too sensitive to model assumptions
(e.g., expected return assumption,
variance-covariance assumptions)
In Black-Litterman framework, no need to specify
expected returns for every asset
Investors views (expected returns, or expected
relative returns, of stocks or styles. E.g., returns
difference between value and growth stocks) can
be added to portfolio construction process
As a result, the result portfolio weights are more
reasonable and stable
Problems of stand-alone value or momentum strategies:
high return volatility
Both strategies outperform the market on average
But returns are volatile (to an extent that the
Sharpe ratio is lower than the market index
Sharpe ratio, Table 1) and may display prolonged
periods of underperformance
Returns to momentum strategies tend to be
pro-cyclical, while returns to value strategies tend
to be counter-cyclical
Problems of a simple combined strategy: tracking error
too large, though more persistent returns
In reality, client mandates generally requires
tracking error limit
Stand-alone value or momentum, or
value+momentum combination strategies deviate
greatly from their benchmarks
So their paper returns are not realizable
New methodologies to construct portfolios
Comments:
Each month the value, momentum and

value-momentum combined portfolios are created
using the national industry indices
Momentum quintiles are created using the last 6
months returns.
Value quintiles are created using the dividend yield
(DY), earnings-to-price (EP), book-to-price (BM)
and cash-to-price (CP)
Combined quintiles are created by double sorting
the Momentum quintiles by BM ratios
Form the view in Black-Litterman framework by
forecasting momentum/value returns
Forecasting momentum/value returns (ie, form the view
in Black-Litterman framework):
Forecasting 6-month momentum returns: using
the term structure (yield difference between 10
year and 3 month US t-bills)
the aggregate BM ratio of the market
Momentum spread decrease with the term
structure, and value spread increases with BM
ratio (Table2)
Using the out-of-sample forecasting over
momentum and value spread the weights of the
combined strategy get determined (Table3).
Promising results using the Black-Litterman framework:
Able to track the benchmark at any tracking error
level under long-only and beta-neutral constraints,
Average out-performance of up to 0.7% per
annum, after assuming substantial transaction
costs.
1. Discussions
The profitability of the combined strategy is not shown
properly. Table 3 shows that you can time the value and
momentum portfolios out-of-sample and switch between
them, but the profitability of the combined strategy is not
reported.
None of the returns are reported in a risk-adjusted
format. The paper only reports average absolute returns
and the return of the market portfolio.
From Table 13, this Black-Litterman framework adds
value when the tracking error is at 400bps and 500bps,
but not at 300bps
2. Data
1995-2004 MSCI national industry indices are from DataStream
(59 industries from each country). The indices are based on US
dollar values.
Paper Type:
Working Papers
Date:
2008-11-30
Category:
Title:
Authors:
Source:
Link:
20MEETINGS/2008-athens/Muradoglu.pdf
Summary:
The paper confirms previous findings that low leverage implies

higher expected returns, and further shows that in UK market,
abnormal returns increase with average industry level leverage.
Definitions:
Firm level leverage is defined as (market value
of total debt) / (market value of equity)
"Average industry level leverage" is defined as the
average leverage levels of the individual firms in
an industry
Empirical findings contradict text-book theory of
Modigliani and Miller (1958)
This theory implies a positive relationship between
leverage and expected returns, because high
leverage increases firms riskiness
But previous study and this study find the opposite
in empirical study
At stock level, high leverage suggests lower future return
in most cases
, high leverage
firms have much lower abnormal returns (-0.99%
per year) compared to low leverage firms (6.28%
per year).
Within most industries, high leverage means lower
returns.
Only oil&gas and basic materials industries
show a positive leverage spread of returns:
the high-low portfolio return for basic
materials is 3.91% per annum and for

oil&gas it is 8.82% (Table 2).
At industry level, average industry level leverage predicts
It is tested as
return(stock i) = average industry
leverage(industry which stock i belongs to) + stock i leverage
Across all stocks in all industries, average industry
leverage significantly predict positive future returns, while
firm level leverage is significantly negative for
cross-sectional returns (1.14 vs -0.22)
For technology, telecommunications, industrials,
consumer services and consumer goods industries, higher
average industry level leverage means significantly
positive returns.
Only for basic materials and healthcare sectors, the
average industry level leverage affects returns negatively.
Data
1965 - 2004 data for stocks listed in London Stock
Exchange are from Datastream.
Paper Type:
Working Papers
Date:
2008-11-05
Category:
Industry relative book/market ratio, value strategy
Title:
Competition, Productivity and cross-section of expected returns
Authors:
Robert Novy-Marx
Source:
Link:
http://faculty.chicagogsb.edu/robert.novy-marx/research/ROCat
XR.pdf
Summary:
The paper shows that stocks industry-relative

book-to-market ratio produces higher Sharpe Ratio (1.29
per year) than Fama-French factors together (0.99 per
year), and than the normal book-to-market ratio (0.54
per year)
The model proposed by the author suggest that
intra-industry variation in book-to-market is correlated
with expected returns while inter-industry variation is

not.
Stocks industry-relative book-to-market is simply defined
as (stocks B/M) / (industry average B/M)
The book-to-market effect is strong and monotonic within
industries, but weak and non-monotonic between
industries.
The intuition: the book-to-market effect depends on the
industries concentration and capital intensity. Firms
invest into new capital when the BM ratio in their
industries is increasing in industry concentration and
decreasing in capital intensity, hence the book-to-market
effect should be mostly an intra industry phenomenon.
Paper
Type:
Working Papers
Date:
2008-09-03
Category:

Global markets
Title:
Authors:
Source:
Link:
df
Summary:
The paper
.
all industries
the market
ahead).
Predicting factors
future inflation


and employment

9)
Factor 1 has great

explanatory power

investment
Factor 1 and 2 have


2. Data
Paper Type:
Working Papers
Date:
2008-07-20
Category:
industry, Sector rotation, sector order flow and macro-economy
Title:
What does equity sector orderflow tell us about the economy?
Authors:
Alessandro Beber, Michael W. Brandt and Kenneth A. Kavajecz
Source:
SSRN Working Paper
Link:
Summary:

aggregate portfolio rebalancing across
equity sectors can forecast economy cycles.
Sector order flows are measured using trade-by-trade
data (TAQ)
For each stock, each trade is grouped as
buyer-initiated or seller-initiated
Sector level order flow is the unexpected net
orderflow, ie, the difference between actual and
expected net sector orderflow.
Sector orderflows were divided in three classes
based on their size - small, medium and large.
Large sized unexpected orderflow into
material sector
forecasts an expanding economy
consumer
discretionary, financials and telecommunications
forecasts
a contracting economy
The following table shows how much the CFNAI index will
expand (positive) or contract (negative) after 1 standard
deviation change in orderflow. Only the significant
coefficients are shown. (Chicago Federal Reserve Bank
National Activity Index is a weighted average of several
economic activity indicators available in real time)
1 Standard
Deviation change in
Orderflow
How
much
CFNAI
will
expand
in 1
month
How much
CFNAI will
expand in
3 months
Material
0.1423
0.1741
Consumer
Discretionary
-0.0971
-0.0837
Comments:
Consumer Staples
0.0878
0.0909
Financial
-0.0988
to
-0.1599
-0.1117
Telecommunication
-0.1250
to
-0.1675
-0.1071 to
-0.2112
Utilities
-0.2032
to
-0.2080
-0.1491 to
-0.2057
Sector orderflow provides

limited
information regarding
future stock returns in different sectors, as well as return
in bond yield
1. Discussions
Using TAQ database is arguably better than using the mutual
fund holdings file (13f filings) because it can better capture the
intra-quarter money inflows/outflows into a sector, whereas 13f
files only provide a snapshot of portfolio holdings by end of
quarter.
Our concern is, the actual economy cycle does not change every
month, although investors view may be changing much faster.
Given that CFNAI is a weighted average of several
real-time
economic activity indicators, the finding here (that order flow
forecasts CFNAI index) may merely be a result of data mining.
One would be surprised to see that 1) mutual fund managers can
forecast business cycles and yet 2) their trades can not bring
excess returns.
2. Data
Equity orderflows are constructed using the Trades and Quotes
(TAQ) dataset for 1993-2005. Common stock data from CRSP.
Sector info is based on GICS by MSCI

Paper Type:
Working Papers
Date:
2008-07-20
Category:
Industry Momentum, ETF
Title:
Can Exchange Traded Funds be used to Exploit Industry

Momentum
Authors:
Laurens A.P. Swinkels, Liam Jong-A-T Joe
Source:
SSRN Working Paper
Link:
Summary:
This paper finds that transaction costs (bid-ask spread,

broker commission and short selling costs) erode
previously recorded industry momentum profit.
Ignoring transaction costs, the strategy exhibit 5% annual
profit during 2000-2007, but such profits will disappear
after transaction costs are taken in account.
This paper uses two sets of Exchange Traded Funds (ETF)
Paper Type:
Working Papers
Date:
2008-07-20
Category:
industry, Sector rotation, sector order flow and macro-economy
Title:
What does equity sector orderflow tell us about the economy?
Authors:
Alessandro Beber, Michael W. Brandt and Kenneth A. Kavajecz
Source:
SSRN Working Paper
Link:
Summary:

aggregate portfolio rebalancing across
equity sectors can forecast economy cycles.
Sector order flows are measured using trade-by-trade
data (TAQ)
For each stock, each trade is grouped as
buyer-initiated or seller-initiated
Sector level order flow is the unexpected net
orderflow, ie, the difference between actual and
expected net sector orderflow.
Comments:
Sector orderflows were divided in three classes

based on their size - small, medium and large.
material sector
forecasts an expanding economy
consumer
discretionary, financials and telecommunications
forecasts
a contracting economy
The following table shows how much the CFNAI index will
expand (positive) or contract (negative) after 1 standard
deviation change in orderflow. Only the significant
coefficients are shown. (Chicago Federal Reserve Bank
National Activity Index is a weighted average of several
economic activity indicators available in real time)
Sector orderflow provides
limited
information regarding
future stock returns in different sectors, as well as return
in bond yield
1. Discussions
Using TAQ database is arguably better than using the mutual
fund holdings file (13f filings) because it can better capture the
intra-quarter money inflows/outflows into a sector, whereas 13f
files only provide a snapshot of portfolio holdings by end of
quarter.
Our concern is, the actual economy cycle does not change every
month, although investors view may be changing much faster.
Given that CFNAI is a weighted average of several
real-time
economic activity indicators, the finding here (that order flow
forecasts CFNAI index) may merely be a result of data mining.
One would be surprised to see that 1) mutual fund managers can
forecast business cycles and yet 2) their trades can not bring
excess returns.
2. Data
Equity orderflows are constructed using the Trades and Quotes
(TAQ) dataset for 1993-2005. Common stock data from CRSP.
Sector info is based on GICS by MSCI
Paper
Type:
Working Papers
Date:
2008-06-08
Category:
Value, industry-relative B/M ratio
Title:
Productivity and the Cross Section of Expected Returns
Authors:
Robert Novy-Marx
Source:
University of Chicago Working paper
Link:
http://www.anderson.ucla.edu/Documents/areas/fac/finance/ROCatXR.pdf
Summary:
The paper documents that a stocks industry-relative book-to-market

(B/M) ratio can better predict stock returns than the normal B/M ratio,
and value industries do not provide higher returns than growth industries.
Industry-relative B/M ratio is defined as
Industry-relative B/M ratio = BM
ij
/BM
i
where BM
ij
is the B/M ratio of firm
j
in industry i
. BMi is the B/M
ratio of industry
i.
Cross all stocks, industry relative B/M portfolio produces high
Sharpe ratios
The strategy is to long (short) stocks with high (low)
industry-relative book-to-market ratio
The portfolio has a Sharpe ratio of 0.738.
A strategy that rank B/M within industries works better than the
normal B/M strategy
The strategy is within each industry, long (short) stocks
with high (low) B/M ratio
The portfolio has a higher Sharpe ratio compared to the
normal book-to-market high-low portfolio (0.583 vs. 0.081),
but lower than the industry-relative B/M strategy (0.738)
Value industries do not provide higher returns than growth
industries.
The strategy is to long high B/M industries and short low
B/M industries
Suggesting book-to-market does not work on Industry level
Robustness: the firm level book-to-market is decomposed into
industry relative book-to-market and industry level
book-to-market. As implied by the model the latter one is
insignificant on the cross-section of stock returns (Table 3).
The paper develops an alternative book-to-market measure that is
superior to classical B/M ratio. Our concern is that we can not find
sufficient discussion regarding the reason behind the findings.
2. Data
Monthly returns are taken from CRSP and book-to-market values are
created using COMPUSTAT for the time period 1973-2007.
Paper Type:
Working Papers
Date:
2008-05-20
Category:
Value effect, industry competitiveness/concentration
Title:
Real and financial booms and busts
Authors:
Gerard Hoberg, Gordon Philips
Source:
Oxford University working paper
Link:
http://www.finance.ox.ac.uk/NR/rdonlyres/E899C154-7731-4E9
A-8D85-6056F445AFDB/0/20070522GordonPhillips.pdf
Summary:
It has been documented that higher valuation (industry boom)

leads to higher investment and subsequent lower stock returns
(industry bust).
This paper finds that at industry-level, such
value effect (i.e., low P/B, low investment firms outperform) is
much stronger in competitive industries than in concentrated
industries.
The reason: company management tends to investment
more when firms valuation is higher, and firms in
competitive industries are more likely to suffer from
over-competition. Consequently, a higher investment in
these industries is more likely to cause vicious
competition and lower returns.
Competitiveness/concentration is measured as the
proportion of total sales for top 1/3 firms (adjusted for
the number of employees per firm in that industry)
Within competitive industries,
Those industries with highest quintile valuation
yields a 4% lower risk-adjusted return (size, value,
beta, momentum) than lower-valued industries.
At stock level, the difference is monotonic and is
10%+.
Similar pattern for operating cash flows: higher
valuation, lower operating cash flows.
Similar pattern for industries with declining
concentration
Within concentrated industries,
yields a <2% lower risk-adjusted return than
lower valued industries
At stock level, the difference is not monotonic.
Comments:
Both stock returns and cash flows are low following high
industry valuation, high industry investment and new
industry financing
1. Discussions
The conclusion here should be helpful for building sector-level
model and for refining the value components of industry
selection/rotation strategies.
2. Data
Firm fundamental data and stock price data are obtained from
the merged Compustat-CRSP database. The time-series sample
covers 1972-2004.
Data for industry concentration is obtained from Compustat,
Commerce Department (Herfindahl data) and the Bureau of
Labor Statistics (BLS). A Herfindahl-Hirschman index (HHI) is
calculated and industries in the highest (lowest) tercile of HHI
are classified as concentrated (competitive).
Paper Type:
Working Papers
Date:
2008-05-01
Category:
Supplier/customer, industry returns, novel strategy
Title:
Market Segmentation and Cross-Predictability of Returns
Authors:
Lior Menzly, Oguzhan Ozbas
Source:
USC Working paper
Link:
http://www-rcf.usc.edu/~ozbas/SegMktCrPred.pdf
Summary:
The paper finds that there exists a return predictability across

the stocks in related supplier and customer industries.
Stocks in
customer and supplier industries may cross-predict each others
returns.
The likely reason: the supplier and customer industries
have correlated fundamentals. Due to the lack of
informed investors that take advantage of slow
Comments:
information diffusion among industries, these industry

stocks prices may lead each other at different times.
A trading strategy based on buying industries with high
returns whose supplier industries have high returns over
the previous month and selling the ones with low supplier
industries past returns yields an annual premium of 6.7%
and a Sharpe ratio of about 0.6.
The same strategy based on past customer industry
returns brings annual premium of 7.1% with a Sharpe
ratio of 0.6.
Orthogonal to known risk factors (Fama-French
4-factors): The monthly intercepts from regressing
customer (supplier) portfolio on four factors is 0.61%
(0.42%).
Two sources of gradual information leaking:
Institutional investors: institutional investors
increase (decrease) their holdings in customer
industries at the same time they increase
(decrease) their portfolio allocations in supplier
industries.
Analysts: Changes in earnings forecast for stocks
are positively related to the lagged changes of
earning forecasts in supplier and customer
industries
1. Discussions
This paper uses a new database (Benchmark Input-Output
Survey of the Bureau of Economic Analysis) and the economic
story sounds reasonable. Readers may remember other papers
on the customer-supplier relationship, most notably Economic
Links and Predictable Returns
(
).
Our concerns:
Causality: should customer industry lead supplier industry
or the other way around? The authors suggest that both
are possible. But people may argue that this should be
one-way: when customers business suffers, suppliers will
suffer for sure. The opposite is not necessarily true.
Small-cap bias: Table 6-panel B shows that the predictive
power of past customer and supplier industry returns
declines with analyst coverage, meaning that the strong
crosssectional predictability holds mainly for stocks with
low analyst coverage and high information asymmetry.
Therefore the implementability of the strategy can depend
too much on using stocks with high information

asymmetry.
2. Data
The Benchmark Input-Output Survey of the Bureau of Economic
Analysis is used to identify supplier and customer industries. The
paper also uses CRSP monthly returns and CRSPCOMPUSTAT
merged database for the period 1963-2005. I/B/E/S database is
used to construct measures of analyst coverage and earnings
expectations. Thomson Financials 13F holdings are used to
construct measures of institutional ownership.
Paper Type:
Working Papers
Date:
2008-05-01
Category:
Industry herding, institutional investors
Title:
Institutional Industry Herding
Authors:
Nicole Choi, Richard Sias
Source:
SSRN Working paper
Link:
Summary:
The paper documents significant institutional investor herding in

industries. A strategy that sells buy-herd industries and buys
sell-herd industries can earn a profit of 3-5% annually.
In the two formation quarters: heavily buy-herd

industries outperform the sell-herd industries by 2.43%
per quarter (2.96% Fama-French alpha per quarter)
In the four post-formation quarters: the buy-herd
industries under-performed by 1.20% per quarter (0.78%
per quarter when adjusted for Fama-French factors)
compared with sell-herd industries.
Institutional herding in industries is more pronounced in
smaller and more volatile industries (Table 6), and is
decided by managers (not capital inflows into the funds)
Herding seems based on past quarter returns: there
exists strong correlation between past quarter industry
returns and herding (ie, momentum trading), however
the past returns dont remain significant once it is also
controlled for lagged institutional demand.
Comments:
The cross-sectional correlation of value weighted

institutional demands between current and lagged
quarters for individual industries is 56% (at 1%
significance).
1. Discussions
This paper documents some interesting findings, as
industry-rotation by institutional investors is evident in stock
market. Our concern is:
Limited profits on paper: the price impact in the
post-formation period is insignificant once it is controlled
for Fama-French factors (Table 7).
What is a better way to observe the buy- or sell-herd
industries in the formation period.
2. Data:
CRSP stock returns and Thomson Financial 13f institutional
holdings data set for the time period 1983-2005 are used in the
paper.
Paper
Type:
Working Papers
Date:
2008-04-09
Category:
US Political Cycles, industry rotation
Title:
Political Cycles in US Industry Returns
Authors:
Jeffrey Stangl, Ben Jacobsen
Source:
Melbourne Centre for Financial Studies working paper
Link:
http://www.melbournecentre.com.au/Finsia_MCFS/2007/Jeffrey_Stangl_1.
pdf
Summary:
This paper finds that there are no Democratic or Republican industries,

though on average stock returns are higher during Democratic presidents.
In other words, no industries outperform others consistently under
Democratic or Republican presidents. Key findings:
Higher raw market return under Democrates: From 1926-2006, at
market index level as well as at industry level, return is higher
Comments
:
during Democratic than Republican presidents. The

treasury-adjusted return of NYSE composite are 8.6% greater under
Democrat presidents
No "Democratic" or "Republican" industries: when controlled for
usual risk factors (market cap, size and book-to-market), no
industries consistently perform better or worse than others when
Democratic or Republican presides.
Meaning contrary to conventional wisdom, one cannot expect
excess returns by employing an industry allocation strategy
based on presidential cycles.
No Quadrennial cycle after adjust for risk factors:
there is a significant 10.0% difference in excess returns
between the first half (1.3%) and second half (11.3%) of an
administration
When adjusted for risk factors, there is no evidence that at
industry-level, the last two years in presidential election cycle
see higher returns.
Small-caps tend to return better than large-caps under Democrates
presidents
Tobacco has the 3rd highest return while its variance and beta risk
are among the smallest
1. Discussion
Conventional wisdom says that for industrial, financials , transportation and
utilities stocks, their returns are higher during Democratic presidents. This
paper comes to a different conclusion, the main reason being that the
authors adjust industry performance for the market, valuation and size
factors, a methodology that quantitative managers may find sensible.
2. Data
1926-2006 return data for 48 industries and US stock market index are
used. The industry SIC classification based on description on Kenneth
Frenchs website.
Paper
Type:
Working Papers
Date:
2008-01-17
Category:
Industry level bubbles
Title:
Ridding bubbles
Authors:
Nadja Guenster, Erik Kole, Ben Jacobsen
Source:
York University working paper
Link:
http://www.schulich.yorku.ca/SSB-Extra/NorthernFinance.nsf/Lookup/Nadj
a%20Guenster15/$file/Nadja%20Guenster15.pdf
Summary:
This paper finds that the better (yet volatile) strategy in an industry-level
price bubble period is to
"go with the tide", ie, to
ride asset bubbles.
"bubble" period is defined as 1.) industry index prices grow faster

than fundamental value measured as the industry raw return over
the return forecast by Fama French style 4 factor model and, 2) a
sudden acceleration in price increases.
On average a bubble last 42 months, the shortest last 12 months.
(table 2)
Bubbles occur in all 48 industries, with an average of four bubbles
per industry over the sample 80 year period.
The average raw return of industries during bubble period is ~25%
(annualized).
the strategy of "Ridding the bubble" yield average monthly abnormal
returns of 6% per year (0.4% 0.6% per month)
The strength of a bubble do not impact returns, but increases
probability of a crash (defined as a return below 1.65 times standard
deviation of abnormal return)
How long a bubble lasts do not impact returns and the probability of
a crash
Comments
:
1. Data
1926 2006 monthly industry returns and fundamentals data for 48 value
weighted industry indexes are from Fama and French's website
(
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.htm
l
). The risk-free rate and the market index are from Ibbotson Associates
and the CRSP all share index
Paper Type:
Journal papers
Date:
2007-09-05
Category:
Industry classification, Strategic Group classification
Title:
Firm, Strategic Group, and Industry Influences on Performance
Authors:
Jeremy C. Short, David J. Ketchen, Jr., Timothy B. Palmer, and

G. Tomas M. Hult
Source:
Strategic Management Journal, Vol. 28, No. 2: (February

2007)147-167
Link:
http://www3.interscience.wiley.com/cgi-bin/abstract/114029267
/ABSTRACT?CRETRY=1&SRETRY=0
Summary:
A long-standing debate has focused on the extent to which

different levels of analysis shape firm performance. The strategic
group level has been largely excluded from this inquiry, despite
evidence that group membership matters. In this study, we use
hierarchical linear modeling to simultaneously
estimate firm-,
strategic group-, and industry-level influences on short-term and
long-term measures of performance.
We assess the three levels
explanatory power using a sample of 1,165 firms in 12 industries
with data from a 7-year period. To enhance comparability to
previous research, we also estimate the effects using the
variance components and ANOVA methods relied on in past
studies. To assess the robustness of strategic group effects, we
examine both deductively and inductively defined groups. We
found that all three levels are significantly associated with
performance.
The firm effect is the strongest, while the strategic
group effect rivals and for some measures outweighs the
industry effect.
We also found that the levels have varying
effects in relation to different performance measures, suggesting
more complex relationships than depicted in previous studies.
Paper Type:
Working Papers
Date:
2007-07-06
Category:
Industry, size premium, value premium
Title:
On the Role of Industry in the Cross Section of Stock Returns
Authors:
Huang Chou, Keng Yu Ho and Po Hsin Ho
Source:
EFMA Annual Meetings 2007
Link:
Summary:
This paper explores the role of industry in explaining the cross

section of stock returns.
Key findings:
1. when decompose size and BM into within and cross industry
components:
On average, BM premium is a within industry

phenomenon. (a portfolio ranking B/M within industry
should generate higher return than that ranking across
industries)
Size premium exists both within industry and cross
industry
January plays an important role. BM premium is on
average significant, but not in January months after 1981
(table 2) the size effect is mostly attributed to the out
performance of small firms in January months (table 6).
2. Within industries, firms with lower than industry mean (size
and B/M) have higher (size and B/M) risk premium.
Size premium exists only for firms performing below
averages, but not above.
BM premium exists for firms with B/M both above and
below industry average. But after removing the extreme
5% observations, it exists only for below average firms.
3. Industry returns has additional (though very weak since 1981)
explanatory power beyond the commonly accepted size and
(book to market) BM factors. The authors run the following Fama
Macbeth regression:
Rit = b
MV
- 1 + b
BM
- 1 + e
0t +
b
1t
it+ b
2t
it
3t
it
it
Where
it(industry implied return) is a normalized measure of
the covariance of returns of the stock i with its own industry.
4. Firms with a ROE (returns on equity) higher than industry
average yield higher expected returns.
Comments:
1. Why important
This paper finds that industry returns has explanatory power
beyond the commonly used size and BM factors. They also show
that within industries, firms which earn lower than the median
size or B/M have higher risk premium.
The asymmetric findings in the paper may be of use to quant
managers. If the results are confirmed, then one may profit from
a portfolio that rank stocks with size or B/M below the industry
medians.
In terms of methodology, this paper re minds us of the
importance of extreme stocks: whether or not stocks with 5%
extreme values (size, B/M) are removed can have a big impact.
Table 8(extreme stocks not removed) and Table 9(extreme
stocks removed) is a great example
2. Data
1963 2002 US stock data (ordinary common equities of all
firms listed on the NYSE, AMEX, and NASDAQ) are from
CRSP/COMPUSTAT database.
3. Discussions
It is interesting to see the different results when the authors

remove stocks with 5% extreme values (size,B/M). On one hand,
it does yield insights in terms of the role of the extreme stocks.
On the other hand,ideally the two scenarios (with and without
extreme stocks) give similar results, as either of them just tells
part of the bigger picture.
Also it would be interesting to control of other known factors:
concentration of the industry as shown by Robinson (2003),
momentum, etc.
Paper
Type:
Working Papers
Date:
2007-04-01
Category
:
Cross-industry lead lag, Limited attention
Title:
When the Tail Wags the Dog: Industry Leaders and Cross Industry
Information Diffusion
Authors:
Ling Cen, Kalok Chan, Sudipto Dasgupta, and Ning Gao
Source:
SSRN working paper
Link:
Summar
y:
This paper first defines "industry leaders" as those firms that rank top 5 in
sales from a specific industry, minor industry segments as other industries
where these industry leaders generate sales, and industry pure players as
those firms with sales only from that one industry.
Key Findings:
Stock returns of industry leader lead those of pure players for up to 2
weeks
Industry returns of minor industry segments lead returns of pure
plays for up to 2 weeks
The reason is that investors' limited attention leads them to trade all stocks in
an industry based on the stockperformance of industry leaders, which are
partially driven by returns of minor industries.
Commen
ts:
1. Why important
This paper presents a new strategy based on a reasonable story, and joins
other related papers to take advantage of investors limited attention.
2. Data
1986 2004 US stock data are from CRSP and Compustat segment files.
Segment customer and supplier data (for robust test purpose) are from the
Business Information File of Compustat 98.
3. Discussions
The authors did not present how much profit an arbitrage strategy can
generate Small size premium is one of our concerns. Though the paper claims
that the strategy is robust from size premium, a direct test with smaller
companies excluded should be very telling. From table 1 in the paper, its
clear that leaders are large firms and pure plays are much smaller with
average market size of only$900mn. The authors essentially denies small size
premium by saying that pure players in minor industries also lead pure plays
in major industry, a conclusion that is not intuitively appealing to us.
This paper reminds us of other papers that address investors limited
attention. For example, Driven to Distraction: Extraneous Events and Under
reaction to Earnings News
http://www.econ.yale.edu/~shiller/behfin/2006-11/hirshleifer.pdf),
where it
is shown that post earning announcement drift is stronger when there are
many earning announcements on the same day.
Paper Type:
Working Papers
Date:
2007-04-01
Category:
Industry classification
Title:
Which Industry Classification Method Produces More

Homogeneous Groups Of Firms?
Authors:
Timothy Cairney, Leslie B. Fletcher
Source:
2006 AAA annual conference paper
Link:
http://aaahq.org/AM2006/display.cfm?Filename=SubID_1618.pd
f&MIMEType=application%2Fpdf
Summary:
This paper measure

member firm homogeneity
as
the correlation
of
change in
operating expense and the variability of
accounting
policies (inventory/debt/depreciation).
In comparing Standard
Industry Classification System (SICS) and North American
Industry Classification System (NAICS), it finds that
(1) NAICS CLEANED industries are more homogenous than the
original SICS industries;
(2) but NAICS CONSOLIDATED industries are not as
homogenous as the prior SICS
Paper Type:
Working Papers
Date:
2006-12-17
Category:
Earnings announcement, peer group, industry
Title:
Overreaction to Intra Industry Information Transfers?
Authors:
Jacob Thomas, Frank Zhang
Source:
SSRN working paper
Link:
Summary:
This paper documents a systematic over reaction of a stock's

price related to earlier earning announcements of peer stocks.
The higher the return of a stock during peer stocks' earnings
announcements, the lower return this stock
will generate during
its own earnings announcements.

The strategy:
At day
t
1(day
t
is a stocks own announcement date), long
(short) stocks with lowest (highest) returns during peer
company earnings announcements, and sell (buy back) at
day
t
+1.
The average day return is 1.16%
Comments:
1. Why important
This study is the first paper we covered that focuses on the price
co movement of peer stocks during earning announcement
period. It may help practitioners improve their earning based
strategies. It may also help people rebalance their portfolios.
If
this paper is right, then one should buy a stock after (before)
firms earnings announcement if its peers have
good (bad)
earning news.
2. Data
2005 stocks' earnings announcement dates are from quarterly
Compustat files, stock return and accounting data are from
CRSP/Compustat databases.
3. Discussions
We suspect that there may be a size biase in this study. From
Table 2, we can see that though the 3 day excess return of this
strategy can be 1.16% (Decile 1 Docile 10), this return drops to
0.37% when we look at the difference between Decile 2 and
Decile 9 , and the size of stocks in Decile 1 and 10 is indeed
considerably smaller than other stocks.
Since we can group stocks in the following way
High
reaction to
Low
reaction to
peer
announcem
ents
peer
announcem
ents
Good
earlier peer
announcem
ents
Segment 1
Segment 2
Bad earlier
peer
announcem
ents
Segment 3
Segment 4
Presumably, the segment 1 stocks are in Decile 10 since they

have high positive response returns, while stocks in the segment
4 stocks in Decile 1 since they have high negative response
returns. This paper suggests that stocks in segment 1 (10) will
generate negative (positive) returns during its own
announcements. This is somewhat surprising.
The panel B of Figure 2 shows that this strategy is working fine
even during year 2003 and its hit ratio isomer 80%, which is very
encouraging.
Paper Type:
Working Papers
Date:
2006-12-17
Category:
Industry, Sector Allocation Decision
Title:
The Importance of the Sector Allocation Decision
Authors:
Raman Vardharaj Frank J. Fabozzi
Source:
SQA seminar paper
Link:
http://www.sqa-us.org/associations/6337/files/SQA%20Presenta
tion%20061026%2Epdf
Summary:
This paper extends the famous Brinson, Hood, Beebower (1986)

paper, where it shows that asset allocation explains over 90% of
portfolio performance
. The authors
confirm the importance of
sector allocation inequity portfolios. For example, such decision

explains 90% of time
series variation.

Paper Type:
Working Papers
Date:
2006-12-03
Category:
Value strategy, industry neutrality
Title:
Peer Pressure: Industry Group Impacts on Stock Valuation

Precision and Contrarian
Authors:
Turan G. Bali, K. Ozgur Demirtas, Armen Hovakimian and John J.

Merrick, Jr
Source:
College of William & Mary working paper
Link:
http://mason.wm.edu/NR/rdonlyres/A342731C-DE50-444B-AF0B
-8478E1ED4484/0/Peer_Pressure_JPM.pdf
Summary:
Value strategy can be significantly improved when implemented

in an industry
neutral fashion
(i. e.ranking stocks within

industries, not across the whole universe). This is true for
different valuenamely market, cash flow market and earnings
market ratios
Comments:
1. Why important
This paper may be of help to practitioners who are measuring
value ratios across their investment universe.
2. Data
2002 Stock monthly returns, prices are from CRSP monthly file.
Accounting data are from COMPUSTAT annual files. Industry
group is defined using the SIC industry definition scheme.
3. Discussions
If we decompose return of value strategy into two parts,
profit (value strategy) = profit (within industry strategy) + profit
(cross industry
then this paper suggests that the industry value strategy (long
value industry short growth industries) will not be profitable.
Interestingly, this is in direct contrast to a similar discussion on
the industry effect of momentum strategy ("Do Industries
Explain Momentum?" Moskowtiz and Grinblatt, Journal of
Finance,54, 1249-1290), where it is claimed that momentum is
mainly an industry level effect, and within industry momentum
strategy doesn't yield significant profit.
What might be the reason? Our guess is that momentum

investors generally pick industry first (they perhaps subscribe to
the theory of buying winning stocks in winning industries),
whereas value investors are relatively less sensitive to industry
selection.
Paper Type:
Working Papers
Date:
2006-11-03
Category:
Strategy, Durable vs Service, industry
Title:
Durability of Output and Expected Stock Returns
Authors:
Joao F. Gomes, Leonid Kogan, Motohiro Yogo
Source:
Center for Advanced Research in Finance working paper
Link:
http://www.carf.e.u -tokyo.ac.jp/pdf/workshop1/18.pdf
Summary:
This paper studies a key determinant of stock returns: durability

of a firms output. Since the consumptionof durable goods is
much more cyclical than services/non-durables , the stock
returns of durable good producers are exposed to more
systematic, business cycle risk. Consequently, durable good
stocks should earn a return premium, which is confirmed in
empirical test
A strategy that long durables and short on services yield
4.5% annually (Table 2)
A strategy that long durables (services) and short on the
market portfolio earns a countercyclical cyclical) risk
premium.
Comments:
1. Why important
This study reveals a new factor in asset pricing, namely
durability of output. The logic is convincing: the economic risks
that durable stocks are taking should be reflected in their stock
returns. Seems a new factor (DMS, durable minus service) can
be added to existing asset pricing models.
2. Data
All stocks are categorized based on how much of their output
contributes to five categories of final demand: durable goods,

nondurable goods, services, investment and others.
2004 stock data are from CRSP Monthly Stock Database.
3. Discussions
Can one build a profitable strategy based on DMS? From Panel B
of Table 8, we can see that DMS clearly works in Services sector,
as the Fama French adjusted excess return is 4% annually. We
also like the fact that such strategy will have very low turnover
rate
Paper Type:
Working Papers
Date:
2006-10-20
Category:
Industry effect, developed/emerging markets, Global markets
Title:
The differing importance of sector effects for developed markets

versus emerging markets
Authors:
Jianguo Chen, Andrea Bennett, Ting Zheng
Source:
2006 Asia finance conference paper
Link:
http://asianfa-admin.massey.ac.nz/paper_org/360314_org.pdf
Summary:
In developed markets, sector effects are as important as

country effects
In emerging markets, country effects still dominate
slowing rising sector effects
Paper Type:
Working Papers
Date:
2006-10-06
Category:
Strategy, value, momentum, industry
Title:
Generating Excess Returns through Global Industry Rotation
Authors:
Geoffrey Loudon and John Okunev
Source:
SSRN working paper
Link:
Summary:
This paper finds that a better way to combine value and

momentum strategy is to 1.) tilt toward momentum when the
yield curve is normal, and 2.) tilt toward value when the yield
curve is inverted.
When the yield curve is inverted, the spread between top and
bottom performing industries is ~31% (14% vs. -17% annually).
Value performs better than momentum.
When the U.S. yield curve is normal, the spread between the top
and bottom performing industries is ~5% (15% vs 10%
annually). Value performs worse than momentum.
Comments:
1. Why important
Though most quant strategies work on average, they break down
at some point in time. Quant managers care about performance
consistency. These findings may help managers improve their
models through better factor combination.
This paper offers rich information that may interest practitioners,
such as the performance of value/momentum in different
periods. It also sheds light on the impact of macro-economic
indicators (yield curve shape) on the profitability of different
strategies.
2. Data
1973-2005 monthly global industry data for 36 industries are
from DataStream.
3. Discussions
When talking about impact of macro factors, people also look at
volatility, market return, inflation etc. It would be interesting to
extend this study to different factors.
Paper
Type:
Working Papers
Date:
2006-09-22
Category:
Value, industry
Title:
The Relationship between the Value Effect and Industry Affiliation
Authors:
John C. Banko, C. Mitchell Conover, Gerald R. Jensen
Source:
2005 FMA annual meeting
Link:
http://www.fma.org/Chicago/Papers/ValueEffectPaperFMA.pdf
Summary:
This paper finds that value effect exist at both cross-industry and
within-industry level (i.e., firm level), and stronger at within-industry level.
Value industries display a stronger within-industry effect than growth
industries. Compared with growth stocks, value stocks have higher returns
but also substantially higher risk in terms of earnings uncertainty, leverage,
and distress risk.
Comments
:
1. Why important
This paper helps us understand what causes value effect by demonstrating
the impact of industry affiliations. For managers who keep their portfolios
neutral on sectors/industries, this paper shows that they do sacrifice some,
but not majority, of the value effect.
We find the study on the temporal consistency of the industry BE/ME ratios
ranking very intriguing. The paper shows that an industrys value ranking
may move drastically from year to year: a value industry may migrate to
growth industry the next year.
2. Data
1968 200 stock data are from CRSP and COMPUSTAT. Firms are ranked by
BE/ME. Standard Industrial Classification (SIC) codes are used to identify
industries.
3. Discussions
For most quant managers, more than one value measures (BE/ME,
Price/Earning, Price/Sales, Price/Cash flow, to name a few) are used.
Different value measures work differently. For example, Price/Cash flow can
better predict returns when the spread of Price/Earnings is very narrow. It
would be very interesting to extend this study to other value measures
using more recent data.
The authors concludes that the value stocks are riskier in terms of
earnings uncertainty, leverage, and financial distress risk. While the
methodology seems logical, this conclusion contradicts with the other paper
we mentioned in previous letters. (Is Value Really Riskier Than Growth?,
http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID891707_code597556.pd
f?abstractid=891707&mirid=1
) which studies risky-ness by comparing the
performance of value/growth stocks in bull/bear markets.
This paper also echoes the results of the widely-debated Moskowitz and
Grinblatt (1999) paper, where it is shown that much of the momentum
profit is at industry level.
Paper
Type:
Working Papers
Date:
2006-06-15
Category:
Healthcare stocks, patents/R&D, industry
Title:
Stock Market Returns and Knowledge Investments
Authors:
Vigdis Boasson, Emil Boasson
Source:
2006 FMA annual meeting paper
Link:
http://www.fma.org/SLC/Papers/StockreturnsandKnowledgeinvestments.pd
f
Summary:
This paper finds that, for pharmaceutical companies, stock returns are
positively associated with investments in knowledge production (proxied by
the citation-weighted patents numbers), which in turn was impacted by its
geographic location (closeness to innovation centers). Moreover, a firm
located closer to innovation center is more likely to yield higher stock
returns for its knowledge investments.

We reviewed a financial-sector earnings quality model (for European and
US banks) in last issue of AlphaLetters, this is yet another study on
sector-level quant models.
We would like to see more sector-specific model, because stock prices are
driven by market-level, sector-level as well as individual-level factors. Most
models these days are based on market-level factors and sector-level
model are under-explored. After all, a quant manager should be good at
quantifying the skills of successful fundamental managers/analysts - in this
perspective sector analysts skills have not been fully used yet.
2. Data
The pharmaceutical patent citation dataset are from the patent citation
database compiled by Jaffe and Trajtenberg (2002). Stock data are from
Compustat. A total of 115 U.S. publicly pharmaceutical companies were
studied between 1990-1999.
3. Discussions
The impact of geographic location on stock returns is not something new. A
recent paper "Does Corporate Headquarters Location Matter for Stock
Returns" (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=733483)
documents the co-movement of stocks with headquarters in same
geographic area. This paper provides a useful extension to link corporate

location with R&D sophistication and then with stock returns.
To us, the measure of "citation-weighted patents" may be a more direct
and intuitively appealing factor to use than the geographic location. It is
the high-quality patents that lead to better drugs and higher stock returns.
Paper Type:
Working Papers
Date:
2006-05-05
Category:
Stock valuation models, industry
Title:
Sector Investment Growth Rates and the Cross Section of Equity

Returns
Authors:
Qing Li, Maria Vassalou, Yuhang Xing
Source:
Rice University working paper
Link:
http://www.ruf.rice.edu/~yxing/invest6JB.pdf
Summary:
This paper proposes a new asset price model using sector

investment growth rates. The authors claim that this model
performs better than CAPM and at least as good as Fama-French
three factor model.
Comments:
1. Why important
We found this paper intriguing because, given the importance of
CAPM and Fama-French models in modern finance theory; any
improvement will be very meaningful. A new model can lead to
new investment strategies because it identifies new risk factors
and potentially arbitrage strategies.
The key motivation behind this paper is that, the return on
stocks should be directly and closely correlated with return on
investment into different sectors. ".the return on capital also
determines investments and, as a result, the investment growth
of the sector". Since data on investment growth is easier to get,
it becomes a natural candidate as predicting factor.
2. Data source
The investment data are from the Federal Reserve Board
Statistical Releases. Stocks prices and firm characteristics are
from CRSP/Compustat.
3. Discussions
As one can tell, one key assumption of this paper is that
business investors base their investment decisions upon recent

past return of capital, as thats how one can conclude that "the
return on capital also determinesthe investment growth of the
sector". This assumption certainly needs to further evidence to
support.
Now that this model is better than Fama-French model, can
quant managers profit from it? One possibility is a sector rotation
strategy - past sector investment growth and return on capital
can forecast future sector level returns. Also now that GICS
seems to be a widely-used sector classification, it would be
interesting to test a similar model under GICS scheme.
If this model actually works like the authors claimed, then we
can have a new way of classifying stocks/sectors (i.e., sector
investment growth rates). It would be of great interest to study
the relative performances of stocks categorized using this new
factor.
Paper Type:
Working Papers
Date:
2006-05-05
Category:
Stock valuation models, industry
Title:
Sector Investment Growth Rates and the Cross Section of Equity

Returns
Authors:
Qing Li, Maria Vassalou, Yuhang Xing
Source:
Rice University working paper
Link:
http://www.ruf.rice.edu/~yxing/invest6JB.pdf
Summary:
This paper proposes a new asset price model using sector

investment growth rates. The authors claim that this model
performs better than CAPM and at least as good as Fama-French
three factor model.
Comments:
1. Why important
We found this paper intriguing because, given the importance of
CAPM and Fama-French models in modern finance theory; any
improvement will be very meaningful. A new model can lead to
new investment strategies because it identifies new risk factors
and potentially arbitrage strategies.
The key motivation behind this paper is that, the return on
stocks should be directly and closely correlated with return on
investment into different sectors. ".the return on capital also

determines investments and, as a result, the investment growth
of the sector". Since data on investment growth is easier to get,
it becomes a natural candidate as predicting factor.
2. Data source
The investment data are from the Federal Reserve Board
Statistical Releases. Stocks prices and firm characteristics are
from CRSP/Compustat.
3. Discussions
As one can tell, one key assumption of this paper is that
business investors base their investment decisions upon recent
past return of capital, as thats how one can conclude that "the
return on capital also determinesthe investment growth of the
sector". This assumption certainly needs to further evidence to
support.
Now that this model is better than Fama-French model, can
quant managers profit from it? One possibility is a sector rotation
strategy - past sector investment growth and return on capital
can forecast future sector level returns. Also now that GICS
seems to be a widely-used sector classification, it would be
interesting to test a similar model under GICS scheme.
If this model actually works like the authors claimed, then we
can have a new way of classifying stocks/sectors (i.e., sector
investment growth rates). It would be of great interest to study
the relative performances of stocks categorized using this new
factor.
Paper Type:
Working Papers
Date:
2006-04-21
Category:
Portfolio construction, Euro-zone, Industry, country correlation
Title:
International Diversification in the Euro-zone: The Increasing

Riskiness of Industry Portfolios
Authors:
Esther Eiling, Bruno Gerard, Frans De Roon
Source:
Eiling, Esther, Gerard, Bruno and de Roon, Frans A.,

\"International Diversification in theEuro-zone: The Increasing
Riskiness of Industry Portfolios\" (September 2, 2005). EFA 2004
Maastricht Meetings Paper No. 3454
Link:
Summary:
This paper documents that, in euro-zone, the cross-country

correlation has been going down while the cross-industry
correlation has been going up since the introduction of euro in
1999.
Comments:

This paper has direct implications on how to diversify ones
portfolio: a.) for those who needs to decide whether to diversify
portfolio by industry or by country, this paper shows that
industry will bring increasingly more benefit. b.) for those who
makes industry bets and/or country bets, this paper shows that
industry bets have higher potential to bring in alpha.
2. Data sources
Monthly returns on industry/country indices are from
DataStream.
3. Next steps
Another common challenge for quant managers is to decide
whether to rank stocks within countries, or within industries, or
simply across the board (all countries and industries). The result
of this paper cannot be directly used as it touches only on the
correlations among country/industry indices, but one can
certainly extend the study and compare the stockscorrelation
within countries/industries. Sections with lower correlation are
more promising.
Paper Type:
Working Papers
Date:
2006-02-23
Category:
Strategy, industry, industry concentration
Title:
Industry Concentration and Average Stock Returns
Authors:
Kewei Hou, David T. Robinson
Source:
SSRN
Link:
Summary:
Long stocks in less concentrated industries (where large

companies collectively control a higher share of total sales), and
short stocks in more concentrated industries
Comments:
1. Why important
This strategy is worth studying not only because its relatively
new, but also because the authors cites two reasonable
rationales why the concentration level may impact stock returns:
a.) firms in higher concentration industry tend to have less
innovations, and b.) such firms are "insulated from
un-diversifiable, aggregate demand shocks".
If we believe that all the quant strategy is all about "whats
surprising", the paper implies that collectively the investors did
not realize that higher-concentration may destroy company
earnings and thus stock returns, more than they protect existing
players from competition.
2. Data source
The industry concentration level is defined using the annual sales
data from Compustat.
3. Next steps
Correlation with value strategy: one would imagine that more
concentrated industries tend to be those stable industries, or
value industries. Thus its interesting to compare stocks rankings
by concentration level and book/price ratio. We did not find such
direct comparison in the paper, although the table VII in the
paper does show that if book/price is added to concentration
level, the 2-way sort strategy can earn extra alpha
Paper Type:
Working Papers
Date:
2006-02-23
Category:
Strategy, Industry
Title:
Do Industries Lead Stock Markets?
Authors:
Harrison Hong, Walter Torous, Rossen Valkanov
Source:
UCLA working paper
Link:
http://personal.anderson.ucla.edu/rossen.valkanov/industry1
-24-04.pdf
Summary:
The paper claims that certain industries (retail, services,

commercial real estate, etc.) can forecast the stock market by up
to two months.
Comments:
1. Why important
In our view, this paper is meaningful to professionals partially
because it reflects the fact that we have far more industry
analysts than macro strategists, and we know all the industries
are inherently inter-connected. Consequently, one can arguably
find more arbitrage opportunities across industries than within
industries.
The paper makes a powerful statement by showing that the
leading industries returns also forecast economic indicators, and
that the strategy works in the 8 out of 9 world's largest stock
markets.
2. Data source
Data on industry portfolios from the U.S. stock market is from
Ken Frenchs website, and commercial real estate data is from
www.nareit.com. Other index (inflation, default spread, market
dividend yield) is from the DRI database, CRSP
3. Next steps
Why some industries lead others? One explanation is the
downstream industries are more sensitive to economy, and such
impact only gradually spread to their suppliers (upstream
industries). It would make sense to check the relationship
between leaders and laggers. Commercial real estate, which the
paper refers to as a key leading industry, seems less intuitive in
this perspective.
Another key concern is that this paper doesn't give the by-period
result. A practitioner will care more about recent performance,
especially in a time when hedge funds are changing everything in
the stock market by playing a key in industry rotations.
Paper
Type:
Working Papers
Date:
2009-03-18
Categor
y:
Novel strategy, advertising, sector-specific
Title:
Advertising, Attention, and Stock Returns
Authors
:
Thomas Chemmanur and An Yan
Source:
SSRN Working Paper
Link:
Summar
y:
The paper shows that advertising stocks (stocks with high increase of
advertising expense) have lower returns in the year
after
the advertisement,
although their contemporary returns in the advertising year(month (-12,0)) is
higher.
The intuition
Advertising increases investor attention and stock prices
increases with increased attention
In the subsequent years when the attention drops, so do the
stock returns
The change in investor attention is in the short- and long-run is
documented using two proxies for investor attention: Number of
financial analyst covering the stock, and trading volume
oChanges in advertising expenditures are shown to be higher for
large firms, value firms and with high increases in past
revenues.
Portfolio construction
Each month, stocks are sorted by the annual change of
advertising expenditures. I.e., it is the ads expense(year(0))
ads expense (year (-1))
The effect of advertising on future stock returns is stronger for
small firms, value firms and firms with poor prior return and
operating performances.
Robustness
The finding is robust to size, book-to-market, and momentum
Similar pattern found in the out-of-sample study of 1980-1993,
though the result is weaker since there was no universal
standard to expense advertising prior to 1994.
Discussions
Industry bias: there must be an industry bias in this study.
Industries like industrials do much less ads than consumer
sectors. So the long and short portfolios are mostly likely made
up of stocks in few industries. We cannot find related
discussions in the paper, though the authors adjust the
holding-period return of any stock by industry and size effects
Defying the usual return momentum pattern: advertising
stocks (stocks with high increase of advertising expense) enjoy
higher contemporary returns, so higher returns in subsequent
year are expected. This merely reinforces the findings in this
paper.
Data
The paper covers the period of 1996-2005 and uses CRSP for
stock returns, IBES for analyst coverage data, COMPUSTAT for
accounting variables (advertisement data is compustat item
#45)
Paper Type:
Working Papers
Date:
2008-05-01
Category:
Banking index returns, sector-specific models
Title:
Common Risk Factors in Bank Stocks
Authors:
Ariel Marcelo Viale
Source:
Texas A&M University dissertation
Link:
https://txspace.tamu.edu/bitstream/handle/1969.1/5806/etd-ta
mu-2007A-FINC-Viale.pdf?sequence=1
Summary:
The paper finds that the market factor and slope of the yield
curve can predict banking sector returns (note: not
cross-sectional, individual stock returns), whereas firm specific
factors (eg, size and book-to-market ratios) cannot.
Definition: Slope of the yield curve = (the yield of
long-term government bonds) - (the yield of one-month
Treasury bill);
Market factor = market forecast return based on
size and book/market
Higher slope of the yield curve, higher returns: there is a
-15.67% per annum premium (table V), indicating that
bank stocks constitute a hedge against future negative
shocks to consumption growth.
Reason: for banks, a steeper yield curve means higher
income from the carry trade (i.e., profit by borrowing
lower shorter-term funds and lending at higher
longer-term rates)
Different interest rate risk sensitivity: smaller banks tend
to have positive betas whereas larger banks have
negative betas.
Therefore positive contemporaneous shocks to
term structure are good news for smaller banks
but bad news for larger banks.
Comments:
Firm specific factors cannot forecast expected bank

returns.
Unlike non-bank stocks, for bank stocks, size and
book-to-market ratios does not forecast returns
Neither does growth of dividend yield, and the
difference between the investment-grade
corporate bonds and long-term government bonds.
Cross sectional regressions that include Fama-French and

momentum factors in addition to the term structure and
market factors show insignificant risk premiums for the
former ones (Table 8).
1. Disucssions
Financial is an important sector for many investors. Yet due to
financial stocks different company specifics, it has been
excluded in many asset pricing models, e.g. Fama-French
3-factor or Carhart 4-factor models. This paper can hopefully
shed more light.
Our concern is that, the innovations to term structure, dividend
yield and short-term interest rate variables are calculated in an
ad-hoc way with a first order VAR model, which can be
problematic since the innovations to term structure is presented
as the key pricing factor in the paper.
2. Data
Monthly return data is taken from CRSP tapes. Accounting data
for book-to-market variable is taken from COMPUSTAT for the
time period 1986-2003.
Only commercial bank holding companies with ordinary common
equity are included.
Paper Type:
Working Papers
Date:
2007-05-02
Category:
sector-specific, retailers and restaurants stocks, same store sales

growth (SSSG)
Title:
Do Industry Specific Performance Measures Predict Returns? The

Case of Same Store
Authors:
Halla Yang
Source:
Harvard University seminar paper
Link:
http://www.hbs.edu/units/finance/pdf/slides_20070316.pdf
Summary:
This paper shows that for retailers

and restaurants stocks, same
store sales growth (SSSG) can predicate

stock returns.
Retailer stocks
Restaurants stocks
Predicting stock
excess
return
Long stocks
with top
quartile
Short
stocks with
bottom
quartile
SSSG.
A statistically
A statistically
insignificant
monthly
significant
monthly alpha of 1.2%
alpha of 2.1% (25% (14%annually)
annually)
after controlling for
after controlling for bookmarket, size,
bookmarket, size,
dividend yield,
dividend yield,
earnings accruals,
earnings accruals,
total asset growth,
total asset growth, momentum significant
momentum
Stock return
regression
significant
Insignificant
Predicting ROA
significant
Insignificant
Reason for SSSG more up date (from

effectiveness: data monthly
staleness
reports from PR
newswire)
more up date (from

monthly
reports from PR
newswire)
Alpha Letters can provide history and up-to-date same store

sales data monthly for both retailer and restaurant stocks).
Please contact us if you are interested.
Comments:
1. Why important
We have been long been advocates of specific factors as new

alpha sources To us, SSSG is a less used and can potentially help
build profitable
2. Data
For retailer stocks, 1998-2006 monthly SSSG data are collected
from PR Newswire. Data in 2005 is from Business Wire. Sample
includes 71 firms and 372 firm year observations.
For restaurant 2006 annual data are from 10 K filings SEC filings.
Sample includes 72 firms and 411 firm year observations.
Stock pricing and accounting data are from Compustat/CRSP.
3. Discussion
First of all, we think the strategy has a convincing economic
story, and it is nice to see that the fresh data for retailers
provides better results than the stale data on restaurants.
Interestingly, the author chooses to use the store sales growth in
each May of year t to forecast stock returns in year t+1. This
scheme sounds somewhat arbitrary to us. Since each year only 1
month SSSG data is used (May), it would be interesting to test
whats the predicting power of SSSG in other months, or
quarterly SSSG.
As with many the sector specific models, SSSGs statistic
significance is debatable as the dataset covers a rather short
period of time (9 years) and (by the very definition of sector
specific factor) a smaller number of stocks
Paper Type:
Working Papers
Date:
2007-05-02
Category:
sector-specific, retailers and restaurants stocks, same store sales

growth (SSSG)
Title:
Do Industry Specific Performance Measures Predict Returns? The

Case of Same Store
Authors:
Halla Yang
Source:
Harvard University seminar paper
Link:
http://www.hbs.edu/units/finance/pdf/slides_20070316.pdf
Summary:
This paper shows that for retailers

and restaurants stocks, same
store sales growth (SSSG) can predicate

stock returns.
Retailer stocks
Restaurants stocks
Predicting stock
excess
return
Long stocks
with top
quartile
Short
stocks with
bottom
quartile
SSSG.
A statistically
A statistically
insignificant
monthly
significant
alpha of 2.1% (25% (14%annually)
annually)
after controlling for
after controlling for bookmarket, size,
bookmarket, size,
dividend yield,
dividend yield,
earnings accruals,
earnings accruals,
total asset growth,
total asset growth, momentum significant
momentum
Stock return
regression
significant
Insignificant
Predicting ROA
significant
Insignificant
Reason for SSSG more up date (from

effectiveness: data monthly
staleness
reports from PR
newswire)
more up date (from

monthly
reports from PR
newswire)
AlphaLetters can provide history and up-to-date same store sales

data monthly for both retailer and restaurant stocks). Please
contact us if you are interested.
Comments:
1. Why important
We have been long been advocates of specific factors as new
alpha sources To us, SSSG is a less used and can potentially help
build profitable
2. Data
For retailer stocks, 1998-2006 monthly SSSG data are collected
from PR Newswire. Data in 2005 is from BusinessWire. Sample
includes 71 firms and 372 firm year observations.
For restaurant 2006 annual data are from 10 K filings SEC filings.
Sample includes 72 firms and 411 firm year observations.
Stock pricing and accounting data are from Compustat/CRSP.
3. Discussion
First of all, we think the strategy has a convincing economic
story, and it is nice to see that the fresh data for retailers
provides better results than the stale data on restaurants.
Interestingly, the author chooses to use the store sales growth in
each May of year t to forecast stock returns in year t+1. This
scheme sounds somewhat arbitrary to us. Since each year only 1
month SSSG data is used (May), it would be interesting to test
whats the predicting power of SSSG in other months, or
quarterly SSSG.
As with many the sector specific models, SSSGs statistic
significance is debatable as the dataset covers a rather short
period of time (9 years) and (by the very definition of sector
specific factor) a smaller number of stocks
Paper Type:
Working Papers
Date:
2007-02-01
Category:
Value measures, technology sector, sector-specific
Title:
Multiples and Their Valuation Accuracy in European Equity

Markets
Authors:
Andreas Schreiner and Klaus Spremann
Source:
SSRN working paper
Link:
Summary:
For stocks in Dow Jones STOXX 600 and S&P500 during

1996-2005,
P/E
(two-year forward earnings estimates
has best
predicting power
For technology
stocks,
earnings
should be adjusted
to
include
R&D
costs
to get better earning predicting power
U.S. results are similar
Paper Type:
Working Papers
Date:
2006-05-19
Category:
Novel strategy, banking, sector-specific
Title:
The stock return predictability of the European banking sector
Authors:
George Leledakis, Christos Staikouras
Source:
2005 European Financial Management Association Meetings
Link:
http://www.efmaefm.org/efma2005/papers/49-christos_paper.p
df
Summary:
This paper shows that certain accounting data (eg. non-interest

income to total operating income, loan-loss provisions to total
loans, loans to total assets) is predicative of European banks
cross section return. Most notably, a strategy to long (short)
European banks with small (large) loan-loss provisions to total
loans yield an annual return of over 8%.
Comments:
1. Why important
This paper is interesting for two reasons: first, it provides several
strategies that may be profitable when investing in European
banking stocks. Secondly, we believe that sector-level
quantitative models can be of great help to quant managers, and
this paper gives a perfect illustration.
2. Data
Yearly consolidated accounting data is from Bankscope database,
and the monthly stock return data is collected from DataStream.
The data spans from July 1997 to June 2004.
3. Discussion
We note that this paper echoes a similar study by Cooper (2003,
http://book-to-market.behaviouralfinance.net/CoJP03.pdf
),
where the authors claim that several factors (changes in noninterest income to net income, loan-loss reserves to total loans,
and standby letters of credit to total loans), can predict US bank
stock returns.
One thing we found interesting is that in US, non-interest income

to total operating income is negatively correlated with stock
returns. While this paper shows the opposite works in Europe.
The reason seems to be that recent years have seen an increase
in fee-based bank in European as a new and promising business
model.
We are concerned about the small data sample used in this study
(only 193 firms in past 8 years), and the fact that all excess
return reported are not adjusted for other known Fama-French
style factors (e.g., beta). Besides, all the stock returns reported
are equal-weighted.

Paper
Type:
Working Papers
Date:
2015-01-16
Category: Momentum, intraday returns, overnight returns

Title:
A Tug of War: Overnight Versus Intraday Expected Returns
Authors:
Dong Lou, Christopher Polk, Spyros Skouras
Source:
London School of Economics
Link:
https://www2.bc.edu/~pontiff/Conference%20Papers/OvernightMom201412
01.pdf
Summary
:
Essentially all of the abnormal return on momentum strategies occurs

overnight, while the abnormal returns on other popular strategies primarily
occur intraday. The reason is the former is driven by retail investors
Intuition
Institutions are more likely to trade intraday, while individuals are
more likely to trade overnight (Table 5)
On average, institutions tend to trade against momentum, while retail
investors chase momentum (Tables 6, 7)
On average, institutions used more sophisticated quant strategies
Such pattern may cause the different patterns of daily vs nightly
returns
Daily open price is proxied by the volume-weighted average price
(VWAP) in the first half hour of trading
The intraday return, rintraday, is the price appreciation between
market open and close of the same day (accumulated over each
month):
The overnight return, rovernight, is imputed based on the intraday

and standard daily close-to-close return (accumulated over each
month):
Portfolio formation
Momentum:
At the end of each month, sort stocks into deciles based on
their lagged 12-month cumulative returns (skipping the most
recent month)
Other strategies:
At the end of each month, stocks are sorted into deciles based
on the lagged values of the corresponding characteristic
Go long the value-weight highest decile and short the value-weight
lowest decile
Hold for one month
Paper Type:
Working Papers
Date:
2014-06-12
Category:
Intraday momentum, first half-hour returns
Title:
Intraday Momentum: The First Half-Hour Return Predicts the

Last Half-Hour Return
Authors:
Lei Gao, Yufeng Han, Guofu Zhou
Source:
SSRN
Link:
Summary:
The first half-hour return of the S&P500 index predicts its own
return in the last half-hour. A strategy using this signal yields an
average annual return of 6.34%. Days with macroeconomic news
releases see 2-4 times greater returns
Intuition
If the first half-hour return is up substantially, it is likely
due to good economic news
In responding to the price move, many daytraders go
short in the first half hour to provide liquidity to the
market
These traders are most likely to unwind in the last
half-hour, their trading is likely to push index further
higher
First and twelfth (second last) half hour returns predict last half
hour returns
Based on regressing last half hour return on the first and
second-to-last half hour returns
Firsthalfhourreturnsyieldhighestannualreturn(andSharperatio)(Table4)
Highestsuccessratewhentradingbasedon1stand12thhalfhourscombined
Onlytakepositionwhensamesignalfrombothindicators
Lowerreturnduetolowerparticipationinthemarket
SimilarresultsforNASDAQ100ETF(Table10)
Resultsarerobusttooutofsampletests(Tables3,9)
Data
TradingpricesfromTradeandQuotedatabase(TAQ)
Sample:activelytradedSPDRS&P500ETFTrust(tickerSPY)
Datarange:January1999December2012
Paper
Type:
Working Papers
Date:
2014-06-12
Categor
y:
Title:
Intraday Momentum: The First Half-Hour Return Predicts the Last Half-Hour
Return
Author
s:
Source: SSRN
Link:
Summa
ry:
The first half-hour return of the S&P500 index predicts its own return in the
last half-hour. A strategy using this signal yields an average annual return of
6.34%. Days with macroeconomic news releases see 2-4 times greater returns
Intuition
If the first half-hour return is up substantially, it is likely due to good
economic news
In responding to the price move, many daytraders go short in the first
half hour to provide liquidity to the market
These traders are most likely to unwind in the last half-hour, their
trading is likely to push index further higher
First and twelfth (second last) half hour returns predict last half hour returns
Based on regressing last half hour return on the first and second-to-last
half hour returns
Stronger predictability when volatility is higher
Stronger predictability during recessions and on days with major
macroeconomic news releases (Tables 1, 2, 6, 7)
Calculate half-hour returns for S&P 500 ETF from 9:30 am to 4:00 pm
Eastern time (a total of 13)
Take a long position in the market at the beginning of the last half-hour
if first half-hour (or twelfth) return is positive, and take a short position
otherwise
The position is closed at the market close each trading day
Strategy yields an average annual return of 6.34%
Trade
based on
Averag
e
annual
return
(%)
Stan
dard
devi
ation
(%)
Succe
ss
rate
(%)
1st half
hour
6.34
6.28
53.92
12th half
hour
2.22
6.30
50.54
Both
4.52
4.52
76.88
Data
First half hour returns yield highest annual return (and Sharpe ratio)
(Table 4)
Highest success rate when trading based on 1st and 12th half-hours
combined
Only take position when same signal from both indicators
Lower return due to lower participation in the market
Similar results for NASDAQ 100 ETF (Table 10)
Results are robust to out-of-sample tests (Tables 3, 9)
Trading prices from Trade and Quote database (TAQ)
Sample: actively traded SPDR S&P 500 ETF Trust (ticker SPY)
Data range: January 1999 - December 2012
Paper Type:
Working papers
Date:
2010-06-09
Category:
Intraday stock return patters, institutional trading
Title:
Are You Trading Predictably?
Authors:
Steven Heston, Robert Korajczyk, Ronnie Sadka,

Lewis Thorson
Source:
SSRN working paper
Link:
Summary:
There exist patterns in intraday stock returns:

stocks whose relative returns are high in a given
half-hour interval today tend to have similar
outperformance in the same half-hour period on
subsequent days. Though not a profitable strategy,
it can help reducing institutional trading cost
Methodology
There are 13 half-hour intervals during
9:30 a.m. to 4:00 p.m.
The paper calculate each of such half-hour
intervals
Run regression of interval t return on
interval t-k return (k = 1 to 65, i.e., lagging
from 1/2 hour to 1 week)
To eliminate the effects of bid-ask-bounce,
use bid-to-bid and ask-to-ask half-hour
returns rather than transaction-totransaction returns
Intraday and daily patterns
There is usually a period of reversal of 6-7
intervals (3-3.5 hours)
After 6-7 intervals the return responses are
positive
At exact multiples of 13 half-hours ( = 1
trading day), the same return pattern
occurs, suggesting investors tend to trade
at the same hours each day
The effect is consistent across years, yet
weaker in magnitude during 2009
Trading volume changes exhibit a similar
pattern
Trading exclusively on this pattern is
unprofitable after trading friction.
Not a profitable strategy, but shows that
randomizing trades can help institutional trading
Small returns, though higher in first and
last half hour
During 2001-2005, the unlevered
dollar neutral portfolios (long
positions in top/bottom 10% stocks
in terms of returns k periods ago)
yields only 3 basis points
In the first and last half-hours of the
trading day, the average return
Data
spread are 11.5 and 8.4 basis

points, respectively
Randomizing trades, rather than trading
predictably, should help
The strategies that attempt to take
advantage of the daily periodicity
lose money, after the bid-ask spread
But the magnitude of the return is
sizeable relative to commissions and
effective spreads
Shifting trades to certain periods can
substantially reduce execution costs
for institutional traders
January 2001 - December 2009 stock
intraday bid and ask prices for 4,494 U.S.
stocks are from the NYSE Trade and
Quotation (TAQ) database
Paper Type:
Working papers
Date:
2009-11-23
Category:
Novel strategies, after-hours trading, intraday strategy
Title:
The Cost of Illiquidity: Evidence from After-Hours Trading
Authors:
Brian Walkup
Source:
SSRN Working Paper
Link:
Summary:
Conditional on the trades volume during after-hours trading of

the prior day, stock prices exhibit reversal/momentum during
market open hours (from 9:30am market open to 10:30am)
Price reverses
if number of trades in after-hours trading is
normal
Normal range is when the number of trades is no more
than two standard deviations above average
At the open of regular trading, 40%-65% of the
after-market price change immediately reverses
More reversal for negative after-hours returns: negative
after-market return is on average about 12% larger (56%
vs 44%) than positive after-hours returns
More reversal for small stocks: reversal for small cap

stocks is 7.7% larger than large cap stocks
More reversal across weekends: The reversal is about
6.6% larger across weekends than non-weekends
No price reversal or even price momentum
if number of trades in
after-hours trading is
much higher than its normal range
This may be due to release of news about the firm
Much less price reversal at the open, even a continuation
in price trends
Data
January 1, 2006 to December 31, 2006 US transaction
Paper Type:
Working Papers
Date:
2008-11-05
Category:
liquidity, Bid-Ask Spreads estimations, daily high and low prices,

intraday
Title:
A Simple Way to Estimate Bid-Ask Spreads from Daily High and

Low Prices
Authors:
Shane A. Corwin and Paul Schultz
Source:
SSRN working paper
Link:
Summary:
This paper develops a simple model to estimate the bid-ask

spreads based on daily high and low prices. The model gives
good estimation without using the transaction (intraday) data.
Estimation methodology:
Measured over two days, the (highest
price)/(lowest price) ratio reflects the two-day
volatility and the bid ask spread
The sum of two consecutive days high and lows
reflect two spreads and the two days volatility
The estimated stocks bid-ask spread is based on
(details in page7, equation 15)
1. Ratio of high-to-low prices, each measured over
a two-day period
2. High-to-low ratios for two consecutive days
This is based on the assumption that stock prices
follow a diffusion process, and that there is a
constant spread over the two-day estimation
period. A bid-ask spread can thus be expressed as

a function of daily high/low prices
Why daily price spread works
Daily high (low) prices are almost always buy (sell)
orders.
Hence the ratio of high-to-low prices for a day
reflects both the stocks variance and its bid-ask
spread
The new method works better than competing models
Compared to the covariance spread estimator of
Roll (1984) and the effective tick size estimator of
Holden (2006), both uses daily data
Higher correlation with actual effective spreads:
(computed from TAQ - Trade and Quote data) than
the Roll and Holden estimators: 0.873 versus
0.694 and 0.720 (Table 2 Panel B)
Lower estimation error. The mean absolute error
(absolute value of the monthly spread forecasted
using one of the models minus TAQ effective
spread) from the high-low estimate is 0.0089,
compared to that for the effective tick estimator
(0.0114), and that for the Roll estimator (0.0172)
- Table 3 Panel B
Works better across markets and firm sizes
Except that the effective tick estimator
performs better for larger firms - Table 6
Easy to program and based on reasonable
assumptions that do not depend on the market
structure
Can be used for a number of applications
Does not require transaction data, thus its use is
not limited to the recent decades
ISSM transactions data covers 1983 to
1993
TAQ transactions data starts from 1993
Two examples in the paper: historic transaction
costs for NYSE stocks and spreads around stock
splits
Data
TAQ and CRSP data from 1993 on, all stocks. The
authors also use CRSP date from its inception on
(1926) for NYSE stocks as well as stock split data
from CRSP.

Paper Type:
Working Papers
Date:
2008-04-09
Category:
Intraday return pattern, optimal intraday timing
Title:
Intraday Patterns in the Cross-Section of Stock Returns
Authors:
Steve L. Heston, Ronnie Sadka, Robert A. Korajczyk
Source:
SSRN working paper
Link:
Summary:
This paper documents a new finding that may help traders better
time their portfolio rebalances:
during 2001-2005, there is a
significant positive correlation among a stocks returns over the
same half-hour interval at daily frequencies.
E.g., a stocks return during 10:00am-10:30am at day t is
positively correlated with 10:00am-10:30am return at
day t+1, t+2, .., t+5.
Such pattern is more pronounced for the first and last half
trading hours.
Whats the reason? Explanation 1: traders tend to
trade at the same time of the day and at the same
direction. Explanation 2: index funds tend to trade
at the open/close to minimize tracking error
(obviously this cant explain the periodicity for
other trading hours).
A stocks return over a half -hour trading interval is

negatively related to its returns with recent interval
E.g., a stocks return during 9:30am-10:00am at
day t is positively correlated with
10:00am-10:30am return at day t.
This may be caused by "microstructure noise" such
as bid-ask bounce.
Not a tradable arbitrage strategy, but may help trader

rebalance their portfolios
: a hedged strategy would make
<10bps and would lose money after paying the bid-ask
spread
Trading volume has a similar pattern.
The findings are robust when controlling for bid/ask
spreads, order imbalances, firm size, systematic risk
premia, S&P500 index membership, particular months of
the year, days of the week, or turn-of-the-month effects.
Comments:
1. Data
2001/01-2005/12 NYSE-listed stocks intraday return data are
from NYSE Trade and Quotation (TAQ) database. For each stock
each day, returns for 13 half-hour interval (9:30am to 4pm each
day) are calculated.
Paper Type:
Working Papers
Date:
2007-10-16
Category:
Future/currencies, high frequency strategies, intraday
Title:
Exploitable Arbitrage Opportunities Exist in the Foreign

Exchange Market
Authors:
Ben R. Marshall, Sirimon Treepongkaruna, Martin Young
Source:
University of New South Wales seminar paper
Link:
http://wwwdocs.fce.unsw.edu.au/banking/seminar/2007/exploit
ablearbitrageMarshall_Sept13.pdf
Summary:
This paper finds that a (minute-level) high frequency strategy

triangular arbitrage, e.g. sell GBP/USD, buy EUR/USD, and sell
EUR/GBP) can take advantage of an exploitable arbitrage
opportunity in the foreign exchange market.
Key findings:
The average profit per arbitrage opportunity is ~0.02%
involving the CHF and JPY, ~0.04 involving the on
average there are 106 169 such opportunities every
hour.
When more number of quotes comes to the market, the
average profitability is lower but number of opportunities
goes up.
When the bid ask spreads are higher, the arbitrage
profits is higher
This strategy does not involve fundamental risk, noise
trader risk, synchronization risk, or margin costs, and
short sales are not required.
Comments:
1. Discussions
We think the authors did a solid job to address the
implementability of this strategy. E.g., they only record an
arbitrage opportunity when there are three quotes within a
two-minute interval that are divergent enough to create

arbitrage profits. Another important fact is that The EBS data
used in this study is binding quote data and any arbitrage
opportunity found can be implemented with near certainty up to
a maximum of one million units of the base currency.
Our concerns:
The capacity of the strategy sounds limited. (~0.02%
profit * $1Mn notional size per trade * 106 opportunities
per hour * 24 hours/day * 365 days/year = $185mn)
The soundness of the strategy critically depends on the
quality of the database they use, which has been less
studied.
2. Data
Foreign currency data for the year of 2005/01 2 005/12 is from
EBS, which is binding quote data (meaning one could trade
realistically with near certainty up to a maximum of one million
units of the base currency)
EBS is now the major marketplace for spot foreign exchange
transactions with an average daily volume of USD145 billion in
2006.
Paper Type:
Working Papers
Date:
2007-10-16
Category:
High frequency trading, Quant Meltdown, Intraday
Title:
Algorithmic trading gets smarter after quant upset
Authors:
Source:
Financial News article
Link:
http://www.financialnews-us.com/?contentid=2348859489&page
=ushome
Summary:
This news article summarizes some recent trends for frequency

traders after the August event
The high frequency trading is now an overcrowded area,
so the challenge is to factor in and deal with liquidity
squeezes.
Some development in this area: increasingly incorporate

risk rules which would allow "an algorithm to
automatically trade on a change in a particular risk
measure, such as value at risk, as well as trading on
arbitrage opportunities"
Incorporate real time news in trading algorithm
Develop minimal market impact order execution strategy:
execution algorithms of JP Morgan can "pick up on subtle
patterns in the order book and adjust the algorithms
execution strategy in an instant".
Regulators (eg. UKs Financial Services Authority) are
relying on algorithm to analyze unusual market trading
patterns and track possible insider trading.
Paper Type:
Working Papers
Date:
2007-09-09
Category:
high frequency (minutes to 1 day) trading, intraday
Title:
The statistics of `statistical arbitrage' in stock markets
Authors:
Robert Fernholz, Cary Maguire, Jr.
Source:
Intech research paper
Link:
https://ww3.intechjanus.com/SiteObjects/published/02945FCE4FCB
E72801064ECAAC8BC009/02945FCE58281926010F2B8003B62678/f
ile/statarb1.pdf
Summary:
Intech is famous for their success as an equity quantitative

investment manager. This paper is written by their founder and
claims that for a dynamic portfolio where holdings are maintained at
almost constant weights, it will produce high information ratio
(of
about 32 in a simulation) by capturing in a natural way the volatility
that is present in stock markets. These portfolios act as market
makers by selling on upticks and buying on downticks.
Comments:
1. Why important
We hope this paper may be of help to readers with an interest to
higher frequency trading. We are attracted by the background of the
authors, the simplicity of the strategy (two hedged portfolios both
with constant portfolio weights), and the very high information ratio
on paper.
The paper is very maths heavy to us and we do not fully understand

the details of stochastic portfolio theory. But hopefully you may
find something useful here.
Paper Type:
Working Papers
Date:
2007-02-01
Category:
Stock index volatility forecast, intraday high low price

range
Title:
Forecasting Stock Index Volatility: Comparing Implied

Volatility and the Intraday High Low Price Range
Authors:
Charles Corrado, Cameron Truong
Source:
University of Technology Sidney Working paper
Link:
http://www.qfrc.uts.edu.au/research/research_papers
/rp127.pdf
Summary:

a
simple measure, intraday
high
low price range, can predict stock indexvolatility
in future 1, 10, 20 days

. This predicting power holds in
three major US large cap indices (S&P500, S&P 100,
Nasdaq 100), and is not subsumed by widely used
implied volatility indexes (e.g. VIX)
Comments:
1. Why important
Even a brief glance at the VIX and SP500 price curve
suggests that there still exists a negative relationship
between these two, even in recent years . This said,
any methodology that can forecast stock index
volatility should be
2. Data
2003 index implied volatility (VIX for S&P 500, VXO for
S&P 100, VXN for Nasdaq 100) are from Chicago
Board of Exchange.
3. Discussions
Why does this simple factor work? What extra
information does intraday high low capture that VIX
does not? We are not convinced by the authors

argument ( ) that microstructure issues may be the
reason The daily return non-normality (kurtosis)
sounds more likely. If this is the case, then kurtosis
should also be able to predict volatility. A study of this
relationship should shed more light
Quant managers care more about whether this will be
an actionable idea, so one may want to test whether a
higher intraday high low predicts lower index prices.
Regarding VIX, a related paper we mentioned before is
VIX Signaled Switching for Style Differential and
Differential Short term Stock
http://www.fordham.edu/workingpapers/images/VIX%
20September26.pdf
where it is shown that VIX is a
useful signal to decide short term (15 days) switching
between small cap and large cap stocks

Paper
Type:
Working Papers
Date:
2012-12-31
Category: Forecasting stock index returns, macro factors

Title:
Economic and Market Conditions: Two State Variables that Predict the Stock
Market
Authors:
Dashan Huang and Guofu Zhou
Source:
SSRN Working Paper
Link:
Summary
:
Two macro factors can forecast the market risk premium better than other
well-known predictors.
Such new predictors work in both economy down turns and also during the
up turns when other predictors fail
Previous studies mostly cover individual macro factors
Factors that only measures certain aspects of economy
I.e., Dividend-price ratio, Earnings-price ratio, Book-to-market
ratio, Treasury bill rate, Default yield spread, Term spread, Net
equity expansion, Inflation, Long-term return, Stock variance
New Predictor1 (ECON): the leading economic indicator (LEI) of The
Conference Board
ECON predict future state of the overall economy
Arguably ECON is superior to various individual economic
variables that measures only certain aspects of economy
New Predictor2 (TECH): measures the mean-reversion behavior of the
stock index
Defined as the year-to-date stock return minus its long term
mean, standardized by volatility
where rt-12 -> t is the year-to-date cumulative return of the S&P

500 index
is its long-term mean (the mean of the past 20 years return)
and t-12 -> t is the moving standard deviation estimator
Intuitively, this means that what is hot today may not be hot
tomorrow, since empirically stock market reverts to its long-term
mean over the long run
Define up-market as when the stock market price is above its

200-day moving average price, and similarly for a down-market
The beta of the market regression on TECH is -0.21 during the
up-market periods, and 0.44 in the down-market
ECON and TECH predict the market risk premium
Much higher out-of-sample R-square

R2 is 3.5%
By contrast, when pooling all common 14 macroeconomic variables,
the R2 is 1-2%
Works in both expansions and recessions: the R2 is 2.57% and
6.60%, respectively (defined as NBER business cycle dates, Table 4)
By contrast, none of the previously studied factor is significant
in both up- and down-markets (Table 3)
In out-of-sample forecast, only earnings-price ratio, inflation
and stock variance worked (Table 3)
Works in recent years and out-of-sample period
During 1985:01-2010:12, ECON, TECH and their combinations
continue to predict the market risk premium
By contrast, the out-of-sample predictive ability of a number of
other economic variables deteriorates markedly after the
mid-1970s
ECON and TECH complements each other
When measured by both in- and out-of-sample R-squares, the
total R-square is close to the sum of both
TECH indicator exhibits different behavior across market states. Its
regression slope is negative in the up-markets and positive in the
down-markets
ECON and TECH can also predict style/industry portfolio risk premiums
Predict significantly on portfolios sorted by size, book-to-market ratio,
industry, long- and short-term reversals
Works best for small cap portfolio
Suggesting that small firms are more affected by economic
fundamentals
For size portfolios, only the performance for the largest size
portfolio is not significant
When ECON and TECH are jointly used, 9 out of 10 R2 are
significant at the 1% level, ranging from 2.26% to 3.53%.
(Table 6)
Works for all but one industries
All industries, except Telecom, are significantly predicted at
the 5% level. (Table 8, Panel B)
Data
January 1985 - December 2010 Leading Economic Indicator data are

from The Conference Board

Paper Type:
Working papers
Date:
2010-06-09
Category:
Macro factors, retail investor sentiments, price reversals
Title:
Relative Sentiment and Stock Returns
Authors:
Roger M. Edelen, Alan J. Marcus, and Hassan Tehranian
Source:
Boston College working paper
Link:
http://www2.bc.edu/~tehranih/Hassan%20published%20paper/
Relative%20Sentiment%2010_20_09.pdf
Summary:
This paper uses data for average retail investors quarterly

holdings in cash/equities/bond data from the Federal Reserve
Board to construct a "relative retail sentiment" (RRS). High (low)
RRS predicts low (high) subsequent quarter equity returns
Definitions
The Federal Reserve Board (FRB) reports quarterly data
for holdings on cash (and equivalents), equities, and
bonds
Both "institutional investors" and "retail investors"
holdings are reported
Relative retail sentiment" (RRS) = (wealth held in
equity) / (wealth held in cash and bonds)
Retail investors are optimistic (pessimistic) when RRS is
above (below) its 75th (25th percentile)
So RRS is an indication of how optimistic average retail
investors are: the higher allocation into equities means
higher risk appetite
RRS uncorrelated with other known sentiment indicators
0.185 correlation with the University of Michigan index of
consumer confidence
0.080 correlation with the Baker-Wurgler (2006)
composite index of investor sentiment
Change of RRS strongly co-move concurrent market returns
When RRS is optimistic, the average CRSP value-weighted
market index over T-bills is 25.6%
When RRS is pessimistic, the average CRSP
value-weighted market index over T-bills is 4.5%
For the full sample period, such index returned 9.7% (last
row of Panel A)
The higher the lagged RRS, the lower the future excess equity
returns
Regressing the return of CRSP index in each quarter on

RRS at the start of that quarter
An increase in the RRS of one percentage point (e.g.,
from 1.00 to 1.01) reduces the expected market return in
the coming quarter by .727% with a t-statistic of 2.32
(table4, panel A)
When RRS is lagged by one quarter, the results is very
similar (table4, panel B)
Performance during the 2008 financial crisis
Stock market returns in 2009:Q1 were dismal, and RRS
declined by .0090 to .9705, the 25th percentile of its
distribution
Equity returns in 2009:Q2 were spectacular, and RRS
increase by .012 to close to its median value
Data
1968 to 2008 quarterly data for holdings on cash and
cash equivalents, equities, and bonds are from the
Federal Reserve Board (FRB)
Both "institutional investors" and "retail investors"
holdings are reported
Paper Type:
Journal papers
Date:
2009-10-14
Category:
novel strategy, macro factors, forecast index returns
Title:
Simple Model for Time-Varying Expected Returns on the S&P 500

Index
Authors:
James S. Doran, Ehud I. Ronn and Robert S. Goldberg
Source:
Journal of Investment Management, Q2 2009
Link:
Summary:
This paper presents a parsimonious, implementable model for

the estimation of the short and long-term expected rates of
return on the S&P 500 stock market index
. Sufficient statistics
for the expected return on the S&P 500 Index consist of the
risk-free rate of interest, the option markets (priced) implied
volatility on the S&P 500 Index, and a measure of the economys
wealth level. The short- and long-term risk-free rates of interest
reflect the impact of the level and slope of the risk-free term
structure. The implied volatility captures a forward looking
measure of uncertainty. Utility-function assumed decreasing

relative risk aversion gives rise to an increased willingness to
invest in risky assets when current wealth level is high. The
models empirical parameters are estimated using
Livingston/Philadelphia Fed growth rates substituted into a
dividend-discount model
Paper Type:
Journal papers
Date:
2009-10-14
Category:
accruals, macro factors, market timing
Title:
Market timing with aggregate accruals
Authors:
Source:
The Journal of Asset Management, Vol 10
Link:
20095a.html
Summary:
We propose a market-timing strategy that aims to

exploit
aggregate accruals return forecasting power
. Using several
performance measures of the aggregate accruals-based
market-timing strategy, such as excess portfolio return, Sharpe
ratio, and Jensens alpha, we find robust evidence that,
relative
to the passive investment strategy of buying and holding the
stock market, the market-timing strategy delivers superior
performance
that is both statistically and economically
significant. Specifically, on average, the market-timing strategy
beats the S&P500 index by 6 to 22 percentage points
(annualized) after controlling for transaction costs over the
19802004 period.
Paper Type:
Working papers
Date:
2009-10-14
Category:
Novel strategies, accruals anomaly, macro factors
Title:
Two Accrual Anomalies: A Dichotomy of Accrual-Return Relations
Authors:
Source:
FMA Conference 2009
Link:
http://www.fma.org/Reno/Papers/twoanomalies.pdf
Summary:
Thepaperdecomposesdiscretionaryaccrualsintoafirmspecificand
marketwidecomponent:
Firmspecificcomponentpredictsfuturestockreturnsnegatively
Marketwidecomponentpredictsfuturestockreturnspositively
Ahedgestrategybasedonthesetwocomponentsyieldsasignificantly
higherreturnthanthatofatypicalaccrualstrategy
Thereexisttwoaccrualsanomaly
Negativepredictabilityforsinglestocks:firmswithhighaccrualson
averageearnlowerfutureexpectedreturns
Positivepredictabilityforaggregatemarket:valueweightedaverage
ofaccrualsinthemarketpredictsfutureexpectedmarketreturns
positively(perHirshleifer,HouandTeoh(2008))
Intuitionofthecoexistenceofthesetwoaccrualanomalies
Firmlevel(discretionary)accrualsisaproxyforfirmlevelearnings
management
However,onthemarketlevel,thehigheraccrualssuggeststhaton
averagecompaniesareexpandingtheirbusiness,whichisagood
signformarketreturns
Decomposingfirmleveldiscretionaryaccruals
Step1:estimatingfirmleveldiscretionaryandnormalcomponents
ofaccruals
Runregression:Accruals(t)/totalassets(t)=alpha+a*
changeinrevenues/totalassets(t)+b*grosspropertyplant
andequipment(t)/totalassets(t)+residual(t)
Normalaccruals=Thefittedpartoftheregression
Discretionaryresiduals=theregressionresiduals
Step2:decomposingfirmleveldiscretionaryaccruals
Aggregateaccruals(AAC)isthevalueweightedaverage
discretionaryaccruals
Runregressionwith10year(t10tot1)data:
Discretionary_AC(t)=alpha+b*AAC(t)+residual
Marketcomponentofdiscretionaryaccruals=Thefitted
valuefromtheaboveregression
Firmlevelcomponent=theregressionresiduals
Constructingportfoliostoverifytheexistenceoftwoindependentaccruals
Portfolio1:Whensortingthestocksbycoefficientbfromstep2
above,theaveragemonthlyfourfactoradjustedreturnis0.105%
Portfolio2:Whensortingthestocksbyonfirmlevelcomponentfrom
step2,theaveragemonthlyfourfactoradjustedreturnis0.159%
Portfolio3:Doublesortingfirstbythefirmlevelcomponentof
discretionaryaccruals,andthenbythemarketwidecomponent
Thepositivereturnpredictabilityofthemarketlevel
componentishighestforlowfirmleveldiscretionary
accrualsfirms(intuitivelythesetendtobemorestable,
value,bigcompanies)
Paper
Type:
Working Papers
Date:
2009-02-01
Category
:
Asset allocation, macro factors
Title:
Time-varying short-horizon predictability
Authors:
Sam Henkel, Spencer Martin and Frederico Nardari
Source:
Link:
http://finance.eller.arizona.edu/documents/seminars/2007-8/FNardari.Predict
ability03-08.pdf
Summar
y:
The paper shows that in G7 countries, stock index return predictors (such as
dividend yield and the short rate) only work during business cycle
contractions
and not in
expansions
.
Short rate, term spread and dividend yield are effective predictors
during recessions and not during booms

Adjusted R-squared in US index over 1953-2007 was 18%
during recessions and 1% in expansions
The difference in predictive power doesnt come from high
volatility or negative skewness of returns in bear markets
This result is not driven by the prediction of negative expected
returns in bad times
Aggregate return predictability has varied significantly in time
In 1960s and 1970s there was very little predictability and
returns were almost random walk
Following recessions in 1980s there was predictability
There was again little predictability in 90s following the booms.
Paper
Type:
Working Papers
Date:
2009-01-12

Title:
Authors:
Junhua Lu
Source:
S&P research paper
Link:
df
Summary
:
Thepapershowsthat
termstockreturns
ways
demand
industries
40outof46industries
46industries
inthepastthreeyears
marketconditions
Regim
Strateg
Average
Sharpe
e
y
Annual
Ratio
return
Overall
Inflation
10.7%
0.64
timing

Market
4.1%
0.36
High
Inflation
12.7%
0.91
inflatio
timing
n

Market
7.7%
0.54
Low
Inflation
10.3%
0.44
inflatio
timing
n

Market
2.4%
0.17
Ourconcerns
markets
Data
global1200index.
Paper Type:
Working Papers
Date:
2009-01-12
Category:

Recommendations
Title:

Authors:
Source:
SSRN working paper
Link:
Summary:

Specifically, the
strategy is
low short interest
short interest,
not work
(2003-2006)
months

1999-2003)
predicting factors
factors
Data
database
Paper Type:
Working Papers
Date:
2008-10-15
Category:
macro factors, LIBOR Manipulation
Title:
LIBOR Manipulation?
Authors:
Rosa M. Abrantes-Metz, Michael Kraten, Albert D. Metz, and Gim
Seow
Source:
SSRN working paper
Link:
Summary:
This study finds some unexpected patterns in reported borrowing

costs by the banks, but fails to detect any manipulation in
LIBOR.
Background information LIBOR
LIBOR rate is an interest rate at which banks can
borrow funds from other banks in the London
interbank market
Published by the British Bankers Association (BBA)
in ten currencies
BBA selects 16 banks to provide quotes, then sorts
these quotes and takes the average of the 8
quotes in the middle to compute LIBOR
Study motivated by a Wall Street Journal article
The article, published on May 29, 2008, claimed
that "the banks were reporting costs that were
significantly lower than the rates that were
justified by bank-specific cost trend movements in
the default insurance market."
LIBOR not differ much from predicted values
Predictions are based on the Federal Funds
Effective (FFE) rate, a short term rate that is very
similar to and highly correlated with LIBOR
This evidence is not consistent with a possible
market manipulation.
Yet there exist suspicious clustering in individual daily
quotes
Individual daily quotes from banks that are used to
compute LIBOR Bank quotes show virtually no
variance, inconsistent with the patterns expected
in a competitive market.
This pattern is of suspect, though in and of itself
does not suggest manipulation
Conclusion: banks may have been "low-balling" their
borrowing costs.
This can be interpreted as extreme optimism, i.e.,
their borrowing cost estimates are not good but
thats not illegal
Banks do so to make their cash positions look
better than they really are.
On-going debate:
The informativeness of LIBOR was questioned

again in another Wall Street Journal article (Libors
Accuracy Becomes Issue Again, September 24,
2008). Authors point out the fact that one-month
dollar LIBOR rates were below the rate for the
28-day Fed facility (which allows banks to borrow
from the Fed by putting up a collateral) 3.21%
versus 3.75%. Since the Fed loans are
collateralized, those rates were expected to be
below the LIBOR rates which are based on
uncollateralized loans.
Paper
Type:
Working Papers
Date:
2008-09-25
Categor
y:
novel strategy, macro factors, Labor hiring, investment
Title:
Labor Hiring, Investment and Stock Return Predictability in the Cross Section
Authors: Santiago Bazdrech, Frederico Belo and Xiaoji Lin

Source:
SSRN working paper
Link:
Summar
y:
The paper shows that 1) higher firm level labor hiring rates and/or 2) higher
investment levels predict lower stock returns.
Lower hiring and investment levels, higher expected returns:
Investment is measured as (Capital Expenditures) / (Property,
Plant and Equipment)
Hiring rate is measured as (Net employee change) / (Total
number of employees)
Proposed explanation: over-investment in labor and capital expenditure
destroys value
High hiring rates result in labor search and training costs
The negative effect of investment rates on returns is only strong
for capital intensive firms and it again brings extra costs on
adjusting to new technologies
Robustness to Fama-MacBeth style factors (Table 3)
The predictive power of hiring and investment rates are robust
to size, BM, momentum, accruals, share splits, asset growth
and profitability
Both factors are stronger than size and BM

The predictive power is stronger in the latter half of the sample
(1986-2006)
Comme
nts:
1. Discussions
Our concerns are mainly related to the extra alpha that these two factors can
add to typical value factors. Two findings worth note on this point:
Both hiring and investment rates seem to increase the exposure to
market and Fama-French factors. The market, SMB and HML loadings
increase with the hiring and investment rates monotonically, which is
not healthy for the robustness of the results (Table 8).
After the inclusion of BM factor in regressions, the t-stat for labor hiring
is still significant for hiring, though less so for the investment factors.
2. Data
Labor and other stock-specific data are from CRSP-COMPUSTAT merged tapes
for 1965-2006 time period.
Paper Type:
Working Papers
Date:
2008-09-25
Category:
Macro factors, market timing, predictive regressions, bond/stock

allocation
Title:
Forecasting stock market returns: The sum of the parts is more

than the whole
Authors:
Miguel Ferreira and Pedro Santa-Clara
Source:
UCLA working paper
Link:
http://personal.anderson.ucla.edu/pedro.santa-clara/Forecasting
StockMarketSumOfThePartsApproach.pdf
Summary:
The paper presents a more accurate method to forecast S&P500

returns based on forecasting the returns of three components:
dividend yield, earnings growth and price-earnings ratio growth.
The new method: decomposing market index return into
returns of three components
Dividend yield: estimated by regressing on
currently observed dividend yield
Earnings growth rate: estimated by regressing on
its twenty-year moving average
Price-earnings ratio growth: estimated by

regressing on macro variables and using the fitted
values.
All the three components are estimated using the
conventional predictor variables
New method vs classic method:
The classic method: forecast S&P500 return by
regression on 16 usual factors (eg, long-term
government bond yield, dividend yield, etc)
The new method: regress the returns of the three
components on these 16 factors, then combine the
component returns to get forecast market return
The new method generates high out-of-sample R-square
At monthly frequency
Out-of-sample monthly R-squared values
ranges between -1.74% to 0.85% (note
this is relative to the R-squared of the
historical mean, so may be negative) when
aggregate returns are forecasted as 1
component
Estimating three components separately
produces monthly out-of-sample
R-squareds between 0.66% and 1.59%
At annual frequency
The classical method obtains R-squared
values between -17.51% (note this is
relative to the R-squared of the historical
mean, so may be negative)
The method in the paper has annual
R-squared values from 9.29% to 14.29%.
The new method leads to a profitable market timing
strategy with higher Sharpe ratios
A market timing strategy based on this approach
has a certainty equivalent gain of as much as
2.3% per year
The maximum gains in multiple components
forecasting is 75% and 82% for monthly and
annual frequencies, respectively.
The classical predictive regressions obtain smaller
excess Sharpe ratios compared to the method in
the paper (Table 4).
Reason: the three components each has different statistic
attributes
For example, earnings growth is nearly
un-forecastable,
Whereas dividend-price ratio nearly follows a
random-walk process
So separately estimating their expected returns

enhance accuracy
Comments:
1. Discussions
The predictor variables that seem to perform relatively well in
monthly frequency do not succeed at annual frequency (Table 1)
or in sub-samples, which threatens the theoretical background
behind the results.
The sub-sample results show that, at annual level, the
out-of-sample predictability looks better in the early half of the
sample (1927-1976) than in recent years, which should serve as
a red-flag and need to be double checked.
2. Data
S&P 500 returns for 1927-2005 period and predictors of stock
returns such as stock variance, long-term-yield,
long-term-government bond return, etc. are taken from
http://www.bus.emory.edu/AGoyal
.
Paper Type:
Working Papers
Date:
2008-09-03
Category:
novel strategy, macro factors, Stock crash/boom sensitivity
Title:
Market Crashes, Market Booms and the Cross-Section of

Expected Returns
Authors:
Jonathan Spitzer
Source:
University of Virginia Working Paper
Link:
http://faculty.darden.virginia.edu/Spitzer/WP-Spitzer-Market_Cr
ashes.pdf
Summary:
The paper documents that stocks

whose return drop heavily
during market crashes and stocks whose return jumps most
during booms generate a 6% ~ 7.5% annual abnormal return.
Definition of market crash/boom sensitivity:
Use the number of consecutive days (k) that
exceed a certain threshold out of a total number of
observations (n)
Comments:
(per formula 7 and 8 in the paper) Sensitivity is

defined as the fraction of days for which both
market return and stock return exceed the
(1-k/n), divided by the fraction of days that is
above the threshold
Intuition: those high-sensitivity stocks bear
undiversifiable risk
Extreme market-wide price movements cannot be
diversified away, so stocks whose prices move
more than average have an undiversifiable risk
So expected returns should be higher for such
stocks, i.e., those whose returns drop most during
crashes and those whose returns jump most
during booms
In other words, the behavior of a stock during rare
extreme market movements can be an important
driver of the expected return of that stock.
Zero-investment portfolios bring significantly returns
Long-short portfolio on crash risk bring a raw
return of 6% per annum and 7.3% per annum
four-factor alpha
Long short portfolio on boom risk bring a raw
return of 7.5% per annum and 6% per annum four
factor alpha
The predictability for both of the strategies is much
more significant for the later period of the sample
and for the month of January.
Robust to Fama-French factors and momentum
The crash and boom factors have negative
loadings if not controlled for other factors.
Once controlled for the other factors both crash
and boom loadings have positive Fama-MacBeth
coefficients, suggesting the positive price of both
risks.
1. Discussions
Most of the predictability of the market crash strategy comes
after the October 1987 crash, which might signal that what the
paper is capturing is some specific episodes.
The estimation of crashes and booms is based on past returns
only and highly sensitive to parameters of the estimation
method, whereas a more robust method could be incorporating
the macroeconomic recession and boom variables as well.
2. Data
CRSP daily returns from 1962 to 2005 as well as COMPUSTAT
variables to construct book-to-market measure
Paper
Type:
Working Papers
Date:
2008-09-03
Category:

Global markets
Title:
Authors:
Source:
Link:
df
Summary:
The paper
.
all industries
the market
ahead).
Predicting factors
future inflation

and employment

9)
Factor 1 has great

explanatory power

investment
Factor 1 and 2 have


2. Data
Paper Type:
Working Papers
Date:
2008-09-03
Category:

Title:
Authors:
Erik Hjalmarsson
Source:
SSRN working paper
Link:
Summary:

developed markets,
short term interest
dividend-Price and
respectively.
Comments:

1. Discussions
time series data.
2. Data
Paper Type:
Working Papers
Date:
2008-09-03
Category:
statistic methodology, IPO/SEO, macro factors, index returns
Title:
Forecasting aggregate stock returns using the number of initial

public offerings as a predictor
Authors:
Gueorgui I. Kolev
Source:
SSRN working paper
Link:
Summary:
Increase in the monthly number of IPOs is followed by

lower monthly returns
Based on regression analysis on both an
equally-weighted portfolio of CRSP stocks (beta
estimate: -0.0327, t-statistic: -3.35) and an
equally-weighted portfolio of Nasdaq stocks (beta

estimate: -.0413 t-statistic: -3.82).
The results hold in out-of sample tests.
Only significant in equal-weighted portfolios, not
value-weighted
Value weighted portfolios yield insignificant results
in general
It is possible that the effect is more pronounced in
small, high-tech, growth stocks which are more
difficult to arbitrage and more subject to
sentiment.
Likely reason: investor sentiment likely drives IPOS
issuance
The behavioral explanation of the results is that
more equity is issued when investor sentiment is
high.
This is followed by mean reversion in sentiment,
which also drives the prices down.
Data
The study covers January 1960 to December 2006.
It uses CRSP data: monthly returns for equally and
value weighted indices on all CRSP stocks and
stocks that are traded on the NASDAQ stock
exchange.
Comments:
Paper Type:
Working Papers
Date:
2008-09-03
Category:
Title:

Authors:
Gueorgui I. Kolev
Source:
SSRN working paper
Link:
Summary:


value-weighted
in general
sentiment.
issuance
high.
Data
exchange.
Comments:
Paper Type:
Working Papers
Date:
2008-06-27
Category:
macro factors, Inflation and Stock return
Title:
Expected Inflation, Expected Stock Returns, and Money Illusion:

What Can We Learn from Survey Expectations?
Authors:
Maik Schmeling and Andreas Schrimp
Source:
Link:
Summary:
This paper finds that expected inflation can predict future stock
return in five stock markets (Germany, UK, USA, France and
Italy) but not in Japan
Expected Inflation is defined as the six months inflation

expectation of professional forecasters
After regressing expected inflation over stock return,
regression coefficients are:
Germany (0.91), UK( 0.60) , US(0.60), France (1.13) and Italy(
0.84)
Japan does not show any relationship between expected
inflation and stock return
Money illusion may be the reason that is driving the
results
Paper Type:
Working Papers
Date:
2008-06-08
Category:
momentum, macro factors, S&P500 timing, Predictive Regressions,

Time-Varying Coefficients
Title:
Predictive Regressions with Time-Varying Coefficients
Authors:
Thomas Dangl, Michael Halling
Source:
Financial Management Association conference
Link:
http://www.fma2.org/Prague/Papers/DanglHallingPaper20071117.pdf
Summary:
The paper finds that a regression with time-variation of coefficients

significantly outperforms the regression with constant coefficients
and no-predictability benchmark.
The model proposed by the paper is the
posterior-probability-weighted average model (the
AVG-Model) and the horserace is done with the constant
coefficients model (the CONS-Model).
Both CONS-Model and AVG-Model predict S&P 500
index returns by regressing S&P 500 index returns on
predictive variables like dividend yield, momentum,
turnover, credit spread, etc.
The difference: AVG-Model incorporates the time
variation of the coefficients, yet CONS-Model estimates
the model once for the whole sample with constant
coefficients.
The AVG and CONS models work best during the early 1980s:
Before the oil price shock in 1974 and after 1990s, no
predictive model beats the benchmark.
Before the oil price shock, the classical CONS-Model

performs better than the AVG-Model proposed by the
paper, however afterwards AVG is consistently more
powerful in out-of-sample forecasting the index
returns.
AVG performs better than CONS
The portfolio formed on the AVG-Model (excess
return=5.6% per annum) outperforms the one formed
on CONS-Model (excess return=2.6% per annum)
Table 3 reports the importance of the predictive variables
during different sub-periods:
The dividend yield has lost its importance significantly
from 1995 to 2005 (average coefficients of 0.159 and
0.027, respectively).
Turnover variable also shows as a poor predictive
variable in the latter part of the sample (average
coefficient of 0.014 in 1985 and 0.001 in 2005).
Inflation seems to be the predictor that increased its
importance the most during the sample (average
coefficient of -0.053 in 1985 and -0.244 in 2005).
Comments:
1. Discussions
The paper explicitly accounts for the parameter instability for
predictive regressions and shows that time-varying coefficient
estimates improves the predictive power of the regressions. The
relevant portfolio implications of the method proposed paper are also
shown with high expected returns and Sharpe Ratios.
What looks troubling to us is AVG only starts to outperform CONS
after the 1980, we think more discussions on this finding will be
helpful.
2. Data
S&P 500 returns for 1951-2005 are used as the dependent
variable in the paper.
For US industrial production Ecowin and for all the other
variables (e.g. liquidity, interest rate and CPI) Global Financial
Data are used.
Paper Type:
Working Papers
Date:
2006-05-19
Category:
Strategy, short-term event, macro factors
Title:
Releases of Previously Published Information Move Aggregate Stock

Prices
Authors:
Thomas Gilberty, Shimon Koganz, Lars Lochstoerx, Ataman

Ozyildirim
Source:
Berkeley working paper
Link:
http://faculty.haas.berkeley.edu/tgilbert/Gilbert_Kogan_Lochstoer_%
20Ozyildirim_LEI_2006.pdf
Summary:
Replicate the U.S. Leading Economic Index (LEI) based on publicly

available data and procedure. Long or short the stock market index
depending on the change of the LEI.
Note that this is a very short-term, minute level strategy.
Comments:
1. Why important
We find this paper very interesting because it apparently shows that
the stock market is not efficient, and stock investors collectively do
not understand and process every piece of information as they
become available. Consequently, an index that is based on "old"
information is perceived as new information and moves market.
The authors show that change in the LEI index is positively
associated with realized contemporaneous market returns, higher
volatility and volume. The fact that post-announcement prices tend to
revert shows that some traders are already taking advantage of this
phenomenon.
2. Data
The LEI data is from the Conference Board. The S&P500 future price
is from price-data.com. Individual stock transactions data are from
the TAQ database.
3. Discussions
We doubt that the capacity of this strategy is limited, given its very
short-term nature and the fact that the LEI index is available for
limited times each year.
The authors claim that stocks with higher sensitivity to macro
economic factors respond less to the release of the LEI. This maybe
because this is a short-term strategy, and the sensitivity to macro
factors is measured based on long term basis. The seemingly
discrepancy here should not be very surprising.
Paper
Type:
Working Papers
Date:
2006-05-05
Category:
Strategy, macro factors, stock sentiment beta
Title:
Noise trading, firm characteristics and Institutional behavior
Authors:
Denys Glushkov
Source:
Link:
http://www.fma.org/Chicago/Papers/paper_Denys_Glushkov_UT_Austin_De
c21.pdf
Summary: Short stocks with highest sentiment beta (defined as sensitivity of stock
returns to the changes in an investment sentiment index) and the stocks
with lowest sentiment beta. The paper shows this strategy earns a
risk-adjusted annual return of ~12%.
Comment
s:
1. Why important
This paper presents a new investment strategy. It first constructs an
investor sentiment based on some macro-factors: closed-end fund discount,
the Investor Intelligence Index, NYSE turnover, aggregate equity share in
the total issues, ratio of specialist short-sales to total short sales, etc. The
intuition is that those stocks with greater sentiment sensitivity should be
smaller, younger, more volatile stocks with lower dividend yields and
greater short sales constraints. A strategy based on this new factor is shown
to be profitable.
2. Data source
Stock data are from the CRSP Monthly Stocks Combined File, which includes
NYSE, AMEX, and NASDAQ stocks. Firm characteristics are from
CRSP/Compustat Merged Industrial Annual database. Institutional ownership
data come from the CDA/Spectrum database. The data on analyst coverage
are from the I/B/E/S.
3. Discussions
This strategy will presumably be correlated with some existing factors: high
sentiment stocks sounds very much like low quality stocks. Also the
performance of the strategy may be correlated with the market trend: when
the market is going up and sentiment is also going up, then high sentiment
beta stocks are also more likely to outperform those with low betas.
If the stock market beta (the com only-known beta as we know it) strategy
are any indication, we also suspect that back-testing results will show a
fairly volatile performance during the past five years.
Paper Type:
Working Papers
Date:
2006-03-09
Category:
Strategy, Fama-French model, consumption risk, macro factors
Title:
Long-Run Stockholder Consumption Risk and Asset Returns
Authors:
Christopher J. Malloy, Tobias J. Moskowitz, Annette

Vissing-Jrgensen
Source:
London Business School seminar paper
Link:
http://fmg.lse.ac.uk/upload_file/438_T_Moskowitz.pdf
Summary:
This paper presents a new asset pricing model which is

reportedly better than the classic Fama-French version. It uses a
Consumer Expenditure Survey (CEX) index and is based on the
theory that stockholders demand a higher return for those
stocks with high correlation with his/her consumption pattern.
Comments:
1. Why important
This scholarly paper is based on beautiful theory framework (i.e.,
you can find lots of Greek letters and formula in the paper) and
gives a novel perspective in asset pricing. The story is intuitively
appealing - the stock market and individual stocks return are
ultimately determined by the demand/supply of stockholders,
and such demand/supply is a function of the stockholders
consumption needs. Consequently, stock returns will be
connected with investors consumption.
2. Data sources
Consumption growth rates for stockholders and non-stockholders
are from the Consumer Expenditure Survey (CEX). Stock
information are from CRSP, Compustat, and Kenneth Frenchs
website
3. Next steps
Can we make money out of it? Its a pity that the regression
statistics of the covariance with the stockholders consumption
growth is not shown in panel A of Table III. A nature next step
would be to sort stocks based on its covariance with the
stockholders consumption growth, and test the excess returns of
the long-short portfolio.
Paper Type:
Working Papers
Date:
2013-02-28
Category:
Novel strategy, (dis)continuous Beta, high frequency data,

downside beta
Title:
Continuous Beta, Discontinuous Beta, and the Cross-Section

of Expected Stock Returns
Authors:
Sophia Zhengzi Li
Source:
Duke working paper
Link:
http://econ.duke.edu/uploads/media_items/jmp-sophiazheng
zili.original.pdf
Summary:
Stock market indices can move continuously or

discontinuously (jump). Using a second-by-second price
database, this study shows that only stocks
discontinuous beta is priced but not continuous beta. A
strategy that goes long(short) stocks in the
highest(lowest) discontinuous beta decile yields 17% per
annum
Intuition
Investors care more about large market movements, and
less about small market movements
If an stock co-varies strongly with market discontinuities,
investors may demand higher return, since such stock
tends to suffer badly when the market goes down sharply
Methodology of calculating betas
Standard beta: each month end, regress stock excess
returns on daily market index returns for previous 12
month
Discontinuous and Continuous beta: for each month,
aggregate the past 12 months high-frequency data
(sampled at every 75-minute interval between 9:45 am
and 4:00 pm) regressions
Where
and
are the continuous and the
discontinuous parts of the market return.
and
are the Discontinuous and Continuous beta
Discontinuous betas have larger magnitudes than the

continuous betas (Table 1, panel A)
These three betas are different: e.g., positive correlation
between illiquidity and discontinuous betas, but negative
relationship between illiquidity and other two betas (Table
2)
Highest return predictability for discontinuous beta (Table 1,
panel A-D)
Standard
beta
0.95%
Continuous
beta
1.04%
Discontinuou
s beta
1.47%
Discontinuous beta has the highest predictability after

controlling for various risk factors, followed by standard
beta and then continuous beta (Per Table 4, Table 6)
Jump risk premium is 3% per annum after
controlling for all other variables (Table 9)
Robust to various sampling frequencies: the baseline
sampling frequency is 75 minutes, but similar patterns
when using 5 to 180 minutes
Robust to portfolio holding period from 1 to 12 months
Discontinuous betas subsumes idiosyncratic volatility (IVOL)
IVOL weakly positively predict future returns (Table 8,
note the universe is SP500 here, as opposed to all stocks
in earlier studies)
When add discontinuous beta, the regression significance
is all but gone (Table 8)
Data
1993-2010 second-by-second price records for S&P500
stocks are from TAQ database
Total of 985 distinct stocks and 4,535 trading days
Daily and monthly stock returns are from for Research in
Securities Prices (CRSP) database
Paper Type:
Working Papers
Date:
2012-04-22
Category:
Novel strategy, number of trades, short-sale constraints,

high-frequency trading data for low-frequency strategy
Title:
The Number of Trades and Stock Returns
Authors:
Yi Tang and An Yan
Source:
Fordham University Working Paper
Link:
http://faculty.baruch.cuny.edu/jwang/seminarpapers/numtrd-03
-23-2012.pdf
Summary:
A high-frequency trading data, number of weekly trades, can

forecast stock returns. A long-short portfolio yields 15.18%
annualized return after adjusting for Carhart-four-factors. Such
pattern holds after adjust for dollar trading volume
Intuition
When fewer investors trade a stock, it may be that the
stock faces more binding short-sale constraints
More investors are sitting on the sidelines and wait
for stock price to fall to reasonable levels
For each stock, define adjusted number of
trades(NUMTRDU) = (weekly number of
trades(NUMTRD) - past 26-week average NUMTRD ) /
(standard deviation of past 26-week NUMTRD)
NUMTRDU has low correlation with the NUMTRD
(correlation coefficient 0.05), and with the
volatility of NUMTRD (correlation coefficient 0.02)
But highly correlated with the adjusted share
turnover (TURNU) (correlation coefficient 80.34%)
and the adjusted dollar trading volume (VOLDU)
(correlation coefficient 79.43%)
Significant alpha
When regressing on lagged NUMTRDU, the cross-sectional
correlation coefficients of two weeks ahead stock return
(RET) and characteristic-adjusted return (RET_ADJ) are
1.72% and 1.31%, respectively (Panel B of Table 1)
Skip week t + 1 to alleviate the concern of
microstructure effects, such as bid-ask bounce and
non-synchronous trading
The average raw return spread is 0.344% per week
(17.89% annualized) (Panel A of Table 2)
The Carharts four factor adjusted returns is 0.29%
weekly (15.18% annualized )
RET monotonically decrease with NUMTRDU: the average
weekly raw return (RET) increases monotonically from
-0.003% per week to 0.341% per week
Robustness
Robust to dollar trading volume (VOLDU)
Data
Double sort stocks by VOLDU and NUMTRDU, the

positive relation between NUMTRDU and RET
remains intact (Table 3)
Although the return spread is <5%, half of
those of other controlling variables
In firm-level cross-sectional regressions that
include VOLDU, the coefficient of NUMTRDU are
still significant (table 4)
Further suggesting that NUMTRDU not
subsumed by VOLDU
Robust to liquidity: if driven by liquidity, then a large
number of non-informational buyer-initiated
(seller-initiated) trades should lead to a price increase
(decrease) (Panel A of Table 5)
Similar findings when using monthly window rather than
the weekly (Panel A of Table 8)
Robust to common return predictors
Such as size, book-to-market, momentum,
illiquidity, analyst dispersion, trading turnover, and
dollar trading volume, etc
Similar pattern in the two subsamples of the
buyer-initiated and the seller-initiated trades
January 1993 - December 2008 stock return and volume
data at the daily and monthly frequencies, and the
financial statement information are from the
CRSP/Compustat
The number of trades and the trade-order imbalance
variables are computed using the tick-by-tick data from
the Trade and Quotes (TAQ) database
Data on analysts earnings forecasts are from the
Institutional Brokers Estimate System (I/B/E/S) database
Paper Type:
Working papers
Date:
2011-03-03
Category:
Using high-frequency (daily) data to construct risk exposures
Title:
Evaluating factor pricing models using high frequency panels
Authors:
Yoosoon Chang, Hwagyun Kim, and Joon Y. Park
Source:
SSRN working paper
Link:
Summary:
At a time when quant managers trade faster than before, it is

appealing to calculate quant factors and risk exposures at a
higher frequency. This paper propose a simple methodology that
runs the multi-linear cross-sectional regression on daily data
(instead of monthly) on a variable time horizon that inversely
correlates to market volatility
Intuition
Traditionally, monthly data are used to calculate
exposures to risk factors (such as value/size) in simple
multi-linear cross-sectional regression
Intuitively higher frequency data gives a better exposure
measure, especially when quant managers trade faster
than before
However, regression based on daily data is problematic,
since volatility of daily return is highly time-varying and
stochastic
To address this issue, this paper uses timing-varying
intervals which are negatively correlated with stock
volatility (instead of fixed intervals based on calendar
time)
The time interval (sampling period) is shorter
when volatilities are higher, and vice versa
A new multifactor pricing model
The key features are 1) use daily data, instead of
monthly. 2) allowing for time-varying calculation period
and stochastic volatilities
Simply put, the risk exposures are calculated based on
daily data during a variable period. The length of such
period is inversely proportional to the market volatility
Meanwhile set the realized volatility over each interval
similar to the volatility level in the classic model
The new models better matches empirical findings
The paper tests returns of size/value/momentum
portfolios using multifactor models on daily returns, and
compare with the fixed-time (conventional) sampling
methods
The classic models (using fixed, monthly time intervals)
often produce invalid and contradicting results
Such as it does not rejects the CAPM on the size
portfolios and the B/M portfolios, which contradicts
the vast amount of literature on the existence of
size and value premia
The classic model is not consistent: when all three
factors are included, (i.e., when the Fama-French
3-factor model is used for estimation on 25

portfolios sorted both by size and B/M), the model
is rejected
The rejection of the three-factor model mainly
come from the small growth firms (those with low
book-to-market ratios)
The new model yield more reliable test results
For example, size premium is now significant: The
old model produces around 0.6% annual size
premium, whereas the new model generates
around 5.6% per annum
The new model produces similar betas compared to the
traditional method
The new model reveals a "consumer goods industry" factor
Meaning the membership in the "consumer goods
industry" can explain part of stock returns
Such consumer factor has some explanatory power on the
returns of the small growth stocks
Data
This study covers daily stock data between July, 1963 December, 2008
Stock sizes, B/M and industry membership in a
30-industry classification are from Kenneth Frenchs web
page
Paper Type:
Working Papers
Date:
2007-12-03
Category:
Small cap investing, lack of data, extreme values (very low price,
high B/P and high debt)
Title:
Extreme Investing: Using Extreme Data to Find Value in Small

Cap Stocks
Authors:
Brian Bruce
Source:
Baylor University seminar paper
Link:
http://finance.baylor.edu/seminars/papers/bruce.pdf
Summary:
This (old) paper studies small caps stocks with extreme

measures. Key findings:
Stocks with extreme data (no analyst coverage) perform
worse
Comments:
for Russell 2000, 20% stocks do not have IBES

coverage (15% of total capitalization)
non-covered stocks yield 5 percentage points
lower annual returns than covered firms, yet their
return volatility is much higher
stocks with no timely financial data yield 10
percentage points lower annual returns than those
with timely data
such patterns does not exist in Russell 1000
Stocks with extremely low price perform worse:
stocks with 10% lowest prices generates 8
percentage points lower return than stocks at
higher price levels
Stocks with extremely high value measure
(book-to-market) perform worse, but a bankruptcy
probability score can help select winners:
stocks with 10% highest value measure (highest
book-to-market ratio) generates lowest returns
however within other stocks (whose value
measure in lower 90%), higher book-to-market
suggests higher returns
stocks with high bankruptcy probability scores
(distressed stocks) are shown to be cheap for
reasons, ie, high book-to-market suggest lower
future returns for these stocks
an enhanced book-to-market measure that
combines with bankruptcy forecasting score can
improve value strategy
Stocks with extremely high debt perform worse, but size
can help:
high debt-ratio does suggest higher return, except
for smallest stocks
1. Discussions
This is rather old paper (first published in 2003), but we find it
very interesting given its unique research topic and practical
perspective (it is written by quant investment researchers).
Two concerns we have:
1. We think the conclusions will be much more powerful if
the authors discuss more about implementation issues,
eg, transaction cost.
2. We would also like to see more discussion about the
economic story for such findings to avoid data-mining.
2. Data
1990/01 2002/12 return, analyst coverage and Valueline
Financial data for Russell 2000 stocks are used. The following
stocks are removed: REITs, Tracking Stocks and mortgage or

other asset-backed securities.
Paper Type:
Working Papers
Date:
2007-04-01
Category:
I/B/E/S data manipulation
Title:
Rewriting history
Authors:
Alexander P Ljungqvist, Christopher Malloy, Felicia Marston
Source:
Yale university seminar paper
Link:
http://icf.som.yale.edu/pdf/seminar06-07/malloy.pdf
Summary:
This paper suggests that IBES has manipulated some 20,000

records of analyst recommendations during2002/09-2004/05.
These changes take form of non
random, selective removal of
analyst's names from some of their historical recommendations.

The authors note that this period coincided with the investigation
of Wall Street research by regulators.
Comments:
Paper Type:
Working Papers
Date:
2007-03-18
Category:
General empirical test methodology, data mining, regression
Title:
The Interval of Observation
Authors:
Source:
SSRN working paper
Link:
Summary:
This paper shows that, in forecasting stock market returns, a

slight change in the interval of forecasting indicators
(commodities returns in this case) can dramatically change the
significance and sometimes the direction of forecasts.

As an illustration, commodity returns during the last 8 trading
days of the previous month can significantly predict next months
stock returns, but returns over the last 8 trading days can not.
In most cases, longer intervals of historical commodity
observations lead to stronger predictability
Comments:
The general question we need to answer here is how we detect

"data mining": slicing and dicing the data in many ways and you
will find something that is statistically significant on paper.
One thing we can do is to judge how many patterns were tested.
If 100 possible combinations of observation intervals are tested,
at 95% confidence level, then one can expect 5 of these
combinations will appear significant in statistic tests. I.e., they
are just results of data mining. In this paper, the authors use
23combinations to find an optimal interval to use gold to forecast
stock market, (6 day interval is the winner).
But we need to bear in mind that two false positives are
expected in such test, and it may well be the 6 day
Combination.
As another illustration, many papers talked about calendar
effects, e.g. which calendar month yields higher returns than
others. Given that there are only 12 months in a year, and that
we only have one set of capital markets history, certain months
will have to show up to be significant.
How to judge what strategy is reliable remains an open question.
We believe two tests are of help:
Consistency: an ideal strategy should work consistently
across different period, and within different segments,
and across different stock markets.
Economic rationale: whether there is an economic force
behind a strategy.

Paper Type:
Working Papers
Date:
2015-06-05
Category:
Momentum, seasonality, time-series predictability
Title:
Covering-Up when the Tide Goes Out? Momentum Seasonality

and Investor Preferences
Authors:
Nigel J. Barradale
Source:
SSRN Papers
Link:
Summary:
The returns to the momentum factor tend to increase during the

quarter. This pattern holds for both winner and loser portfolios, is
more pronounced for large firms, and is stronger in a declining
market
Intuition
As evidence of their skill, investors are likely to prefer
well-performing stocks/markets at the quarter-end,
particularly in a declining market
This preference causes winners to outperform and losers
to underperform prior to quarterend, generating greater
momentum returns
Small (big) stocks are defined as the bottom (top) 20% of
stocks sorted by size
Seasonality slopes represent changes in momentum
returns per trading day of the seasonality measure
Portfolio formation
Each day, sort stocks based on their returns over prior 21
to 251 days (2 to 12 months)
Buy winner stocks and short loser stocks
Momentum returns increase towards the end of the quarter
Graph below shows the cumulative momentum returns
throughout a quarter
Source: The Paper

Holds more strongly in the developed markets (Tables 2)
Stronger pattern following a market decline (over the prior
2126 days) (Tables 4)
For both cross-sectional momentum (Table 4) and
time-series momentum (Table 10)
Countries with higher momentum returns have higher
quarterly seasonality (Figure 3)
Holds for winners and losers and is stronger for big stocks
(Table 5)
Robust when excluding yearly seasonality (Table 2,
Quarterly Excl. Y/E)
Unrelated to both the timing of earnings announcements
and the accounting quarter-end date (Table 6, Figure 6)
Robust to the year-end seasonality or tax-loss selling
(Tables 8, 9)
Data
U.S. stock data from Kenneth Frenchs website
Non-US stock data from Datastream
Data range: US data 1926 2012; 44 non-US stock
markets data 1983 2012
Paper
Type:
Working Papers
Date:
2015-06-05
Category: Momentum, formation process of past return, path-dependent momentum
Title:
The Formation Process of Winners and Losers in Momentum Investing
Authors:
Li-Wen Chen, Wen-Kai Wang, Hsin-Yi Yu
Source:
SSRN Papers
Link:
Summary
:
A strategy that buys the winners whose historical prices are convex shaped
and shorts the losers whose historical prices are concave shaped
outperforms classic momentum, yielding an annual raw return of 17.11%
Intuition
In addition to past returns themselves, the formation process of past
returns also predicts future expect returns
Winning stocks whose historical prices are convex shaped (increase
at an accelerating pace) produce the highest returns
Losing stocks whose historical prices are concave shaped (decrease
at an accelerating pace) produce the lowest returns
The formation process of past returns is defined by their convexity or
concavity
Convexity ( > 0) and concavity ( < 0) of past returns is estimated
using the following quadratic regression:
Where ( ) denotes the daily price of stock i at day t
Portfolio formation
Each month t, sort stocks into quintiles based on the past 12-month
returns
Further sort stocks in each return group into quintiles based on their
from the quadratic equation
Stock groups based on the two sorts:
Past returns bottom
quintile
Past returns top quintile
bottom
quintile
Accelerated losers
(AcLosers)
Decelerated losers
(DeLosers)
top quintile
Decelerated losers
(DeLosers)
Accelerated winners
(AcWinners)
Source: The paper

Acceleration strategy: buy AcWinners and short AcLosers
Skip one month, hold for 6 months (overlapping portfolios)
Acceleration strategy outperforms plain momentum
Raw returns (monthly
Three-factor alphas
b.p.)
(monthly b.p.)
All
months
Januar
y only
Januar
y
exclud
ed
All
months
Januar
y only
January
exclude
d
Accelerati
on
strategy
132.46
-133.5
2
156.14
174.7
9.56
193.5
Plain
momentu
m
83.22
-171.3
9
105.89
123.14
-52.23
139.62
Source: The paper, Table 4

Acceleration strategy profits have remained significant over all
sub-periods:
Raw returns (b.p.)
1962/01
-08/197
8
1978/09
-1995/0
4
1995/0
4-2011/
12
Expansio
ns
Recessio
ns
Accelerati
on
strategy
150.30
149.78
98.53
154.83
49.00
(insign)
Plain
momentu
m
98.27
106.19
46.19
(insign)
98.07
30.31
(insign)
Source: The paper, Table 8

The findings are robust to including additional controls, replacing the
daily closing prices with the midpoints of bid and ask quotes, and
using various holding/ranking periods (Tables 5, 7, 9, A1)
Acceleration strategy offers explanatory power to the profits earned
by the plain momentum strategy and the 52-week high strategy
(Table 6)
Data
U.S. stock data from The Center for Research in Security Prices
(CRSP)
Paper
Type:
Working Papers
Date:
2015-06-05
Category
:
Mean variance, momentum, tactical asset allocation
Title:
Momentum and Markowitz: A Golden Combination
Authors:
Wouter J. Keller, Adam Butler, Ilya Kipnis
Source:
SSRN Papers
Link:
Summar
y:
The classic Markowitz mean-variance optimization(MVO) framework is

criticized for being unstable. However, using a lookback horizon of less than
12-month and using only positive asset weights (no short-sales) can help the
performance of MVO
Intuition
Traditionally, MVO is performed using a longer range of data (e.g. 60
months)
However, such a long lookback period includes both momentum
returns as well as longterm reversal returns, so the best assets in the
past often become the worst assets in the future
Therefore, limiting the lookback period to up to 12 months results in
more relevant predictions about asset returns
Applying MVO over a shorter lookback horizon of less than one year
improves returns due to avoiding long-term return reversals
Using long-only portfolio weights helps to stabilize the optimization
and make the model more practical
Classical Asset Allocation (CAA) model applies MVO with the following
constraints:
The lookback period is up to 12 months
Short sales are not allowed
3-month T-Bills and US Government 10 year bond are used as
cash
The Target Volatility (TV): 10% (for offensive) and 5% (for
defensive models)
A maximum weight for all risky assets (cap) is 25%
Equal Weight (EW or 1/N) allocation is used as a benchmark
Next month expected returns and covariances are proxied by the
rolling historical means (returns) and covariances
Sharpe Ratio with 5% threshold: SR5 = (Annual Return 5%)/Annualized Volatility
Calmar Ratio with 5% threshold: CR5 = (Annual Return 5%)/abs(Maximum Monthly Drawdown)
Three investment universes
SmSmall asset
universe
(Global, N=8)
SP500, EAFE, EEM, US Tech, Japan Topix,

T-Bills, US Gov10y, and
US High Yield
Intermediate
sized asset
universe (US,
N=16)
10 Fama/French US sectors plus five US bonds:

US Gov10y, US
Gov30y, US Muni, US Corp, US High Yield and
(3m) T-Bills
Large asset
universe
(Global, N=39)
All assets from the small and intermediate sized

universes plus US
Small Caps equities, GSCI, Gold, Foreign bonds,
US TIPS, US
Composite REITs, US Mortgage REITs, FTSE US
1000/US
1500/Global ex US/Developed/EM,
JapanGov10y, Dow
Util/Transport/Industry, FX-1x/2x, and Timber
Source: The paper

Portfolio formation
Each month, estimate the optimal mix of asset weights based on the
information from the prior 1 to 12 months
Use this mix for the next month
CAA model outperforms EW (1/N) model for 8, 16 and 39-asset universes
TV = 10%
(N=8)
TV = 10%
(N=16)
TV = 10%
(N=39)
CAA
EW
(1/N)
CAA
EW
(1/N)
CAA
EW
(1/N)
Annual
return
12.70
%
8.70
%
11.2
0%
8.70
%
15.40
%
8.80
%
Annualized
volatility
8.3%
9.20
%
9.40
%
11.50
%
10.40
%
10.70
%
Max
monthly
drawdown
-17.3
0%
-49.7
%
19.7
0%
64.70
%
22.80
%
63.30
%
SR5
(Sharpe
ratio)
92.30
%
40.1
%
65.6
0%
32.70
%
100.2
0%
35.00
%
CR5
(Calmar
ratio)
44.6
%
7.4%
31.3
0%
5.80
%
45.80
%
5.90
%
Source: The Paper, Figures 6, 10, 14

Cumulative outperformance of CAA offensive (TV10) and defensive
(TV5) models:
Source: The paper

Results are robust to different cap levels (Figure 18)
Data
Returns for 39 asset from Global Financial Data (GFD), Kenneth
French Database (FF), Barclays, MSCI, Yahoo and other providers of
historical data
Data range: January 1915- December 2014
Paper
Type:
Working Papers
Date:
2015-06-05
Category: Momentum, diversification, asset allocation

Title:
Momentum and Diversification: A Powerful Risk-Adjusted Combination
Authors:
Source:
Link:
http://www.thinknewfound.com/wp-content/uploads/2014/11/Momentum-A
NDDiversification- A-powerful-risk-adjusted-combination.pdf
Summary
:
Combining momentum and diversification across a spectrum of static asset

allocation portfolios improves total risk-adjusted strategy returns
Intuition
Momentum selection process is usually implemented within an asset
class
The benefits of diversification can be added to a momentum strategy
by treating a portfolio as an asset class
Spectrum of US investments includes static portfolios consisting of a
US Equity (S&P 500 Index) / Treasury (Barclays US Treasury 20+
Year Index) allocation of 100%/0%, 80%/20%, 60%/40%,
40%/60%, 20%/80%, 0%/100% rebalanced on an annual basis
Spectrum of globally diversified portfolios:
Source: The paper

Portfolio formation
Sharpe ratio strategy: each month, invest in the asset class (US
Equities or Treasury) with the greater Sharpe ratio based on the
trailing 6 or 12-month Sharpe Ratio
Diversified strategy: each month, invest in the asset allocation (one of
the defined static portfolios) with the greater Sharpe ratio based on
the trailing 6 or 12-month Sharpe Ratio
Diversified strategy outperforms simple Sharpe switching strategy and broad
index
Strategy performance is similar when using 12-month or 6-month
lookback periods:
12-month lookback
(%)
Diversifie
6-month lookback
(%)
Annualize
d
return
Sharpe
ratio
Draw
Down
Annualize
d
return
Sharp
e
ratio
Draw
Down
12.14
0.59
(29.58
12.37
0.59
(23.26
d
strategy
Sharpe
ratio
strategy
11.28
0.5
(29.58
)
10.85
0.46
(23.26
)
S&P 500
index
11.31
0.45
(50.95
)
11.31
0.45
(50.95
)
Source: The paper

The two last major downturns were particularly favorable for the
diversified strategies
Annualized returns (%)
2000-2
002
2008
2009-2
014
Diversified strategy (6m)
3.10
14.21
Diversified strategy (12m)
6.00
8.87
S&P 500 index
(14.55)
(37.00
)
17.22
50-50 blended benchmark

(50% S&P 500 Index / 50%
Barclays US Treasury 20+
Year Index portfolio)
(0.26)
(1.64)
11.88
Source: The paper

Diversified strategy also outperforms across a spectrum of globally
diversified portfolios (2001 2014):
6-month
lookback (%)
12-month lookback
(%)
Annuali
zed
return
Shar
pe
ratio
Draw
Dow
n
Annuali
zed
return
Shar
pe
ratio
Draw
Dow
n
Diversified
strategy
8.37
1.12
(4.4
2)
4.93
0.60
(13.
22)
S&P
Target
Risk
Growth
Total
Return
6.08
0.49
(37.
73)
6.5
0.54
(37.
73)
S&P
Target
Risk
5.26
0.55
(26.
68)
5.52
0.59
(26.
68)
S&P
Target
Risk
Aggressiv
e Total
Return
6.93
0.43
(48.
76)
7.48
0.48
(48.
76)
S&P
Target
Risk
Conservati
ve Total
Return
5.23
0.76
(15.
97)
5.41
0.79
(15.
97)
Moderate
Total
Return
Source: The paper

The 12-month strategy took longer to adjust its allocation during
2002 and 2008; 6-month allocation delivered preferable returns
Data
Data range: 1977-2014
Paper Type:
Working Papers
Date:
2015-05-03
Category:
Momentum, skewness
Title:
Expected Skewness and Momentum
Authors:
Heiko Jacobs, Tobias Regele, Martin Weber
Source:
SSRN working paper
Link:
Summary:
A simple skewness-enhanced momentum strategy generates twice

as large alpha compared with the classic momentum strategy
Definitions
Skewness is calculated as the maximum daily return during

the preceding month
This measure predicts future skewness more accurately than

past skewness (Table 1 in the online appendix)
Skewness-enhanced mometum (SEM): Long negatively
skewed winners and short positively skewed losers
Skewness-weakened mometum (SWM): Long positively
skewed winners and short negatively skewed losers
Significant returns
SEM
Traditional
momentum
SWM
Raw
value-weighted
long-short return
1.65%(t=6.26
)
0.81%(t=4.28
)
0.47%(t=2.0
5)
Monthly Fama
and French
(1193) three
factor alpha
2.14%(t=11.4
2)
0.96%(t=5.83
)
0.21%(t=1.5
0)
Shape ratio
0.70
0.45
0.22
Source: the paper. Enhanced momentum as in Barroso and

Santa-Clara (2015) and Daniel and Moskowitz (2014) and denoted
as Enhanced Momentum* and Enhanced Momentum**
Works in the recent past
Works in most of 16 developed markets and in all countries
in the G7 countries (Table 11)
Mostly driven by the short leg of the strategies (Table 1,
panel C, D)
Risk management procedure can further help
Scale the momentum strategy based on forecasted variance
to keep the realized variance constant, i.e., to increase
exposure when the forecasted variance is low and divest
when it is high
Scale the strategys volatility to the volatility of the market.
(Table 3, Figure 1)
A momentum-neutral strategy yield significant returns
Basically construct a portfolio of SEM SWM
The value-weighted Carhart five-factor adjusted intercept
for is 1.72% and is significant
Robustness checks
Data
Robust to size: even for large stocks with a market

capitalization above the NYSE median, the three factor alpha
of SEM is 1.87% (t=8.60) (Table 9)
By comparison, the return is 0.97% and 0.24% for regular
and weakened momentum, respectively(Table 9)
Robust to past returns, volatility, continuously arriving
information, credit rating, the 52-week high or unrealized
capital gains
These tests are important since high skewness stocks tend
to have small size, high idiosyncratic volatility, and high
bid-ask spreads
1926 to 2011 data for United States stocks are from CRSP
16 developed international markets is gathered from
Datastream and Worldscope
Paper Type:
Working Papers
Date:
2015-03-26
Category:
Momentum, post earnings announcement drift
Title:
Fundamentally, Momentum is Fundamental Momentum
Authors:
Robert Novy-Marx
Source:
University of Rochester
Link:
http://rnm.simon.rochester.edu/research/FMFM.pdf
Summary:
Earnings momentum strategy after controlling for price

momentum yields high returns with reduced volatilities and much
lower drawdown
Intuition
Price momentum works at least partially because there
exists momentum in company fundamentals
After controlling for fundamentals momentums, past
performance may not provide significant additional
information
Definitions
Past performance is measured over the preceding year,
skipping the most recent month
Earnings surprises are proxied by standardized unexpected

earnings (SUE) and cumulative three day abnormal
returns (CAR3)
SUE is defined as the most recent year-over-year
change in earnings per share, scaled by the
standard deviation of the earnings innovations over
the last eight announcements
CAR3 is defined as the cumulative return in excess
of that earned by the market over the 3-day period
around the most recent earnings announcement
Portfolio formation
Each month, sort stock into three portfolios (divided at the
30th and 70th percentiles) based on earnings surprises
(measured using either SUE or CAR3)
Buy the upper tertile and short the bottom tertile of the
earnings surprises portfolio
On stand-alone basis, SUE and CAR3 yields significant returns
Source: the paper

Excess returns remain significant among small and large
cap stocks, defined using NYSE median (Table A4):
Portfolios
sorted on
SUE
Portfolios
sorted on
CAR3
Sm
all
ca
p
0.79%
0.74%
Lar
ge
ca
p
0.24%
0.21%
Even better results from earnings momentum controlled for price

momentum
The predictive power of past performance derives primarily
from its correlation with earnings surprises (Table 1)
Performance of earnings momentum cannot be explained
by other factors while price momentum is subsumed by
earnings momentum (Table 2)
Purging price momentum from earnings momentum
strategies (the blue curve below, SUE | R12,2) reduces
volatilities and drawdowns (Figure 3, Tables 4-5)
Source: the paper

Consistent across different time periods, robust to
different size deciles (Tables 1-3, A1)

Data
Robust to transaction costs (Tables 1-3, A1)

1975 2012 U.S. stock data from The Center for Research
in Security Prices (CRSP)
U.S. firm data and announcement dates from Compustat
Paper
Type:
Working Papers
Date:
2015-03-26
Categor
y:
Novel strategy, momentum, absolute returns
Title:
Absolute Strength: Exploring Momentum in Stock Returns
Authors
:
Huseyin Gulen and Ralitsa Petkova
Source:
Purdue University
Link:
http://finance.bwl.uni-mannheim.de/fileadmin/files/areafinance/files/FSS_201
5/Petkova_2015_AbsoluteStrengthMomentum.pdf
Summa
ry:
Stocks with higher returns relative to historic range outperform. A strategy

that buys(sells) stocks with significantly positive(negative) returns over the
previous year generates a monthly risk-adjusted return of 1.51% between
2000 - 2014
Intuition
Traditional relative momentum ranks stocks based on relative returns
Sometimes stocks with negative returns maybe classified as
winner stocks
Though such stocks did not experience a large positive move
Absolute strength momentum tries to identify stocks with most
positive/negative returns (instead of relatively higher/lower returns)
The break points are determined using the historic range
For example, at the beginning of January, rank all stocks on the basis
of the historical distribution of January to November cumulative returns
If a stocks cumulative return over t-12 to t-2 falls in the top (bottom)
10% of the historical distribution, it is classified as an absolute winner
(loser)
Intuitively, an absolute winner is a stock that has done well over the
recent 11 months according to the historical range
Note that by construction, there may be instances in which none of the
stocks meet the criteria to be defined as absolute winners or losers
Portfolio formation
Each month t, compute the cumulative returns of all stocks over the
period t-12 to t-2
Compare these to all previous non-overlapping 11-month cumulative
returns
10% of the historical distribution, the stock is classified as an absolute
winner (loser)
Go long in absolute winners and short absolute losers
Hold for month t, rebalance monthly
Switch to risk-free asset if there are less than 30 stocks in either
portfolio
Absolute strength momentum outperforms relative strength momentum
Absolute
Strength
Momentum
Relative
Strength
Momentum
196
5201
4
20
00
20
14
19
65
20
14
20
00
20
14
Loser
s
-0.3
8%
-0
.8
1
%
-0.
25
%
0.
01
%
Winn
ers
1.74
%
0.
69
%
1.6
0%
0.
76
%
Winn
ers Loser
s
2.16
%
1.
51
%
1.8
5%
0.
75
%
Source: The Paper

Absolute strength momentum subsumes relative strength and time
series momentum strategies; the reverse does not hold (Tables 3, 5)
Much better drawdown relative to the classic momentum strategy
Source: the paper

Data
1965 2014 U.S. stock data from CRSP
Comme
nts:
Paper Type:
Working Papers
Date:
2015-03-26
Category:
Momentum crash prediction, volatility of momentum returns,

drawdowns
Title:
Momentum Crash Management
Authors:
Mahdi Heidari
Source:
SSRN
Link:
Summary:
Change in momentum volatility is predictive of momentum

crashes, and can be used to construct better momentum
strategies with lower drawdown
Intuitions and known predictors
Momentum suffers from well-documented crash periods
There are 60 crash periods (those months with

momentum returns -10% or worse) out of 1044
total months
Such crashes happen in times of market stress and market
rebound, thus the variables that capture these episodes,
can be used as momentum predictor
Various predictors of momentum crashes have been
studied: momentum volatility (M-MomVol) and market
volatility(M-MktVol), state of the market(M-Mkt), market
illiquidity
These predictors can be improved
They weight winner/loser stocks according to the
momentum volatility
They unnecessarily changes the portfolio weights in
normal period, though it did correctly change the
weights in crash period
It also has high portfolio turnover that leads to
higher transaction cost
Three new momentum predictors: 1) cross sectional
dispersion of stock returns (M-Disp), 2) change in market
return (M-MktChg), and 3) change in momentum volatility
(M-MVolChg)
Two groups of variables:
Group1 (broad market related): past return (Mkt),
change in the market return (MktChg), volatility of
the market (MktVol), cross sectional dispersion of
stock returns (Disp) and market illiquidity (Illiq)
Group2 (momentum time series based):
momentum return volatility (MomVol), change in
momentum volatility (MVolChg)
Define state dummy for each predictor to distinguish
between crash and normal periods: define predictor Xs
dummy equal to 1 if its less than 90 percentile of prior
5-year range, and 0 otherwise
Only when state dummy is 0 (when predictor is more than
its 90 percentile range), then dynamic strategy closes all
of the positions in static momentum strategy
MVolChg works best in predictive regressions
In uni-variable regression, MVolChg has the highest R2
and t statistics on stand-alone basis
Though all seven predictors have significant beta
with negative sign (Panel A in table 6)
MVolChg better than MomVol: in predicting one
month ahead momentum return, MVolChg has t
statistics of -12 and R2 of 12%, which is four times
larger than R2 of M-MomVol
When all of the predictors are included in the regression,

MVolChg is the most important predictor, with lower
correlation with other predictors (Panel B in table 6)
Only MktChg, MomVol and MVolChg stay significant
Within Group1 predictors, MktChg has higher predictive
power than other variables
Most of the predictive power comes from loser portfolio
prediction, not winner portfolio (Table 9)
Use stand momentum portfolio when the state dummy of
specific variable is equal to 1
Invest in cash when the state dummy is 0
Improved performance when using MVolChg
Sharpe ratios are 1.1, compared with 0.68 in the standard
momentum strategy (Table 8)
Much better drawdown when using dynamic strategies
(Table 8)
Source: the paper

Comparable turn-over: turnover are between 84 to 104
percent of static momentum strategys turnover (Table 10)
Works in subperiods of 1927-1955, 1956-1984 and
1985-2013): MVolChg has significant negative coefficient
in all subsamples (Table 12)
Data
Jan 1926 - Dec 2013 stock data are from CRSP
The Fama and French (1993) factors as well as returns on
portfolios formed on size and book-to-market are from
Kenneth French
Paper Type:
Working Papers
Date:
2015-01-16
Category:
Fama-French model, timely value, momentum
Title:
Our Model Goes to Six and Saves Value From Redundancy Along
the Way
Authors:
Cliff Asness
Source:
AQR working paper
Link:
AQR working paper
Summary:
Adding a timely value measure and momentum can enhance

the recent Fama-French(FF) five factor model
One recent study
of Fama-French(FF) uses five factors to explain
stock returns
1. RM-RF: The return spread between the capitalization
weighted stock market and cash
2. SMB: The return spread of small minus large stocks (i.e.,
the size effect)
3. HML: The return spread of cheap minus expensive stocks
(i.e., the value effect)
4. RMW: The return spread of the most profitable firms
minus the least profitable
5. CMA: The return spread of firms that invest conservatively
minus aggressively.
FF claims HML is redundant and UMD (momentum) not needed
Since there is no significant alpha for HML (i.e, regression
intercept) in the five factor regression (Table 1)
Partially due the correlation with RMW and CMA
Leading to the FF conclusion that the HML is
redundant
This does not mean HML is an ineffective strategy,
it merely says that it does not add additional value
in explaining stock returns
Even with its negative correlation to value, UMD is largely
independent of the other factors (8% R2)
Need to add UMD to the pricing model
The holy grail of investing is to identifying with factors that
are uncorrelated to existing set, but have high average
returns
Even better, a factor that is negatively correlated high
mean factors
One recent study of Fama-French(FF) uses five factors to explain
stock returns

the size effect)
5. CMA: The return spread of firms that invest conservatively
minus aggressively.
redundant
The holy grail of investing is to identifying with factors that
are uncorrelated to existing set, but have high average
returns
mean factors
Paper Type:
Working Papers
Date:
2015-01-16
Category:
Novel strategy, Profitability momentum
Title:
The Trend in Firm Profitability and the Cross Section of Stock

Returns
Authors:
Ferhat Akbas, Chao Jiang, Paul Koch
Source:
SSRN working paper
Link:
Summary:
Firm gross profitability trend, or gross profitability momentum,

predicts stock returns
Definitions and statistics
Quarterly gross profit = (sales cost of goods sold) /

total assets
Profitability is the average gross profit over the past eight
quarters
Trend in profitability is the linear slope over the past
eight quarters
On average, the average level of profitability is 10%
On average no trend: The average trend in profitability is
-2.2% to +2.9% per quarter
The average correlation between level of and trend in
profitability is slightly negative
Profitability trend predicts gross stock returns
Each month long (short) the 10% stocks with the highest
(lowest) profitability trends
Skip-month between portfolio formation and holding
period
The average gross next-month return of 0.83% (Table 3)
For large (small) stocks, hedge portfolio average gross
monthly return is 0.34% (0.89%) (Table 3)
The four-factor (market, size, book-to-market,
momentum) adjusted alpha is 0.64% (Table 3)
Predicts over the next eight quarters: with no subsequent
return reversal over the ensuing three years
Robustness: the effect is robust to alternative measures of
profitability, size, book-to-market ratio, momentum,
return volatility, volatility of profitability, earnings
momentum,
Source: the paper Profitability trend is not subsumed by

profitability level
Controlling for profitability trend, stocks with high
profitability levels outperform those with low profitability
levels by up to 0.73% per month (Table 3)
Data
Controlling for profitability level, stocks with high

profitability trends outperform those with low profitability
trends by up to 0.85% per month (Table 3)
A broad sample of U.S. common stocks during January
1977 through December 2012
Paper Type:
Working Papers
Date:
2015-01-16
Category:
Time series momentum, volatility, futures
Title:
Time Series Momentum and Volatility States
Authors:
John E. Pettersson
Source:
Hanken School of Economics working paper
Link:
Summary:
Time series momentum is most profitable in futures with declining

or low volatility
Definitions
An asset is in Low(high) volatility state if the current
period (at time t - 1) volatility is lower(higher) than the
historical level volatility
Volatility is calculated as a weighted sum of squared
returns with the mass center about 60 days back in time
The volatility level is calculated as an average of past
volatilities for the last 120, 250 and 500 days
Construct portfolios
If the excess return during the evaluation period is
positive (negative), the strategy takes a long (short)
position in the instrument
Position size is inversely relative to the current (at time
t-1) volatility
The first month following the investment decision is not
excluded
Significant short-term profits
Significant excess returns are found for holding and
evaluation periods of up to 256 days
The highest t-statistics are for strategies with a holding
period around one month and an evaluation period around
12 months
iven by long leg: significant returns only in the long leg of

each volatility portfolio (Figure 6)
Driven by low volatility instruments: similar for both long
horizon and short horizons (Table 2, 4, 7, Figure 6)
Using monthly data and conditioning time series
momentum on volatility states, Sharpe ratios is
0.22 for the low volatility portfolio, vs 0.06 for the
high volatility state portfolio (Table 5)
Similar patterns when using both daily and monthly
data (Table 2, 4)
Crash proven: low volatility portfolio lacks the large
negative return periods found in the high volatility state
portfolio (Figure 7)
Robustness: robust for shorter frequency volatility
measures, for conditional volatility, and when using
squared returns as a proxy for volatility
In the graph above, TSML, TSMH, and TSMA are the low-,
high-, and all volatility portfolios
Source: the paper
Data
Data for 26 equity index futures (for the markets in North
and South America, Europe, Asia and the Pacific) for the
period of April 1982 to November 2013 from Factset
Paper
Working Papers
Type:
Date:
2015-01-16
Category
:
Momentum, intraday returns, overnight returns
Title:
A Tug of War: Overnight Versus Intraday Expected Returns
Authors:
Dong Lou, Christopher Polk, Spyros Skouras
Source:
London School of Economics
Link:
https://www2.bc.edu/~pontiff/Conference%20Papers/OvernightMom201412
01.pdf
Summary
:
Essentially all of the abnormal return on momentum strategies occurs

overnight, while the abnormal returns on other popular strategies primarily
occur intraday. The reason is the former is driven by retail investors
Intuition
Institutions are more likely to trade intraday, while individuals are
more likely to trade overnight (Table 5)
On average, institutions tend to trade against momentum, while retail
investors chase momentum (Tables 6, 7)
On average, institutions used more sophisticated quant strategies
Such pattern may cause the different patterns of daily vs nightly
returns
Daily open price is proxied by the volume-weighted average price
(VWAP) in the first half hour of trading
The intraday return, rintraday, is the price appreciation between
market open and close of the same day (accumulated over each
month):
The overnight return, rovernight, is imputed based on the intraday

and standard daily close-to-close return (accumulated over each
month):
Portfolio formation
Momentum:
At the end of each month, sort stocks into deciles based on
their lagged 12-month cumulative returns (skipping the most
recent month)
Other strategies:
At the end of each month, stocks are sorted into deciles based
on the lagged values of the corresponding characteristic
Go long the value-weight highest decile and short the value-weight
lowest decile
Hold for one month
All momentum profits occur overnight
De
cile
Overnight
3-Factor
monthly alpha
Intraday
3-Factor
monthly
alpha
0.15%
-1.13%
10
1.09%
-1.02%
10
-1
0.95%
.11% (insig)
Source: The Paper, Table 1

Overnight returns on momentum are less volatile (standard deviation
of 4.02% versus 6.50% for intraday returns) (Table 1)
Variation in risk factors cannot account for this trend in momentum
returns (Table 2)
Overnight momentum returns remain strongly positive for up to 12
months (Figures 1, 2)
Results are robust for 1993-2002 and 2003-2013 subsamples
(excluding 2009) (Table 3)
Overnight momentum returns are stronger for large cap and
high-price stocks (those above NYSE median)
Overnight
3-Factor
monthly
alpha
Small cap
stocks
0.54%
Large cap
stocks
1.04%
Low-price
stocks
0.66%
High-price
stocks
1.14%

The dominance of overnight returns holds for earnings and industry
momentum (Table 8)
Returns on size and value strategies occur primarily intraday
CAPM
monthly
alpha
Intraday
CAPM
monthly
alpha
Size
strategy
-0.11%
(insig)
-0.43%
Value
strategy
-0.10%
(insig)
0.48%

Strong differences between intraday and overnight returns for other
strategies
Overnigh
t
3-Factor
monthly
alpha
Intraday
3-Factor
monthly
alpha
Profitabilit
y
-0.95%
1.43%
Asset
growth
0.36%
-0.78%
Beta
0.49%
-0.80%
Idiosyncra
tic
volatility
1.61%
-2.34%
Equity
issue
0.52%
-1.05%
Discretion
ary
accruals
0.56%
-0.94%
Turnover
0.35%
0.52%
Short-ter
m
reversals
0.88%
1.05%

Data
(CRSP) and the Trade and Quote (TAQ) database
Data range: 1993 - 2013
Paper
Type:
Working Papers
Date:
2014-12-03
Catego
ry:
Novel strategy, momentum, short-sell levels
Title:
Crowded Trades, Short Covering, and Momentum Crashes
Author
s:
Philip Yan
Source
:
Princeton working paper
Link:
http://dataspace.princeton.edu/jspui/bitstream/88435/dsp01j098zb26x/1/Yan_
princeton_0181D_10916.pdf
Summ
ary:
Momentum crashes can be alleviated by shorting only non crowded loser stocks
Intuition
Momentum crashes. E.g., momentum portfolio formed on March 2009
lost 66% over just a two month period
Most of the crashes occur when market recovers from bear markets,
when the losing stocks bounce back more than winning stocks
Hence, momentum crashes may be alleviated by shorting only those
loser stocks that are less crowded. E.g., those stocks that have been
sold by institutional investors
When stock is crowded-shorts, short covering increases significantly by
0.155% of total shares outstanding in the next month (Column (2) of
Table 1.6)
No crowd-ness in futures, so no crash: using a set of 63 futures
contracts, momentum crashes do not exist in futures market after
market exposure is hedged
The other way to improve is to hedge market exposures
Definitions and portfolio construction

SIR = (shared shorted) / (# shares outstanding)
EXIT= (# of shares completely liquidated by institutional investors in
the past quarter) / (# shares outstanding)
A crowded loser portfolio consists of loser stocks having top 20th
percentile SIRi,t1 and top 20th percentile EXITi,t1, in addition to the
classic winner stocks
A non-crowded loser portfolio consists of loser stocks with top 20th
percentile SIRi,t1 and bottom 80th percentile EXITi,t1, in addition to
the classic winner stocks
Intuitively, institutional investors have already sold and are already
shorting those crowded loser stocks
Better return and lower risks for non-crowded portfolio
Non-crowded strategy yields much higher return, comparable volatility

and much higher Sharpe Ratio
Hedging out market exposure improved performance for all strategies
both before and post 2001 period
The non-crowded portfolio outperformed the baseline slightly before
2000, and substantially outperformed the baseline post 2001 even
before the crash in 2009
Source: the paper

Smaller drawdown: non-crowded hedged strategy has a drawdown of
-24.57% vs -45% of crowded hedged strategy (Table 1.3)
No crash pattern in futures momentum strategy
Data
Momentum in futures market should suffer less from crashes, because

no short covering in the futures market
Futures momentum displays comparable (if not better) average return,
volatility and Sharpe ratios
Compared with stock momentum strategies, the hedged futures strategy
has a significantly better skewness of positive 1.27 compared to the
hedged baseline in equity of negative -0.88( Table 1.7)
January 1980 to September 2012 data on daily and monthly stock
returns are from CRSP/Compustat
Quarterly data on institutional holdings is obtained from the Thompson
Reuters Institutional 13F Holdings
Monthly short interest data for NYSE, NYSE MKT, and NASDAQ stocks is
obtained from COMPUSTAT and Bloomberg
January 1981 to June 2013 28 commodity futures, 6 bond futures, 10
currency futures, and 19 index futures, a total of 63 futures contracts
obtained from Bloomberg
Paper Type:
Working Papers
Date:
2014-12-03
Category:
Momentum/reversal after one-day extreme returns, stock indices,

commodities
Title:
Short-Term Price Overreactions: Identification, Testing,

Exploitation
Authors:
Guglielmo Maria Caporale, Luis Gil-Alana, Alex Plastun
Source:
SSRN
Link:
Summary:
For many securities, inertia (i.e., momentum) works after a day

with large price returns
Two strategies
Strategy 1(reversal): at the end of the overreaction
day(day with large price returns), financial assets are sold
or bought depending on whether abnormal price increases
or decreased
An open position is closed if a target profit value is
reached or at the end of the following day
Strategy 2 (inertia): at the end of the overreaction day

financial assets are bought or sold depending on whether
abnormal price increases or decreases
An open position is closed if a target profit value is
reached or at the end of the following day
Define sigma_dz as the number of standard deviations
added to the mean to form the standard day interval
Stop profit per trade = profit_koef (0.5 or 1) *sigma_dz
Stop Loss (stop): Stop Loss = stop (2, 3, 5) *sigma_dz
Reversal exists in some cases (Table 4-8)
US stock market (for the averaging period of 5, 10, 20, 30
days)
FOREX (USDJPY and GBPCHF) (for the averaging period of
20)
Commodity (Oil) markets (for the averaging period of 30)
The only exceptions are Gold and EURUSD
Inertia exists in many cases and yields better returns (Table
9-13)
Commodity (the only exception is Gold with an averaging
period of 20)
Strategy 2 is much more consistent (with an averaging
period of 30) than the ones for
Strategy1
Strategy 2 appears to be much more successful: it
generates positive profits in the case of the Gold and
FOREX (EURUSD and UDSJPY) markets, not only in 2013,
but also in other time periods
Gold-based inertia strategy has 75% success rate, with
annual return of 30% from 2012-2014 (Appendix E)
Data
This study covers the period of January 2002 - September
2014
The securities studied are the US stock market, the Dow
Jones index, stocks of Microsoft and Boeing
Forex includes EURUSD, USDJPY and GBCHF (for the
trading robot analysis also AUDUSD)
Commodities includes Gold and Oil
Paper Type:
Working Papers
Date:
2014-10-22
Category:
Momentum, return reversal, asset growth
Title:
Investment and the Term Structure of Stock Returns
Authors:
Sandra Mortal and Michael J. Schill
Source:
SSRN
Link:
Summary:
Adding asset growth rates to momentum can yield better returns.

Higher predicted asset growth and high prior returns predicts
higher subsequent returns
Intuition
Company managers have incentives to make more
investments and grow assets
Investors initially bid up firm stock as investments are
undertaken, but later sell down the
Therefore, stock return momentum and reversal are highly
related to firm investment
Firm investment = semi-annual growth in total assets
Half-year periods are measured from January to June and
from July to December
Predicted contemporaneous firm investment is obtained by
regressing asset growth on a range of predictors, including
assets, book-to-market ratio, past returns and past asset
growth rates (Table 1)
Firm investment and returns are highly correlated
Past
stock returns predicts investment (Tables 1, 2, 3)
Contemporaneous
returns positively corresponds to
investment (Tables 1, 2, 3)
Subsequent
returns is negatively related with investment,
generating reversals in stock returns (Tables 4, 6)
Portfolio formation
Momentum portfolio
Each month, sort stocks into quintiles based on
their returns in the past 6 months (half-year -1)
Independently sort stocks based on their predicted
contemporaneous asset growth (half-year +1)
Reversal portfolio
Each month, sort stocks into quintiles based on
their returns in a 6-month period 12 months ago
(half-year -3)
Independently sort stocks based on their asset
growth in a subsequent 6-month period (half-year
-2)
Hold for six months, re-balance monthly
Higher predicted asset growth and high prior returns predicts
higher subsequent returns
Suggesting that the momentum effect is isolated among

those firms which invest
Among the predicted low growth firms, the momentum
effect is near zero (monthly momentum spread of 0.38%
(t-stat =1.30))
The momentum spread climbs to 1.67% (t-stat = 6.14) for
firms with high predicted asset growth. (table 7)
Source: the paper

Data
Prices (CRSP)
Data range: 1976 - 2011
Paper Type:
Working Papers
Date:
2014-10-22
Category:
Futures, momentum, volatility
Title:
Risk-Adjusted Time Series Momentum
Authors:
Martin Dudler, Bruno Gmur, Semyon Malamud
Source:
SSRN
Link:
Summary:
When trading futures, the risk-adjusted time series momentum

(RAMOM) strategies outperform the standard time series
momentum (TSMOM)
Intuition
The classic momentum strategy is based on averages of
past realized returns
Ignoring the noise associated with fluctuating
stochastic volatility
Normalizing past returns by realized volatility removes at
least partially the impact of volatility
This results in lower turnover, lower associated trading
costs and much more stable trading signals, improving the
overall strategy performance
Volatility is the exponentially weighted moving average
(EWMA()):
o Where 1 = 0.94, 2 = 0.87, 3 = 0.50 correspond to

approximately 30-day, 15-day and 5-day realized volatility,
respectively
Equally weight securities
Portfolio formation
At date t-1, compute the sign of security is risk-adjusted
returns over the chosen look-back period (1, 3, 6, 9, 12,
24 months)
Add up those signs and normalize the total size of the
position by the current realized volatility measure
i,t-1(0.94)
Hold this position for one day until the returns ri,t are
realized and repeat the procedure
RAMOM momentum systematically outperforms TSMOM when
using a 12-month holding period
Cumulative performance of both strategies with a
12-month holding period
Source: the paper

Not much value-added when using a 1-month holding
period:
Source: the paper
Higher RAMOM strategy Sharpe ratio for full sample and
two sub-periods (1984-1998, 1999-2013) (Table 9)
The outperformance of RAMOM is not large for any given

asset class and is most significant across classes (Tables
11 15)
RAMOM allows investors to gain significant exposure to
Fama-French factors without actually trading the (very
large) stock universe (Tables 19 23)
Much lower turnover: even though RAMOM strategy is
adjusted daily (compared to monthly TSMOM adjustment),
turnover is reduced by about 40-50% (Table 16)
Robust to trading cost: assuming transaction costs of 5
basis points per dollar traded, only RAMOM Sharpe ratios
remain positive in both sub-periods (Table 17)
Further adjusting RAMOM returns by the volatility of
momentum returns increases Sharpe ratio by ~20%
(Table 24)
Source: the paper

Data
Data on futures contracts from CSI (commercial market
data provider) and Bloomberg
Sample: 64 liquid futures contracts (15 stock index
futures, 25 commodity futures, 13 bond futures, 5 interest
rate futures, and 6 currency futures)
Data range: 1984 - 2014
Paper
Type:
Working Papers
Date:
2014-10-22
Categor
y:
Momentum, information processing, industry shocks
Title:
Product Market Momentum
Authors: Gerard Hoberg and Gordon Phillips

Source:
SSRN Papers
Link:
Summar
Momentum strategies based on past returns of firms product market peers
y:
can generate monthly alphas of 1% - 2%

Intuition
Firm momentum can be driven by the slow transmission of information
from less visible industry links
The text-based network industry classification (TNIC) identifies
industry peers based on how similar their products are to each other
TNIC offers more precise industry classifications that can significantly
differ from traditional SIC or NAICS industry classifications
Less investors are aware of such links, hence stronger momentum
returns
The uniqueness measure assesses the degree to which any firm can be
replicated in the product market
Based on the optimized weighted average product offerings of
available rival firms
Disparity is a measure of the extent to which TNIC industries do not
overlap with SIC-3 peers
Disparity = 1 (total sales of peers in the intersection of
TNIC-3 and SIC-3 industry peer groups / the total combined
sales of peers in the union of TNIC-3 and SIC-3 peer groups
overall)
Excess stock returns are decomposed into systematic and idiosyncratic
components
Systematic return is the predicted value from regressing excess
stock returns on the stock returns of the market factor, HML,
SMB, and UMD
Idiosyncratic return is the monthly excess stock return minus
the systematic excess stock return in the same month
Strong returns comovement between own-firm returns and TNIC peer returns
Only TNIC peer returns continue to predict own-firm returns after two
months (not SIC based peer returns) (Table 3)
The higher the disparity, the longer the comovement between TNIC
peer returns and own-firm returns and the higher momentum returns
(Tables 4, 10)
The comovement between TNIC peer returns and own-firm returns is
weaker but longer for more unique firms, generating higher
momentum returns (Tables 4, 11)
Idiosyncratic peer returns create less initial comovement, but are
priced slowly and still predict own-firm returns after three months
(Table 5)
TNIC peer returns from the previous 3, 6 and 11 months better explain
own-firm current returns than own-firm and SIC-3 peer past returns
(Tables 6, 7)
More similar TNIC peers generate more significant long-term
momentum (Table 8)
TNIC peer returns are significant for the full sample and the pre-crisis
period (Tables 5 - 11)
Portfolio formation
In each month t, sort firms into quintiles based on a given momentum
variables return (TNIC-based, SIC-3-based, or own-firm-based) from
month t-12 to t-2
Go long into highest quintile firms and short the lowest quintile firms
Hold for one month
TNIC-based momentum generates highest returns, particularly for high
disparity firms
Monthly momentum alphas for different strategies:
TNIC
mome
ntum
(high
dispari
ty
firms)
TNI
C
mo
me
ntu
m
SIC
mo
men
tum
Own
-ret
urns
mo
men
tum
Full
Sampl
e
1.50%
0.8
%
.3%
(insi
gnifi
cant
)
0.2
%
(insi
gnifi
cant
)
Pre-cri
sis
1.30%
0.8
%
.2%
(insi
gnifi
cant
)
0.1
%
(insi
gnifi
cant
)
Source: Table 12
TNIC-based momentum strategies generate the strongest cumulative
abnormal returns over time:
Source: Figure 1
Data
Business descriptions from the SEC Edgar website (10-K annual filings)
Paper Type:
Working Papers
Date:
2014-10-22
Category:
Futures, momentum, contracts with different expiration dates
Title:
Exploiting Commodity Momentum Along the Futures Curves
Authors:
Wilma De Groot, Dennis Karstanje and Weili Zhou
Source:
SSRN
Link:
Summary:
Commodity futures momentum strategy can be enhanced by

considering all contract expirations and limiting trading frequency
Intuition
When more future contracts with various expiration dates
are included in the investment universe, investors may
expect increased roll yield, reduced volatility and lower

portfolio turnover
The benchmark (generic) strategy: each month buys
(sells) half of commodities with the highest (lowest)
12-month returns using nearest-expiration contracts,
equally weight all securities
Alternative1 (Optimal-roll momentum): each month ranks
commodities in the same way, but buys the most
backwardated contract for each winner commodity and
sells the most contangoed contract for each loser
commodity from among contracts with expirations up to
12 months
Alternative2 (All-contracts momentum): each month first
select for each commodity the contract expiration with the
strongest and weakest momentum. Then rank the
commodities based on these contracts and buy (sell) the
equally weighted half with the highest (lowest) momentum
Alternative3 (Low-turnover roll momentum): same as
alternative1, except holding each position until it is about
to expire or until it switches sides (long-to-short or
short-to-long), whichever comes first
Assuming trading frictions of about 0.22% per trade
Significantly better results
The low-turnover roll momentum strategy performs best

Robust in different sub-periods
Not driven by the lower liquidity of contracts with the
longest times to expiration: since the profit is not driven
profitability improvements, so it is unlikely that additional
profits derive from lower liquidity.
Source: the paper
Paper
Type:
Working Papers
Date:
2014-09-02
Categ
ory:
Gross margin, stock return, anomaly, momentum
Title:
Gross Profit Surprises and Future Stock Returns
Autho
rs:
Peng-Chia Chiu and Tim Haight
Sourc
e:
University of California, Irvine
Link:
http://business.fullerton.edu/centers/ccrg/PDF/Gross%20Profit%20Surprises%2
0and%20Future%20Stock%20Returns.pdf
Summ
ary:
Seasonally-differenced gross profit predicts future returns incremental to

earnings surprises. Hedge portfolio strategy based on gross profit surprises can
yield an abnormal monthly return of 0.95%
Intuition
Gross profit surprises convey information for future profitability that are
distinct from those conveyed by earnings surprises
Investors do not fully incorporate the incremental signaling power of

gross profit surprises, leading to predictable returns
Quarterly gross profit surprise (SUGP) = (gross profit in quarter t
gross profit in quarter t-4) / market value of equity
Standardized unexpected earnings (SUE) = (earnings in quarter t
earnings in quarter t-4) / market value of equity
Revenue surprises (SUREV) = (revenue in quarter t revenue in
quarter t-4) / market value of equity
Portfolio formation
Each firm-quarter, independently sort stocks based on SUGP, SUE and
SUREV
For each variable, go long (short) in the highest (lowest) decile portfolio
in the fourth month subsequent to quarter-end
Hold for three months (until the end of the sixth month subsequent to
quarter-end)
SUGP-based strategy outperforms SUE and SUREV hedge portfolios
SU
GP
SU
E
SU
RE
V
Three-mon
th raw
3.5
0%
3.4
0%
1.
90
%
Monthly
risk-adjust
ed returns
0.9
5%
0.8
6%
0.
50
%
Source: the paper

SUGP-based strategy delivers positive quarterly returns in 83% of
quarters
Data
SUGP and SUE exhibit incremental explanatory power for future returns
(Tables 2, 3, 4)
SUGP has stronger incremental return predictive power relative to SUREV
(Tables 3, 4)
Both levels and changes in gross profitability have incremental
explanatory power for future returns (Table 4)
Results are robust to controlling for common risk factors and other
predictive accounting-based variables (Table 4)
Gross profit surprises can help predict next quarters earnings surprise
(Table 5)
U.S. monthly stock data from The Center for Research in Security Prices
(CRSP)
U.S firms quarterly accounting data from Compustat
Sample: 269,967 firm-quarter observations (10,005 distinct firms)
Paper
Type:
Working Papers
Date:
2014-07-21
Category
:
Price reversal, industry momentum, overreaction hypothesis
Title:
Simultaneous Reversal and Momentum Patterns in One-month Stock Returns
Authors:
Marc William Simpson, Axel Grossmann
Source:
Financial Management Association Paper
Link:
http://www.fma.org/Nashville/Papers/SimRevandMom.pdf
Summar
y:
A strategy of buying
losing stocks in the winning industries
and selling
winning stocks in the losing industries
can yield a monthly market adjusted
return of 2.82%
Intuition
Many fund managers tend to invest in recent winning industries and
then adjust individual stock holdings within each industry
As a result, losing stocks in the winning industries and winning stocks
in the losing industries tend to experience higher reversal
Portfolio construction (Dual Effects strategy)
Industry level
Stocks are grouped into 17 industry portfolios (based on SIC
codes) which are ranked based on the equally-weighted
industry return in each formation month
Select three worst (best) performing industries
Stock level
Within each industry, stocks are sorted into quintiles based on
their returns in each formation month
Bottom (top) quintile stocks are grouped together as the loser
(winner) stocks
Buy the losing stocks in the winning industries (Worst of the Best)
and short the winning stocks in the losing industries (Best of the
Worst)
Hold for one month
Comparable strategies:
Market-wide overreaction strategy: hold (short) losing
(winning) quintile of stocks in the overall market
Industry momentum: hold (short) stocks in the best (worst)
performing industries
Dual Effects strategy outperforms market-wide overreaction strategy and
industry momentum
Marke
t
adjust
ed
month
ly
return
s (%)
source: the paper
Dual
Effects
Market-wide
overreaction
Industry
moment
um
2.82
0.99
1.19
Data
Significant abnormal returns persist after controlling for market-risk,

size, book-value, January effect, and longer-term momentum effects
(Table 9)
U.S. stock data from the Center for Research in Security Prices (CRSP)

Type:
Date:
2014-07-21
Categ
ory:
Disposition effect, momentum strategy, cross-sectional return predictability
Title:
Asset Pricing when Traders Sell Extreme Winners and Losers
Auth
ors:
Li An
Sourc
e:
Columbia University
Link:
http://www.columbia.edu/~la2329/Asset%20Pricing%20When%20Traders%20S
ell%20Extreme%20Winners%20and%20Losers.pdf
Sum
Stocks with larger gain and loss overhang experience higher selling pressure and
mary: hence generate higher future returns. A trading strategy based on a V-shaped
selling propensity generates a monthly alpha of 0.5%-1%
Intuition
Investors are more likely to sell a stock when the magnitude of gains or
losses on it increases, leading to lower current prices and higher future
returns
In other words, investors demonstrate asymmetric V-shaped selling
propensity depending on stocks returns
Variables definition
V-shaped Selling Propensity (VSP) combines the effects of the gain

overhang (Gain) and the loss overhang (Loss) within the past five years:
Where Gain and Loss are the volume-weighted percentage
deviations of the past purchase price from the current price for
each month
Coefficient 0.2 indicates the asymmetry in the V shape in
investors selling schedule
Recent gain/loss overhangs use purchase prices within the past
one year
Distant gain/loss overhangs use purchase prices from the previous
1-5 years
Residual V-shaped selling propensity(RVSP) is constructed from
cross-sectional regressions of the raw selling propensity variables on past
returns, size, turnover, and idiosyncratic volatility
At the end of each month, sort stock into quintiles based on their RVSP
Go long in stock with high RVSP (5) and short stocks with low RVSP (1)
Hold for one month
Strategy yields a monthly return of 0.5%
Raw
retu
rn
Adjusted
return
Al
ph
a
Q
1
0.78
%
-0.27%
0.
18
%
Q
5
1.36
%
0.21%
0.
66
%
Q
5Q
1
Data
0.58
%
0.47%
0.
48
%
V-shaped selling propensity subsumes the original capital gains overhang

effect (Table 5)
Stronger effect of gain overhang compared to loss overhang
Stronger effect for recent gain/loss overhang than distant overhang (Table
4)
Robust to firm size, past returns, book-to-market ratio, turnover and
volatility (Tables 3, 4)
Stronger effect of unrealized gains and losses in stocks with lower
institutional ownership, smaller size, higher turnover, and higher volatility
(Table 6)
During high capital gains tax periods, return predictability from the gain
side is weaker and that from the loss effect is stronger (Table 7)
Daily and monthly stock data from The Center for Research in Security
Prices (CRSP)
Institutional ownership data from Thomson-Reuters Institutional Holdings
(13F) database
Paper
Type:
Working Papers
Date:
2014-06-12
Categor
y:
Title:
Intraday Momentum: The First Half-Hour Return Predicts the Last Half-Hour
Return
Author
s:
Source: SSRN
Link:
Summa
ry:
The first half-hour return of the S&P500 index predicts its own return in the
last half-hour. A strategy using this signal yields an average annual return of
6.34%. Days with macroeconomic news releases see 2-4 times greater returns
Intuition
If the first half-hour return is up substantially, it is likely due to good
economic news
In responding to the price move, many daytraders go short in the first
half hour to provide liquidity to the market
These traders are most likely to unwind in the last half-hour, their
trading is likely to push index further higher
First and twelfth (second last) half hour returns predict last half hour returns
Based on regressing last half hour return on the first and second-to-last
half hour returns
Re
gr
es
sio
n
co
eff
ici
en
t
for
fir
st
ha
lf
V
o
l
a
t
i
l
i
t
y
Busines
s Cycle
Macro
News
Release
L
o
w
E
x
p
a
n
s
i
o
n
R
e
c
e
s
s
i
o
n
N
o
r
e
l
e
a
s
e
R
e
l
e
a
s
e
0
.
0
2
6
0
.
0
5
0
.
1
2
0
.
0
7
0
.
0
8
0
.
1
0
0
.
1
9
ret
ur
n
Re
gr
es
sio
n
co
eff
ici
en
t
for
se
co
nd
to
las
t
ha
lf
ho
ur
ret
ur
n
0
.
0
7
8
0
.
0
5
0
.
2
3
0
.
1
3
0
.
1
4
.
0
1
0
.
5
4
Stronger predictability when volatility is higher

Stronger predictability during recessions and on days with major
macroeconomic news releases (Tables 1, 2, 6, 7)
A
v
e
r
a
g
e
a
n
n
u
a
l
r
e
t
u
r
n
(
%
)
Calculate half-hour returns for S&P 500 ETF from 9:30 am to 4:00 pm
Eastern time (a total of 13)
Take a long position in the market at the beginning of the last half-hour
if first half-hour (or twelfth) return is positive, and take a short position
otherwise
The position is closed at the market close each trading day
Strategy yields an average annual return of 6.34%
Trade
based on
Averag
e
annual
return
(%)
Stan
dard
devi
ation
(%)
Succe
ss
rate
(%)
1st half
hour
6.34
6.28
53.92
12th half
hour
2.22
6.30
50.54
Both
4.52
4.52
76.88
Data
First half hour returns yield highest annual return (and Sharpe ratio)
(Table 4)
Highest success rate when trading based on 1st and 12th half-hours
combined
Only take position when same signal from both indicators
Lower return due to lower participation in the market
Similar results for NASDAQ 100 ETF (Table 10)
Results are robust to out-of-sample tests (Tables 3, 9)
Trading prices from Trade and Quote database (TAQ)
Sample: actively traded SPDR S&P 500 ETF Trust (ticker SPY)
Paper
Type:
Working Papers
Date:
2014-06-12
Category: Sensitivity to govt policies, politics, momentum

Title:
Under-Reaction to Political Information and Price Momentum
Authors:
Jawad M. Addoum, Stefanos Delikouras, Da Ke, Alok Kumar
Source:
SSRN Papers
Link:
Summary
:
Government policies have a strong impact on stock returns. Investors

underreact to such policy sensitivities. A momentum portfolio based on
political sensitivity yield a monthly risk-adjusted return of 0.51% (0.72%)
Intuition
Election outcomes usually predict policy changes, which are favorable
to some industries and unfavorable to others
Investors do not incorporate this information
This under-reaction creates momentum in stock and industry returns
Measuring political sensitivity
Political sensitivity, i, is constructed based on a regression for excess
industry (stock) returns during the past 15 years:
Where RepubIndt = 1 during Republican, and = 0 during Democratic

Presidential periods
i measures the magnitude and direction of industrys (stocks)
political sensitivity
Firms or industries favored by the current regime have a higher ci
Each month, sort industries (stocks) in descending order based on i
The top five industries form the political favorites portfolio

The bottom five industries form the political unfavorites
portfolio
Go long into politically favored stocks with high prior momentum, and
go short into politically unfavored momentum losers (L)
Politically momentum strategy outperforms standard momentum

Indust
ry-lev
el
Data
Stock
-level
Stand
ard
mome
ntum
Politi
cally
consi
stent
mom
entu
m
Stan
dard
mom
entu
m
Politi
cally
consi
stent
mom
entu
m
W-L
monthly
raw
returns
(%)
0.54
1.10
0.83
1.10
W-L
monthly
characteri
stic-adjus
ted
returns
(%)
0.34
0.72
0.42
0.51
At the industry level, the strategy doubles returns compared to

standard momentum
Political sensitivity has greater influence (particularly at stock-level)
around election years (Figures 2, 3, 4; Table 6)
Politically consistent momentum outperforms the traditional strategy
in almost all sub-periods (Table 3)
At the industry level, standard momentum outperforms only in
January and during 2001 2007 (Table 3)
At the stock level, standard momentum outperforms only during
NBER recessions (Table 3)
Robust to various factor models (Tables 5, 6, 7, 8)
U.S. stock data from the Center for Research in Security Prices
(CRSP)
Fama-French factor returns, book equity data, industry classifications

and industry monthly value-weighted portfolio returns from Kenneth
Frenchs data library
Data on Presidential election outcomes from the CQ Press Voting and
Elections Collection
Data range: January 1939 to December 2011
Paper Type:
Working Papers
Date:
2014-06-12
Category:
Addressing criticisms of momentum
Title:
Fact, Fiction and Momentum Investing
Authors:
Clifford Asness, Andrea Frazzini, Ronen Israel and Tobias

Moskowitz
Source:
SSRN
Link:
Summary:
This paper refutes ten criticisms of momentum strategy: low

profitability, high volatility, easy to crash, works mostly on short
side, works only within small stocks and susceptible to trading
frictions, etc
Momentum consistent and stronger than size and value
Consistence: during 1927 - 2013, momentum yields 8.3%
a year
During 1991-2013, momentum yields annualized returns
of 6.3% (compared with 3.3%, 3.6% of size and value)
During 1991-2013, momentum yields annualized Sharpe
ratios of 0.36 (vs 0.29 and 0.32 for size and value)
Momentum not driven by short side
Long side is equally profitable as the short side
Similar patterns when using 86 years of U.S. stock data,
40 years of international equity data, 40 years of data
from five other asset classes
Momentum works in large cap stocks
During 1991-2013 within large cap stocks, momentum
yields return of 4.5% (vs 0.7% for value)
During 1991-2013 within small cap stocks, momentum
yields return of 8.1% (vs 6.5% for value)
Momentum survives tradings costs
An actual institution trading data, which covers $1trillion

trades over 15 years, shows that careful institutional
traders know how to reduce trading costs
The average investors however experience 10 times larger
trading frictions
Momentum works for a taxable investor
The tax burden of momentum is no greater than that of
value
Mainly because momentum tends to hold winners
and sell losers, hence incur long-term capital gains
and short-term capital losses
Momentum has lower dividend exposure
Momentum crashes, but long term SharpeRatio still higher
Combining value and momentum (such as 60/40
value/momentum) mutually mitigates momentum and
value crashes
Paper Type:
Working Papers
Date:
2014-05-12
Category:
Momentum, maximum drawdown
Title:
Maximum drawdown, recovery, and momentum
Authors:
Jaehyung Choi
Source:
Stony Brook University
Link:
http://arxiv.org/pdf/1403.8125v1.pdf
Summary:
Within SP500 stocks, drawdown based factors yield better results

in monthly momentum strategy, while recovery measure works
better in weekly contrarian strategy
Intuition
Maximum drawdown (MDD) and recovery (R) allow
incorporating risk into momentum portfolio construction
MDD and R are more insightful and easier to calculate
compared to traditional risk indicators like VaR
Definitions
Cumulative returns (C) for estimation period are
decomposed into three phases:
Phase1: PP is the pre-peak period log-return

Phase2: Maximum drawdown (MDD) is the worst
successive loss during a given period:
Phase3: Successive recovery (R) measures how much
MDD loss is recovered by short-term reversal
Alternative momentum factors:
Source: the paper

Sort stocks into deciles using the alternative factors
above, formation period is six months for momentum
strategies, and six weeks for contrarian portfolios
Equal-weighted portfolios
Hold for six months for momentum strategies, and six
weekly for contrarian
MDD best in monthly momentum portfolios
Within S&P 500 stocks, MDD works best with a significant
Criterion
Alpha (%)
(W-L)
Standard
Deviation (W-L)
Cumulative return ( C )
0.44
5.87
MDD (M)
0.92
7.13
Recovery ( R )
-0.32
3.12
Recovery-MDD (RM)
0.65
5.93
Cumulative-MDD (CM)
0.65
6.24
Source: Table 9
The return is almost double that of the classic momentum
measure
Results are similar for U.S. ETFs and South Korea equity
market (Tables 3, 5)
Recovery measures best in weekly contrarian portfolios
Within S&P 500 stocks, recovery measures (R, CR) yields
best results of a significant weekly alpha of 0.13% (Table
8)
Results are similar for U.S. ETFs and South Korea equity
market (Tables 2, 4)
Data
S&P 500 stock data from Bloomberg
KOSPI 200 stock data from
Paper
Type:
Working Papers
Date:
2014-05-12
Category
:
Momentum, Product Market Competition, Stock Returns
Title:
Intra-industry Momentum and Product Market Competition around the Wor
Authors:
Ting Li, Bohui Zhang
Source:
University of New South Wales
Link:
http://etnpconferences.net/efa/efa2014/PaperSubmissions/Submissions2014
/S-2-140.pdf
Summary
:
Intra-industry momentum profits are higher in competitive industries

compared to concentrated industries. In non-US countries, intra-industry
momentum generate an annualized return of 7.6% within competitive
industries
Intuition
It is more difficult for a firm to recover in a competitive industry once

it falls into the group of losers, compared to concentrated industries
Therefore, buying past winners and selling past losers in competitive
industries may generate higher momentum returns
Definitions
Industry competitiveness is measured by the Herfindahl-Hirschman
Index (HHI):
o Where sijkt is the market share of firm j in industry i of country k in

year t
o Firms market share in year t is computed as firms sales divided by
total sales in its industry of country k
Smaller HHI indicates many competitive firms, while greater HHI
means few large firms
Rank HHI in every country, top (bottom) two industry are considered
competitive (concentrated)
Within each HHI portfolio, rank stocks based on past 12 months
performance
Within each industry, buy top 30% (winners), sell bottom 30%
(losers)
Zero-cost portfolio: buy past winners and sell past losers (W-L)
Hold for 3 months
Higher competitiveness, higher annualized returns
Particularly high returns in Non-US countries:
All
countries
U.S.
Non-U.S.
countries
G7
counties
Competitive
industries
7.2%
1.2%
7.6%
7.6%
Concentrated
industries
2.0%
-2.5%
2.3%
4.9%

Significant profits in competitive industries remain for both
sub-periods (1990-2000 and 2001-2010)
Robust to using cross-sectional regressions with country-fixed effects
(Table 4)
Robust to ranking stocks based on the 52-week high instead (Table 5)
Discussion
Regressions do not include common controls and coefficients are not
very significant (mostly 5-10% significance level)
Data
Stock data from Datastream
Financial data from Worldscope

Sample: 19 countries including United States, United Kingdom ,
Australia, Belgium, Canada, Denmark, Finland, France, Germany,
Hong Kong, Italy, Japan, Netherlands, New Zealand, Norway,
Singapore, Spain, Sweden, Switzerland
Paper
Type:
Working Papers
Date:
2014-04-10
Category: Momentum drawdown, stop-loss

Title:
Taming Momentum Crashes: A Simple Stop-loss Strategy
Authors:
Yufeng Han and Guofu Zhou
Source:
SSRN working papers
Link:
Summary
:
The classic momentum strategy can be greatly improved by applying a

5%-15% stop-loss rule at stock level. The improved strategy yields much
higher Sharpe Ratio and much lower drawdowns
Each month, rank stocks into deciles by cumulative returns over the
past six months (skip one month)
Buy the top decile, sell the bottom decile
Equally weight stocks and hold for one month
During the holding month, sell (buy back) any winner (loser) stocks
that fall below (rise above) the portfolio formation price by 10%
based on either daily opens or closes
If an opening price breaches the 10% stop-loss level, liquidate
at the open
If an opening price does not breach the threshold but the
same-day closing price does, liquidate at the stop-loss level
Superior performance
Buy-hold
Classic
momentum
10% stop-loss
momentum
Monthly raw
return
0.62%
1.01%
1.73%
Standard
5.45%
6.07%
4.67%
deciation of
monthly returns
Sharpe Ratio
0.11
0.17
0.37
Max draw-down
-49.80%
-29.00%
-11.30%
Three-factor
(market, size,
book-to-market)
alpha
1.27%
1.75%
Much better drawdown per the monthly graph below
Source: the paper

Robust to subperiods: in fact stronger during July 1992 - December
2011 than earlier subperiod
Robust to stop-loss thresholds of 5%, 10% and 15% (best for 5%)
Robust to a 12-month momentum measurement interval
Robust to value weighting of the momentum portfolio
On average, 34% (33%) of losers (winners) stocks trigger stop loss

limit
Discussions
Note that the assumptions that stocks can be liquidated at open or
intra-day stop-loss price level may limit the capacity of this strategy
A more conservative assumption (such as liquidating stocks at closing
price when stoploss is triggered) may help reinforce the strategy
Data
January 1926 - December 2011 daily opening/closing prices and
monthly market capitalizations are from CRSP
Paper
Type:
Working Papers
Date:
2014-04-10
Categ
ory:
Alpha Momentum, Price Momentum
Title:
Alpha Momentum and Price Momentum
Autho
rs:
Hannah Lea Huehn, Hendrik Scholz
Sourc
e:
Friedrich-Alexander-Universitt (FAU)
Link:
https://mediacast.blob.core.windows.net/production/Faculty/StoweConf/submiss
ions/swfa2014_submission_177.pdf
Summ
ary:
A momentum strategy that ranks stocks by 3-factor alphas outperforms the

common momentum strategy. In the U.S., stocks with
only
alpha momentum
but not the classic price momentum yields significant returns even after 2002;
while European stocks with both price and alpha momentum yield highest
returns
Intuition
Stock returns and profits of momentum strategies are partially driven by
risk factors such as size and B/M
When ranking stocks solely on their stock-specific return component
(alpha), the strategy becomes more robust to variations in such factors
Definitions
Daily stock returns in excess of risk-free rate (ri,d):
o Where RMRFd is the daily excess return of the market index
o SMBd is the daily return on the size factor

o HMLd is the daily return on the value factor
The excess return can be decomposed into a stock-specific component
(i3F,d+ ei,d) and a factor-related return contribution (i dRMRFd +
sidSMBd + hidHMLd)
Alpha momentum strategy uses
daily
stock-specific alpha component to
rank stocks
Alpha momentum is compared to price momentum (stocks ranked based
on raw returns) and GM momentum (stocks ranked based on
monthly
alphas)
Sort stock based on alphas during a 6- or 12-month formation period
(skip one month)
Buy winner stocks and short loser stocks (zero-investment portfolio)
Hold for one month
In the U.S., alpha momentum outperforms and (Alpha Price) is even better
Higher average monthly returns, Sharpe ratios and alphas, particularly in
the recent years
Source: The Paper, Table 1A

Similar results for six- (J6) and twelve-month (J12) formation periods
(Tables 1, 2)
Stocks with only alpha momentum (Alpha Price) yields significant returns
after 2002 (Table 3A)
I.e., stocks that are in the highest/lowest decile when ranked on
alphas, but arent in the highest/lowest when ranked on price
Suggesting higher arbitrage activities in US
Source: The Paper

Alpha momentum shows lower reversal: cumulative alphas stay positive
for five years in the U.S. (figure 2)
In Europe, stocks with both Price and Alpha momentum out-performs
When ranked by alpha momentum, only J12 outperforms for in Europe
(Table 1B)
Price momentum profits disappear after 2002; alpha momentum persists
(Tables 1, 2)
Stocks with both alpha and price momentum (Price Alpha) yields
highest returns in Europe, superior in all sub-periods (Table 3B)
Lower but significant performance improvement by hedging in Europe
(Figure 3)
Much lower reversal for alpha momentum in Europe(Figure 2)
Data
U.S. and European stock data from Thomson Reuters Datastream
Sample countries: U.S., Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal,
Spain, Sweden, Switzerland and the United Kingdom
Data range: 1974 2011 (U.S); 1984 2011 (Europe)
Paper
Type:
Working Papers
Date:
2014-03-10
Category: Intermediate Momentum, Credit Ratings
Title:
Intermediate Momentum and Credit Rating
Authors:
Jesper Haga
Source:
Hanken School of Economics
Link:
/S-2-84.pdf
Summary
:
Intermediate momentum (IM) strategy sorts stocks by their cumulative

returns from month t-12 to t-7. For large firms, IM profits increase when
credit risk decreases, while for small firms the opposite is true. A long-short
strategy in high risk small firms generates a monthly return of 1.91%
Intuition and definitions
Intermediate momentum(IM) is a strategy that sorts stocks into
deciles based on cumulative returns from month t-12 to t-7
Profits from IM are larger than those from traditional momentum
strategy
Sort stocks into deciles based on cumulative returns from month t-12
to t-7 (IM)
Take a long position in stocks with the highest intermediate returns
and a short position in stocks with the lowest intermediate returns
Hold the position for one month
Significant IM profits
The return from the IM strategy is 1.24% a month (Table 2)
Robust to recent momentum (t-6 to t-2) and common risk factors
Robust to credit quality: IM works in all credit rating groups
On average, higher rating, lower IM returns
Portfolios are double-sorted on IM and credit quality
IM profits are significantly higher for stocks with the lowest credit
quality
0.85%/month for investment grade stocks versus
1.62%/month for non-investment grade stocks (Table 4)
0.61%/month for the best rated 30% firms versus
1.77%/month for the worst 30% rated firms (Table 5)
Mostly driven by the worse performance of IM losers with a poor
credit quality
Robust to recent momentum and common risk factors
Different patterns within large and small stocks
Small firms IM profits is 1.91%/month for high credit risk stocks
(versus 1.09%/month for medium risk) (Table 9)
IM profits for large firms with a credit rating of AA and higher has a
monthly return of 1.09% (Table 11)
Data
December 1985 - December 2011 U.S. stock data from the Center for
Research on Security Prices (CRSP)
Credit rating data from Compustat

Paper Type:
Working Papers
Date:
2014-01-07
Category:
Momentum, forecast momentum returns
Title:
The Momentum Gap and Return Predictability
Authors:
Simon Huang
Source:
Yale working paper
Link:
http://students.som.yale.edu/phd/wsh3/SHuangJMP.pdf
Summary:
Momentum gap (formation period return difference between the

75th and 25th percentiles) can predict momentum returns. An
improved conditional momentum strategy yields 50% higher
Sharpe Ratio
Background and definitions
Momentum returns varies significantly from time to time
Define Momentum Gap: Difference between the 75th and
25th percentiles of the distribution of cumulative stock
returns from month t-12 to t-2
Momentum gap displays substantial time variation with no
clear trend
1927-1940 average gap is 80% higher than that of
1941-1960 (Table 1)
Lagged momentum gap negatively predicts momentum returns
When the momentum gap is in the lowest quintile,
momentum earns large alphas of 2.2% a month
When the momentum gap is in the highest quintile,
momentum loses 0.13% a month (Table 2)
Such relationship is monotonic but non-linear
When regressing three-factor adjusted momentum returns
by the lagged momentum gap, one standard deviation
increase in the momentum gap leads to a 1.29% fall in the
monthly adjusted return of the momentum strategy (Table
3)
Predicts the returns to both long and short legs of the
Gap-based conditional momentum strategies perform better
Strategy1: takes a position in momentum unless the
momentum gap is ranked in the top quintile
Strategy2: takes a position in momentum unless a
negative return is predicted in a quadratic predictive
regression
Look-back window is 30 months
Both strategies yield improved Sharpe ratio and down-side

risk
Strategy1 yields a Sharpe ratio that is more than
50% higher (0.79 vs. 0.52)
Robust out-of-sample and robust to many known factors

Standard macroeconomic variables do not drive out the
momentum gaps predictive ability (Table 6)
Robust to different gap measures (i.e., use difference
between the 90th and 10th percentiles of formation period
stock returns)
Similar patterns is pervasive across size and trading
volume groups (Table 9 and Table 10)
Data
1926 - 2012 stock data are from the CRSP
Fama-French factors and returns on portfolios formed on
size and book-to-market are sourced from Kenneth
Frenchs website
Paper Type:
Working Papers
Date:
2014-01-07
Category:
Momentum, government-bond term structures
Title:
Momentum and the Term Structure of Interest Rates
Authors:
J. Benson Durham
Source:
Federal Reserve working paper
Link:
http://www.ny.frb.org/research/staff_reports/sr657.pdf
Summary:
Momentum strategies using government-bond term buckets

yields excess returns of 207 basis points per year. Such pattern
holds in US, Japan and Canada, though not UK
Background
This study is the first to examine momentum along
individual government-bond term structures
In other words, momentum based on the relative
performance of different duration buckets across the
curve, as opposed to across sovereign markets or
individual term structures as a whole over time
The investment universe is the six sub-indexes of the
nominal U.S. Treasury markets based on buckets of
durations
1- to 3-, 3- to 5-, 5- to 7-, 7- to 10-, 10- to 20-,
and 20- to 30-year maturities
Construct duration-neutral trading rule along yield curves
Formation period for each duration bucket is prior 2-13
months
Each month, buy one of the six buckets with the largest
past return
Constraint 1: no short sales
Constraint 2: same weighted-average duration as
the benchmark
Decent access returns
The average (annual) excess return over the benchmark is
96 basis points (Exhibit 1)
Source: The paper
Ex-post tracking error is 150 basis points for an

information ratio of 0.64 (Exhibit 1)
Returns are positively skewed: Excess returns are positive
for almost 60% of the sample
Findings are insensitive to momentum window
(Exhibit 3)
Allowing short sales produces even greater abnormal returns
Long(Short) the buckets with highest(lowest) prior returns
Average excess return increases to approximately 207
basis points
Term premiums are greater at the very front and back
ends of the term structure than at intermediate maturities
(Exhibit 12)
Momentum returns appear to be low beta, positive alpha
(Exhibit 15)
Momentum represents more than sufficient compensation
for curve risk. (Exhibit 16 and Exhibit 17)
Works in Japan: the average momentum portfolio is
concentrated in intermediate maturities (Exhibit 8)
Works in Canada (Exhibit 9)
Not working in U.K (Exhibit 10)
Robust to common risk factors

No specification captures substantial variation in returns of
the strategy (Exhibit 11)
Term structure momentum appears to hedge key
exposures, more so than a benchmark Treasury portfolio
(Exhibit 11)
Data
1996 - 2013 data for U.S. index values, durations and
market capitalizations sourced from Barclays Capital
Data for non-U.S. cases sourced from Citigroup World
Government Bond Index
Comments:
Paper Type:
Working Papers
Date:
2013-12-04
Category:
Novel Strategy, Volume, Momentum
Title:
Trading Volume, Return Variability and Short-Term Momentum
Authors:
Umut Gokcen, Thierry Post
Source:
SSRN Working Paper
Link:
Summary:
Stocks with increasing volume and/or return variability see

stronger short-term momentum
Intuitively, momentum is strongest when accompanied by
significant news
Volume and return variability can be indirect measures for
such significant news
Define return variability as the variance of daily returns,
estimated over rolling three-month periods
Significant alpha spread between winner and loser stocks
For the classic momentum strategy, the return spread is
11.6% per year (Table 3)
Higher return spread in high volume tercile: the return
spread within high volume tercile stocks is 14.2%, whileas
within low volume tercile 6.7% (Table 3)
High return spread in high variability tercile: the return
Triple-sort show even stronger return spread

Return spread for high volume + high variability
stocks is 19.6%
Return spread for low volume + low variability
stocks is 2.2% (Table 4)
Results hold in alternative holding periods (Table 5)
Momentum stronger for longer windows (Table 6)
Robustness
Results are robust to alternative factor models (Table 7)
Stronger effect (13% return spread) for mid-cap and small
stocks, while only 4.9% for large-cap stocks (Table 8)
Conditioning on informational arrivals is more effective for
medium- than low-liquidity segments (Table 9)
Data
1965 - 2012 stock data are sourced from
COMPUSTAT/CRSP and WRDS
Paper
Type:
Working Papers
Date:
2013-10-03
Category:
Novel strategy, enhanced momentum strategy, implied volatility
Title:
Slow Diffusion of Information and Price Momentum in Stocks: Evidence from

Options Markets
Authors:
Zhuo Chen and Andrea Lu
Source:
Kellogg School of Management, Northwestern University Working Paper
Link:
http://www.kellogg.northwestern.edu/faculty/chen-z/ChenLu_Momentum.pd
f
Summary: An enhanced momentum strategy that longs (shorts) winner (loser) stocks
with higher growth (larger drop) in call option implied volatility generates a
risk-adjusted alpha of 1.78% per month over 1996-2011, when the classic
momentum strategy fails
Investors with private information are more likely to trade options
Option implied volatility growth (OIVG) reflects the arrival of new
information carried by option investors, and hence may predict stock
returns
Define OIVG: the implied volatility on the last trading day of month
t / the implied volatility five trading days earlier
Use implied volatilities of call and put options with a delta of

0.5 (-0.5 for put) and time-to-maturity from 1-month
(30-day) to 6-month (182-day)
Average OIVG for call (put) options with delta of 0.5 and maturity of
one-month is 0.31% (0.19%), indicating that implied volatility is
persistent (Table 2)
At the beginning of each month, sort stocks within winner and loser
stocks into three OIVG groups
Using OIVG over the last one week in the previous month
Form three groups: slow, median, and fast information
diffusions
Using call options, slow stocks are winner (or loser) stocks
with large (small) OIVG
Using put options, slow stocks are winner (loser) stocks with
small (large) OIVG
Take long (short) position in winner (loser) stocks with slow
information diffusion
Equal-weight winner-minus-loser momentum portfolio
Hold for one month, and rebalance monthly
OIVG momentum outperforms
Traditional momentum strategy failed 1996-2011 (Table 3)
For all stocks, returns are almost always insignificant (Panel
A)
For stocks with listing options, the returns are insignificant for
all cases, with return less than 1% (Panel B)
Within slow stock, OIVG has average excess return of 1.55% per
month (Table 4)
The classic momentum yields 0.94% per month
Controlling for the Fama-French three-factor and the short term
reversal factor, the enhanced momentum strategy generates a
monthly alpha of 1.25% when the holding period is six month
Both long and short position contribute to the momentum profit
(Table 4)
OIVG based on put option does not work (Table 5)
Robustness: holds when excluding stocks that have earnings
announcements in the holding month (Table 7), robust to transaction
cost (Table 6), value-weighted or equal-weighted stocks ( Table
A.0.7)
Data
1996/1 to 2011/12 data on stock-level implied volatility are from
OptionMetrics Volatility Surface
Stock return data is from the CRSP Monthly Stocks Combined File
Paper Type:
Working Papers
Date:
2013-09-07
Category:
Novel strategy, time-series momentum
Title:
Improving Time-Series Momentum Strategies: The Role of

Volatility Estimators and Trading Signal
Authors:
Akindynos-Nikolaos Baltas, Robert Kosowski
Source:
ESEM conference paper
Link:
http://www.eea-esem.com/files/papers/EEA-ESEM/2013/1403/BK
_SigVol_v5.pdf
Summary:
An improved version of time-series measure can greatly enhance

performance by lowering turnover
Background
Time-series momentum strategies (TSMOM): takes
long(short) position in assets with a positive(negative)
past 12-month return
A drawback of TSMOM is its high turnover
By comparison, cross-section momentum selects assets
with relatively higher (not necessarily positive) past
performances
TSMOM provides impressive diversification to investors
tool during the 2008 financial crisis, as in previous
business cycle downturns
Define constant-volatility strategy (CVOL): construct
portfolio such that each asset has same level of volatility
Trend detection reduces transaction costs by 2/3
The traditional TSMOM only use the sign of the past
returns
But intuitively, investors only want to take a position when
there exists a clear trend
The solution: fitting a linear trend on the past 12-month
daily futures price series using least-square
Define TREND: takes the value of +1/-1 when the t-stat is

above 2 or below -2
Comparable Sharpe ratio, but 2/3 less trading cost
Sharpe ratio before transaction costs is 1.04 and 0.99 for
traditional TSMOM and TREND based TSMOM (Table V )
Mean return and volatility are all comparable
But TREND can reduce turnover by 2/3 for most contracts,
ranging from 55-85% (Panel B of Figure 6 )
Source: the paper

Slightly better performance when using alternative volatility
estimators
Traditional volatility estimators, (e.g, the standard
deviation of daily returns), provide relatively noisy
estimates, hence worsening the turnover
Of various range estimators (those based on daily
low/high prices), YZ estimator works best (page9-10)
It accounts for overnight jump of the price, and is
an unbiased volatility estimator (page 10, formula
23)
Similar Sharpe ratio of 0.6 for all volatility estimators in a
out-of-sample test (Table III)
However, YZ estimator lowers the annualized turnover by
1/5, compared with the conventional STDEV estimator
Hence generating greater risk-adjusted returns
after accounting for transaction costs (Panel A of
Table III )
Data
1974-2013 data for 75 futures contracts are from Tick
Data
26 commodities, 23 equity indices, 7 currencies
and 19 short-term, medium-term and long-term
bonds
Equity indices spot prices from Datastream
Paper Type:
Working Papers
Date:
2013-08-02
Category:
Momentum factor timing, liquidity
Title:
Time-Varying Momentum Payoffs and Illiquidity
Authors:
Doron Avramov, Si Cheng and Allaudeen Hameed
Source:
SSRN Working Paper
Link:
Summary:
Periods of high market illiquidity are followed by negative

momentum profits. Momentum strategy can be improved by
conditioning on market liquidity, even in recent decades when
unconditional momentum failed
Intuition
Compared with winning momentum stocks, loser stocks
are much more illiquid
During low market liquidity periods, the liquidity gap
considerably widens
Consequently when liquidity is low, the loser stocks
demands a much higher returns to compensate for
liquidity risk
This leads to negative momentum payoffs or even
momentum crash
Measuring illiquidity using the Amihud illiquidity
Intuitively, the greater the change in stock price for
a given trading volume, the higher the illiquidity
Define market illiquidity as the value-weighted average of
each stocks Amihud illiquidity
Momentum profits correlated with market illiquidity
Most profitability comes from the short side of the trade
Momentum crashes some times: its profit is highly
negatively skewed with skewness of -6.25 (Table 1)
Loser decile portfolio contain more illiquid stocks
Amihud = 8.4, market average Amihud = 1.2
(Panel A, Table 1)
Following periods of low market liquidity, momentum
payoffs are low, with a correlation of -0.26 (Panel B, Table
1)
Illiquidity negatively predicts momentum profits
Run time-series regression, controlling for market
volatility, market states, and Fama-French three factors
A one standard deviation increase in market illiquidity

reduces momentum profits by 0.87% the next month
(Table 2)
A large amount, given that the average momentum
payoff is just 1.18% (Table 1)
Momentum profits significantly drop during illiquid periods
Coefficient for loser stocks ranges between 0.133
and 0.199
Coefficient for winner stocks ranges between
-0.120 and -0.151 (Table 2)
Higher momentum profits within high volatility stocks
Due to larger exposure of high volatility stocks to
market illiquidity
Pattern holds in recent years
On average momentum didnt generate significant return
in recent years
But momentum still works when market is relatively liquid.
Run regression
Significant alpha when Illiquidity is controlled for (Panel A,

Table 8)
Per the graph below, the lack of profitability of momentum
in the recent decade is related to episodes of market
illiquidity (2002, 2009)
Source: the paper

Illiquidity better than other explaining variables
Data
Such as market state (up or down during the past 24

months), market volatility (standard deviation of daily
market returns over past month) (Table 8)
The effect of market illiquidity effectively subsumes these
factors
Robust to investor sentiment: when the equity market is
illiquid, momentum is unprofitable in all sentiment states
(Table 9)
1926/1 - 2011/12 daily and monthly prices are from CRSP
Analyst consensus earnings forecasts are from I/B/E/S,
and the actual earnings and announcement dates are from
COMPUSTAT
Paper Type:
Working Papers
Date:
2013-03-31
Category:
Time-series momentum, historic evidence
Title:
A Century of Evidence on Trend-Following Investing
Authors:
Brian Hurst, Yao Hua Ooi, Lasse H. Pedersen
Source:
AQR working paper
Link:
http://www.aqrcapital.com/Research/AllResearch.aspx
Summary:
Time-series momentum works consistently out-of-sample over

100+year and in various markets, suggesting that trending are a
pervasive feature of global markets
Intuition: why time-series momentum works and may continue to
do so
Time-series momentum is to long markets that have been
rising and going short markets that have been falling
Driving forces: investor behavioral biases, market
frictions, hedging pressures, and market interventions by
non-profit organizations(central banks and governments)
E.g. when central banks intervene to reduce
currency and interest rate volatility, they slow
down the rate at which information is incorporated
into prices, thus creating trends
Such forces are likely to continue
Market interventions and hedging programs are still
prevalent
Investors are likely to continue to display same

behavioral biases
AUM of trending strategies still small fraction of the
market
0.2% of the size of the equity markets, 3% of the
underlying bond markets, 5% of the underlying
commodity markets, and 0.2% of the underlying
currency markets
Constructing a time-series momentum portfolio
Construct an equal-weighted combination of 1-, 3-, and
12-month time series momentum strategies for 59
markets across 4 major asset classes
24 commodities, 11 equity indices, 15 bond
markets, and 9 currency pairs
Cover the period of 1903 - 2012
Long(short) assets with a positive(negative) past return
Hence each asset is either being long or short at
any given time
Scaling by volatility: each position is scaled to target the
same amount of volatility
Aggregated portfolio is scaled such that the combined
portfolio has an annualized ex-ante volatility target of 10%
Net of transaction costs: apply a 2% management fee and
a 20% performance fee
Remarkably consistent performance
Profitable in each decade in past 100 years
Note that such periods includes the Great Depression,

multiple recessions and expansions, multiple wars, stagfl
ation, the Global Financial Crisis, and periods of rising and
falling interest rates
Not driven by periods of declining interest rates: best

performing decade occurred during the 1973-1982 period,
when US 10 year treasury yields rose from 6.4% to 10.4%
with extreme volatility in between.
Can benefit the traditional 60/40 portfolio: when allocating
20% of the capital from a 60/40 portfolio to the time
series momentum strategy, it helped reduce the maximum
portfolio drawdown, lowered portfolio volatility, and
increased portfolio returns. (Exhibit 3,4)
Expect to see lower returns
Return may go lower due to: increased assets under
management in the strategy, high fees, and higher
correlations across market
The assets managed by systematic trend-followers has
grown from $22B in 1999 to over $260B in 2012
Ways to improve return for investors
Offer lower fees
Invest in trading infrastructure and strategy
implementation that reduce transaction costs
Expanding into less traded futures and forward contracts
Paper
Type:
Working Papers
Date:
2013-01-31
Category:
Momentum, residual return momentum, volatility, correlation
Title:
Some Simple Tricks to Boost Price Momentum Performance
Authors:
Andrew Lapthorne, Rui Antunes, John Carson, Georgios Oikonomou,

Charles Malafosse and Michael Suen
Source:
SG Americas research report
Link:
http://gallery.mailchimp.com/6750faf5c6091bc898da154ff/files/117108.pdf
Summary: Momentum profit can be enhanced by using residual return (those return
that are unexplained by classic risk factors), by scaling such returns by its
volatility, and by avoiding distressed stocks
Intuitively, the return unexplained by risk factors is a better
measure of idiosyncratic forces that drives momentum
Distressed stock may hurt momentum profit
Such stocks are likely to appear in the short side of a

conventional momentum portfolio
Yet they may recover sharply
Definitions
Four versions of residual returns
IMOM: stock returns unexplained by market beta, based on
rolling 36-month historical regressions
IMOM/VOL: IMOM scaled by return volatilities over the
ranking interval
FFIMOM: Stock returns unexplained by market beta, sizes
and book-to-market ratios, based on rolling 36-month
historical regressions
FFIMOM/VOL: FFIMOM scaled by stock volatilities over the
ranking interval
Define stocks distress level as the percentage by which a stocks
current price is below its rolling lagged 12-month high
Distressed stocks are those stocks that are at least 50%
below their respective 12-month highs
Much better performance when using returns residual
E.g, gross annual return of IMOM more than doubles that of a
conventional momentum strategy, while lowering volatility by
almost half
Sharpe ratio is 0.69, much higher than for conventional momentum
strategy (0.05)
Scaling by return volatilities (IMOMVOL) further boosts gross annual
Sharpe ratio to 0.84
Source: the paper

Avoiding distressed stocks helps
Excludes stocks that are at least 50% below their respective

12-month highs
Compared with stand-alone IMOM strategies, volatility decreases
from 16.2% to 9.1% (table on page8)
Yielding Sharpe ratio 1.51, much higher than the conventional
strategy (0.05), and stand-alone IMOM strategies (0.63-0.84)
Sensitive to the cut-off line: when exclude fewer stocks (stocks
lower than 60%, 70%, 80% or 90% below their 12-month highs),
the result is weaker
Source: the paper

Data
June 1993 through September 2012 data for FTSE World Index
stocks are covered in this study
Paper Type:
Working Papers
Date:
2013-01-31
Category:
Title:
Generalized Momentum and Flexible Asset Allocation (FAA): An

Heuristic Approach
Authors:
Source:
SSRN Working Paper
Link:
Summary:
An asset allocation strategy based on assets relative momentum,

absolute momentum, volatility and correlation greatly outperforms
traditional momentum strategy

Intuition
relative
returns) is infamous for its large drawdown
absolute
momentum can help
reducing drawdown
Funds volatility and correlation can be used to further
reduce portfolio risk
Trade 7 assets
3 global stocks (VTSMX, FDIVX, VEIEX) covering
US, EAFE and EM regions
2 US bonds (VFISX) (VBMFX) covering short- and
mid-term horizons,
Calculate momentum, volatility and correlation based on
prior 4 months data
Choose 3 (out of 7) funds to build an equally weighted
(EW) portfolio
Return momentum (R): rank funds based on lagged
total returns. Long/short funds with higher/lower
returns
R+Absolute momentum(A): when winner funds
have a negative momentum, replace them with
cash
R+A+Volatility momentum (V): to lower risk,
further rank funds by volatility (standard deviation
of daily returns). Lower is better
R+A+V+Correlation momentum (C): to diversify,
rank funds by their average pair-wise correlation of
daily returns and lower is better
Optimized portfolio: Change weights on (relative
momentum, volatility, correlation) from (1, 0.5,
0.5) to (1, 0.8, 0.6)
Leveraged and optimized portfolio: apply 2x
leverage to match that of S&P 500 index, add
transaction costs (0.1% per transaction) and
interest costs of leverage (3% annual)
Use simple linear functions to combine volatility and
correlation with return momentum ranking
Benchmark portfolio is the equal-weighted all 7 funds,
rebalanced monthly
Annual
Annual
Monthly
Sharpe
Return
Volatility
max
Drawdown
ratio
Benchmark
5.6%
16.6%
-46.3%
0.34
9.1%
14.5%
-29.2%
0.63
R+A
11.7%
12.8%
-12.6%
0.92
R+A+V
12.5%
11.7%
-11.4%
1.07
R+A+V+C
14.7%
9.2%
-7.4%
1.60
Optimized
Portfolio
13.0%
7.4%
-5.2%
1.76
Leveraged
and
optimized
22.6%
14.7%
-10.7%
1.54

Robust to look-back months of 1-12 months, with 4

months performing the best (Figure 8)
Data

Paper Type:
Working Papers
Date:
2013-01-31
Category:
Novel strategy, large price changes, momentum, reversal,

analysts revisions
Title:
Large Price Changes and Subsequent Returns
Authors:
Suresh Govindaraj, Joshua Livnat, Pavel G. Savor and Chen Zhao
Source:
SSRN Working Paper
Link:
Summary A strategy that longs (shorts) stocks with 1) large price
increases (decreases) and
Summary:
A strategy that longs (shorts) stocks with 1) large price increases

(decreases) and 2)immediate upward (downward) analyst
revisions earns an abnormal return of about 73-98 bps per month
When accompanied by new information, large price
changes are less likely to reverse
A good proxy for new information is the immediate analyst
revisions, be it earnings forecast revisions or target price
revisions
Define large price changes: a day when a stock yields
returns of 5% or more or -5% or less in a single day
Define analysts immediate revision: by examining if
analysts revise their earnings forecasts (or target prices)
on or within 5 days after the large price change
If a majority of analysts following the firm revise
upward (downward), then its an immediate
revision
Examine both the short-term return ([1,5] days) and the
longer-term returns ([6, 30], [6, 60] and [6,90] days)
Calculate excess return by adjusting to size,
book-to-market ratio, and momentum
Only 21.9% (18.2%) of the large move stocks have their
earnings forecasts (target price) revised (Table 1 and 2)
Suggesting most large return days are probably not
associated with significant new information
Each month end, select firms with 1) large price swings
and 2) immediate analyst forecast/target price revisions
that occur during the month but prior to the last day of the
month
Hold for one month

Benchmark is a portfolio that long/short stocks with large
price moves and no immediate analyst revisions
Average number of long and short stocks is 141 and 154
for earnings forecast revisions (Table 7)
Large price change and immediate revisions predict abnormal
returns
The average monthly excess return is 0.98% (0.73%) with
t-stat=7 (t-stat=3.1), respectively, for earnings forecast
(target price) revisions (Table 7)
By contrast, benchmark (stocks with large move, but no
immediate revision) yields an average monthly excess
return of only 0.18% (Table 7)
Conditioning on trading volume further improves
When limiting long(short) stocks to those with
high(low) volume stocks, the excess return is
1.31% (1.33%) for the case of earnings forecast
(target price) revisions) (Table 8)
Fama-MacBeth regressions confirm the results (Table 6)
Return reverses after the initial large price change
that are not accompanied by immediate revisions
Reversal much stronger if analysts revisions are in
the opposite direction to initial price changes than
in the case with no revisions
Data
1982 - 2011 earnings forecast and target price data are
from the IBES database, and stocks return data are from
CRSP
Only select firms with market value exceeds $100 million
Paper Type:
Working Papers
Date:
2013-01-31
Category:

analysts revisions
Title:
Authors:
Source:
SSRN Working Paper
Link:

Summary:

revisions
revision
month
Hold for one month
returns
Data

CRSP
Paper
Type:
Working Papers
Date:
2012-12-31

Title:
Authors:
Gary Antonacci
Source:
SSRN Working Paper
Link:
Summary
:
turnover
relative momentum

costs
asset
Equity pair
MSCI U.S.
MSCI EAFE/MSCI
ACWI

vs 15.86%) (Table 1)
0.45) (Table 1, 2)
Credit pair
High Yield Bonds

The Barclays
Capital U.S.
Intermediate
Credit Bond Index

assets (0.97 vs 0.51)
Dual momentum is
Real estate pair
Morningstar
mortgage REITs
Morningstar
equity based
REITs

Economic stress
pair
The Barclays
Capital U.S.
Treasury 20+ year
bond index
Gold
Dual momentum

(Table 9)
Data
indices.
bill Index
Paper Type:
Working Papers
Date:
2012-12-02
Category:
Intra-industry reversals, contrarian strategies, industry

momentum
Title:
Industries and Stock Return Reversals
Authors:
Allaudeen Hameed and G. Mujtaba Mian
Source:
SSRN working paper
Link:
Summary:
Intra-industry reversal strategy generates significant excess

return that is higher than the conventional reversal strategy. It
works in large and liquid stocks, works consistently over time
including recent years, and is robust to common risk factors
Intuition
Stock prices sometimes deviate from fundamental values,

mostly due to liquidity reasons
Compared with conventional reversal strategy,
intra-industry strategy yields higher returns since its
long/short pairs are in same industry and have similar
fundamentals
Decompose reversal profits
Decompose reversal profits into (1) an intra-industry
reversal profits and (2) an inter-industry reversal profits
Inter-industry reversals may earn negative profits, given

momentum in industry portfolios
Intra-industry reversal strategies generate significant returns
Constructing portfolios: long (short) stocks that are losers
(winners) within same industry in the past month, and
hold the portfolio over the next month
Higher returns than the conventional reversal strategy
(Table 2)
Monthly 4-factor risk-adjusted return is 0.94%,
compared to the 0.63% from the conventional
reversal strategy
Such return difference comes from the significant
inter-industry momentum (item2 above, about
-0.30% per month)
Hence an intra-industry reversal strategy improves
by isolating the short-term reversals from
across-industry momentum
Robust to various checks, while traditional reversal fails
Works even among the large cap stocks, while
unconditional one not
Yield significant 4-factor alpha of 0.47% per month
for large stocks
While unconditional strategy has an insignificant
0.12% (Panel A of Table 6)
Works in every industry (Figure 1)
Works in each of the 17 industries
With the exception of Consumer Durables and Oil,
intra-industry reversal is better than unconditional
reversal returns
Not driven by extreme returns
Excluding the top/bottom 5% extreme returns,
risk-adjusted return for the intra-industry reversal
strategy is 0.71% (vs. only 0.38% from

unconditional strategy (Panel A of Table 3)
Robust to bid-ask bounce effects, while unconditional
strategy does not
Skip a day between formation and holding months
to account for bid-ask effects
4-factor risk-adjusted monthly return for the
intra-industry (unconditional) reversal strategy is
significant (insignificant) 0.57% (0.27%) (Panel B
of Table 3)
Significant in January and non-January months
Both intra-industry and unconditional strategies
yield significant returns during January (2.7% vs.
2.36%) and non-January (0.81% vs. 0.47%)
(Panel C, Table 3)
Profitable when value-weighting stocks, while
unconditional reversals do not (Table 4)
Persistent across time and generate a significant 0.94%
monthly alpha during the recent period of 2000-2010,
while traditional one does not (Table 5 and Figure 2)
Source: the paper

Data
1968/1 to 2010/12 data for US stocks are from CRSP
Classify stocks into 17 industry groups based on four-digit
SIC code
Paper Type:
Working Papers
Date:
2012-10-28
Category:
Value effect, momentum, emerging equity market
Title:
Size, Value, and Momentum in Emerging Market Stock Returns
Authors:
Nusret Cakici, Frank J. Fabozzi and Sinan Tan
Source:
SSRN Working Paper
Link:
Summary:
There exists strong evidence for the value effect in the 18

emerging markets and the momentum effect for all but Eastern
Europe. Value effects are similar for big and small stocks while
momentum effects are stronger for small firms
Background
To ensure a reasonable number of stocks in the portfolios,
combine 18 countries into the following three emerging
regions as defined by MSCI
1. Asia: China, India, Indonesia, South Korea,
Malaysia, Philippines, Taiwan, and Thailand
2. Latin America: Argentina, Brazil, Chile,
Colombia, and Mexico
3. Eastern Europe: Czech Republic, Hungary,
Russia, Poland, and Turkey
Reasonable number of stocks (Table 1)
Mean number of firms is 4,000 (800, 400) in Asian
(Latin American, Eastern Europe)
Mean firm size is close to $108 ($165, $86) million
dollars in Asia (Latin America, Eastern Europe)
Mean B/M ratio is about 0.70 regardless of the
region
Value and momentum works in emerging markets (Table 2)
Value premium (bps)
Momentum
Asia
103
93
Latin America
66
96
Eastern Europe
188
25 (insignificant)
All
115
86
US
30
55
Developed markets
40
63
Different patterns by market cap groups

Value is similar in large and small stocks, unlike in
the U.S. and the Global Developed markets, where
value premia exists only for small stocks
Momentum is significant only for small stocks but
not large stocks, similar to the pattern in US and
Global Developed Markets
Volatility much higher in emerging markets
Volatilities of the Eastern European portfolios
formed on size and B/M ratio is ~15%
By comparison, the volatilities are 5-10% (5-6%)
for the U.S. (Global Developed markets)
Potential for diversification given correlation patterns
Diversify by factors
Thanks to the negative correlation between value
and momentum
Such correlations ranging from -10% (Eastern
Europe) to -26% (All-Emerging markets), (Table 3)
Lower volatility and higher returns when combining
value and momentum (Figure 1)
Diversify within emerging markets
Low correlation among emerging markets
The average of market returns (HML, WML)
correlations between Asia, Latin America, and
Eastern Europe is 49% (8%, 17%) (Panel A, Table
4)
Hence offer the potential for multi-region
diversification
Diversify from U.S. markets
Low correlations with the U.S
The average correlation of Asia, Latin America, and
Eastern Europe with U.S is 55% (1%, 27%) for
market returns (HML, WML) (Panel A of Table 4)
Hence provide a reason for internationally
diversifying value and momentum
Data
1990/1 to 2011/12 monthly stock data for 18 emerging
countries is from Datastream
U.S. and the Global Developed explanatory factors and
cross-sectional portfolio data are from Kenneth Frenchs
website
Paper Type:
Working Papers
Date:
2012-09-30
Category:
Novel strategy, timing momentum profits
Title:
Comomentum - Inferring Arbitrage Capital from Return

Correlations
Authors:
Dong Lou and Christopher Polk
Source:
LSE working paper
Link:
http://personal.lse.ac.uk/loud/Comomentum_20120831.pdf
Summary:
When many investors are chasing momentum strategy, the

momentum profit is likely to suffer. Comomentum can measure
such crowd-ness by measuring the return correlation among
typical winner/loser stocks. Momentum profits are higher (lower)
during periods of low (high) comomentum. Similar findings in
international markets and also in value strategy. A stock level
comomentum strongly and positively forecasts stock returns
Intuition
When lots of capital is deployed in momentum strategy,
winner (loser) stocks may be over bought (sold) and may
reverse
Because many investors are buying/selling same stocks,
the correlation of winner/loser stocks may be high
Co-momentum is a proxy for the amount of capital
deployed in momentum strategy
A high comomentum suggests that momentum is
crowded and may more likely to be an overreaction
Measuring comomentum
In essence it is the return correlation among typical
winner/loser stocks
Step1: at the end of each month, sort all stocks into
deciles by previous 12-month return (skipping the most
recent month)
Step2: in winner and losers group, compute the 52 weekly
pairwise return correlations in past year for all stocks in
each decile. Such correlation is comomentum
Comomentum varies over time
E.g., the average loser stock has an correlation as
low as 0.053 and as high as 0.284 (Table I Panel A)
Interestingly, comomentum is not moving up over the
years
Though more arbitrageurs are trading the
momentum strategy
This may be due to that markets are more liquid,

so that each dollar of trading has a smaller price
impact
High comomentum forecasts lower momentum returns
For the 20% of the period with high comomentum,
momentum strategy yields 10.4% lower returns over the
first year, relative to its performance during the 20%
period with low comomentum (Table IV Panel A)
Momentum continues to lose 14.4% (relative to the
low comomentum periods) in the second year after
formation
Robust to Fama-French three-factors: the return
differential then becomes 9.5% and 9.4% in years one
and two, respectively
Holds for the three years after portfolio formation (Figure
2)
Similar findings in regression: comomentum is negatively
correlated (-0.183) with future 1-year momentum profit
(Table III Panel B)
Evidence of institutional investors herding: these results
are only present for stocks with high institutional
ownership (Table VI )
Similar pattern in international markets
Worked in every one of the 19 largest non-US stock
markets
When only investing in countries with relatively low
comomentum, the profit is a significant 12% per year (6%
if hedged to global market, size, value and momentum)
By comparison, countries with high comomentum yields
only 1/4 of profits and is insignificant
A stock-level comomentum(SC) strongly forecasts stock returns
Define SC: for each stock, calculate the partial correlation
between its weekly returns and the minus returns of the
bottom momentum decile
High SC indicates higher likelihood of being chased
by momentum investors
These stocks should perform well subsequently
and, if aggregate comomentum is high, eventually
reverse
When sorting stocks by SC, the abnormal performance
linked to stock comomentum lasts for six months (Panel B
of Table IX)
Robust to momentum: in regression, SC significantly
predicts stock returns, after controling for momentum,
size, log book-to-market ratio, idiosyncratic volatility, and
turnover (turnover) (Table IX)
Data
1964 to 2010 US stock data are from CRSP

Monthly returns of actively-managed equity mutual funds
and long-short equity hedge funds from the CRSP
survivorship-bias free mutual fund database and the
Lipper TASS database
Paper Type:
Working Papers
Date:
2012-09-30
Category:
Time-Series momentum, volatility estimation, managed futures
Title:
Improving Time-Series Momentum Strategies: The Role of

Trading Signals and Volatility Estimators
Authors:
Akindynos-Nikolaos Baltas and Robert Kosowski
Source:
SSRN Working Paper
Link:
Summary:
This paper proposes an improved time-series momentum strategy

by inversely weighting futures by volatility
Background
Time-series momentum is based on the assets own price
history. It is long assets that have positive recent returns
By contrast, cross-sectional momentum is based on
the relative price of assets
Usually in time-series momentum strategies, trading signal
is based on only the sign of the past return
Hence only provides a rough indication of a price
trend, without information of the price path itself
This paper proposes a new time-series momentum
strategy by inversely weighting assets by volatilities
Using intra-day 30-minute quotes of 12 futures
contracts, the authors find a more efficient way to
estimate volatilities
Methodology
Volatility estimation
Using the dataset includes 48 30-minute intra-day
data points per contract, estimate running volatility
at the end of each trading day
Among five volatility estimators, YZ estimator
(Equation (21)) is the best, with smallest bias and
lowest turnover (Table 2 and Figure 3)
Use YZ ex-ante volatility estimate with a rolling
window of 30 days
Five competing momentum signals

Return Sign (SIGN): long (short) when past return
is positive (negative)
Moving Average (MA): long (short) when past
J-month price moving average is below (above)
past 1-months moving average of daily prices
EEMD Trend Extraction (EEMD): decompose prices
into an oscillating component and a residual
long-term trend. Long (short) when price trend is
upward (downward)
Time-Trend t-statistic (TREND): long
(short/neutral) when the t-statistic of the slope
from fitting a linear trend on past prices is more
than 2 (less than -2 / otherwise)
Statistically Meaningful Trend (SMT): a stricter
version of TREND (Equation (31))
Inversely weight assets by volatility
Where M is the number of available assets

Xi (t-J, t) is either -1(short), 0 or +1(long), and is the
trading signal for the ith asset which is determined
during the lookback period
The scaling factor 10% is used to achieve an ex-ante
volatility of 10%
(t; D) is an estimate of volatility of the ith asset,
using a window of the past D trading days
Ri(t,t+k) is the return of assets in coming K days
Trend-related signals (SMT and TREND) works best
All five momentum strategies are strong for the first 12
months and start to reverse subsequently (Figure 5)
SMT and TREND have higher returns, higher downside-risk
Sharpe ratio and lower turnover
Works best for lookback period of 6 to 12 months
and a holding horizon of 1 to 3 months (Table 4)
For example, SMT yields a (6,1) momentum profit
of 28% (Table 4)
They also generate the lowest turnover among all
signals
Data
Data spans from 11/1/1999 to 10/30/2009 (2610 days)

Dataset consists of intra-day price quotes for 12 future
contracts, which include 6 commodities (Cocoa, Crude Oil,
Gold, Copper, Natural Gas and Wheat), 2 equity indices
(S&P500 and Eurostoxx50), 2 FX rates (US Dollar Index
and EUR/USD rate) and 2 interest rates (Eurodollar and
10-year US Treasury Note
Paper Type:
Working Papers
Date:
2012-06-25
Category:
Momentum, reversal, volatility, large-cap stocks
Title:
Short-Term Momentum and Reversals in Large Stocks
Authors:
Jason Zhanshun Wei, Liyan Yang
Source:
SSRN working paper
Link:
ownload=yes
Summary:
Within large stocks and for up to six months, low-volatility stocks

exhibit reversals, and high-volatility stocks experience
momentum
Previous studies show that momentum exist in short-term
(1-3 year) and reversals exist in longer term (3-5 years)
This study differentiate the returns of high/low volatility
stocks
Why low volatility stocks reverse: per the Moderated
confidence theory, investors systematically bias a signals
reliability toward the unconditional mean
That is, people overestimate the reliability of
unreliable information and underestimate the
reliability of reliable information
Information of large-cap/low-volatility stocks tend
to be un-reliable
Step1: calculate stock volatility based on daily returns of
past 1, 2, 3, 6 and 12 months
Step2: each month, sort stocks first into large/small
halves, and then in each half into 5x5 segments by
realized past returns and volatility
Step3: equally weight and hold for up to 12 months
Low(high) vol large cap stocks demonstrates reversal (
momentum)
When the evaluation period is 1 or 2 months, momentum
and reversals coexist for a holding period of up to six
months
I.e., low(high) volatility demonstrates reversal (
momentum)
For large stocks with low volatility, significant reversal for
evaluation period (J) and holding periods(K) that sum to
seven or eight (table 2)
The reversal weakens as the holding period becomes
longer, and momentum prevails when K=6
Such return reversal/momentum are monotonic with past
returns
In other words, such three-way sorts restore the
monotonic ordering of portfolio returns
By contrast, all small stocks exhibit momentum regardless
of the volatility level. (left panel, table 2)
Such reversals among low volatility stocks are not the widely
documented monthly reversals
Since the month-by-month (as opposed to holding period)
returns prevail well beyond the first month (table 3)
Momentum doesnt start until the 4th month after portfolio
formation
Even for a holding period of 6 months, the 2nd month still
sees a reversal (albeit insignificant), and a statistically
significant momentum doesnt start until the 5th month
Within the high volatility stocks, by contrast, momentum
exists for all evaluation- and holding-period combinations
Robustness
Such findings are robust to market beta, size and B/M
(table 4), and January effect (table 5)
Similar findings when sorting by idiosyncratic volatilities
Similar findings in different sub-periods: 1965-1978,
1979-1993, and 1994-2008 (table 6)
The effect is much weaker when group stocks by other
firm characteristics: age, cash flow volatility, leverage,
book-to-market (table 9)
E.g., when replacing firm size by cash flow volatility
as the first sorting variable, reversals occur for a
holding period of up to only two months
Data
January 1, 1964 to December 31, 2009 daily data for US
stocks are obtained from CRSP
Stocks with a price of $5 or lower on the portfolio
formation day are excluded
Paper Type:
Working Papers
Date:
2012-05-21
Category:
Momentum, momentum crashes and drawdown, momentum in

Japan
Title:
Eureka! A Momentum Strategy that Also Works in Japan
Authors:
Denis B. Chaves
Source:
SSRN working paper
Link:
Summary:
Compared with the classic momentum measure, an idiosyncratic

momentum (IMOM) generate much lower risk and higher excess
returns. IMOM also greatly reduces drawdown. It works in 21
countries, including Japan, where the classic momentum fails

Define idiosyncratic return as the residual of regressing
daily returns on Carhart four factors
So idiosyncratic return removes the impact of beta
and risk exposure
IMOM is then defined as the idiosyncratic return of
month -12 to -2
IMOM
IMOM
where
- is the monthly regression residual
Intuitively, IMOM removes the impact of other risk factors
Hence it reduces the risk of momentum by a factor
of two
It also greatly reduces maximum draw-downs
Not surprisingly, IMOM is highly correlated with MOM
The monthly cross-sectional Spearman rank
correlation is 0.7 (Table 8)
Per earlier studies, see for example
Value and Momentum
Everywhere
covered by AlphaLetters, the classic
momentum works in many countries but fails in Japan
generate significant return spread
In terms of raw returns, quintile raw returns monotonically
increase with IMOM
WML portfolios have annualized value-weighted
returns of 17% (Table 1)
In terms of Carhart 4-factor adjusted return, the
regression alpha is 9.19% with t-stat of 5.8 (Table 2)
The value-weighted WML portfolio has a negative
correlation with the market, but not correlated with SMB
and HML (Table 2)
subsumes MOM, with lower volatility and higher returns
IMOM is still significant after controlling for MOM (Table 4,
panel B)
IMOM generates lower volatility and higher returns
Source: the paper
IMOM
IMOM works for all size groups

When value-weighting stocks, classic momentum
only works for micro and small cap stocks, but not
large cap stocks (Table 3, panel D)
By contrast, IMOM works in all size groups (Table
3, panel B)
Worth noting that an alternative momentum
measure proposed by an
earlier reviewed paper
,
using a firms return in prior 12 to 7 months
(instead of 2 months), works among large stocks,
with a coefficient of 7% (Table 4, panel B)
greatly reduces max draw-down
To some extend alleviate crashes
In the table below, IUMD is return of IMOM, UMD is the
return of classic momentum
Per this table, IMOM significantly cut maximum drawdown
Source: the paper

IMOM works in 21 developed countries, including Japan
Compared with classic momentum factors, IMOM average
returns are higher in 13 of the 21 countries (Table 8)
More importantly, t-stat increase in all countries
except for New Zealand (Table 8)
IMOM generates a return of 7.37% and a t-stat of
3.11(Table 8)
IMOM works even among the most liquid stocks in each
country (Table 12)
E.g, within the most liquid stocks in Japan, IMOM
yields an average return of 6.48% with a t-stat of
2.59.
Data
1964-2010 US stock data are from CRSP,
1972-2010 international stock data are from Datastream
Countries covered include France, Germany, Japan,
the United Kingdom, etc
The risk-free rate and the four U.S. risk factors are from
the Kenneth French website
Paper Type:
Working Papers
Date:
2012-04-22
Category:
Novel strategy, momentum, risk parity
Title:
Managing the Risk of Momentum
Authors:
Pedro Barroso and Pedro Santa-Clara
Source:
SSRN working paper
Link:
http://ssrn.com/abstract/2041429
Summary:
Scaling long/short momentum portfolio by the inverse of

momentum portfolio return volatility can avoid momentum crash,
and greatly improve momentum long-term performance
Intuition: momentum portfolio crashes is linked to momentum
return volatility
Momentum crashes, though few in member, greatly hurt
performances
In 1932, momentum returned a -91.59% in two
months. In 2009 momentum returned -73.42%
over three months
Take decades to recover investment: took 31 years
after the 1932 crash
Crashes likely happen in high momentum return
volatility periods
Momentum portfolio volatility is highly persistent
Momentum return risk is measured as the realized
variance of daily returns
From 1963:07 to 2011:12, the R-squares of
auto-regression of realized variance of momentum
is 57.82% (table 2 )
Hence more than half of the risk of momentum is
predictable
Momentum volatility is not stock market volatility
Stock market volatility accounts for only 23% of
momentum portfolio volatility
Intuitively, it would make sense to allocate more(less)
assets to long/short momentum portfolios when its risk is
low (high)
In some sense, this approach is to equally allocate risk to
long and short portfolios
Define momentum in traditional fashion
Measure momentum as the 11-month lagged
returns, skipping one month
but weighting long/short portfolio by the inverse of
return volatility
Step1: Calculate daily momentum portfolio returns
volatilities for the past 6 months
Where
is the square of daily momentum returns
Step2: Weight long/short portfolios by the inverse of such
return variance
Consequently, the risk managed momentum return is
Where the left-hand side is the risk-managed momentum

return,
is the variance per the formula above,
is a constant target level of volatility (set to be 12%)
The monthly scale factor (which determines the portfolio
leverage) has an average of 0.90 and a range of 0.13 to
2.00, with extreme values during 1933, 2000-02 and
2008-2009 (figure 7)
Rebalanced monthly
Superior performance to classic momentum strategy
Classic
momentum
Risk-party
momentum
Average (%) annual

return
14.46
16.5
STD (%)
27.53
16.95
Sharpe Ratio
0.53
0.97
Max monthly
drawdown(%)
-78.96
-28.4
Max monthly
drawdown(%)
-96.69
-45.2
Virtually all out-performance comes from avoiding crash
Results are similar when using alternative ways of

measuring realized return volatility
Managing time-varying realized variances is better than managing
time-varying betas
Because specific risk is more persistent and predictable
than the systematic
Yet most of the momentum risk is specific: systematic
component is only 23% of total risk on average
Hedging with time-varying betas fails as it focuses on the
smaller and less predicatable part of risk
Discussions/Concerns
Leverage cant be assumed to be unlimited and costless in
reality. The authors think that As a zero-investment
and self-financing strategy we can scale it without
constraints.
Momentum has notoriously high turnovers, need to see
more discussions regarding portfolio turnovers
Data
July 1963 to December 2011 daily stock data is from CRSP
Paper Type:
Working Papers
Date:
2012-04-22
Category:
Momentum strategies, reversals
Title:
Limited Attention, Salience, and Stock Returns
Authors:
Avanidhar Subrahmanyam, Jason Wei, and Hsin-Yi Yu
Source:
SSRN Working Paper
Link:
Summary:
Stocks that have just arrived to and/or left from extreme

winner/loser deciles behave differently compared with other
winner/loser stocks. A refined momentum strategy greatly
improves returns and Sharpe ratio, and is robust in recent decade
Intuition
Definition: arrivers (droppers, keepers) are those stocks
that just arrive to (leave, remain in) the winner/loser
portfolios
Arrivers are stocks that appears in the overlapping
portfolios for the first time
Droppers are stocks that leaves the overlapping
portfolios for the first time
Keepers are previous arrivers that are still in the
overlapping portfolios
Arrivers and Droppers may show unusual future returns
than other winner/loser stocks
Stocks leaving the extreme portfolios are losing
steam, but those arriving to the extreme portfolios
are at their peak of action
New arrivers to winner portfolio rarely outperform
for more than one month
New arrivers to loser portfolio deliver very high
returns in the first month after arrival, even higher
than the returns of new arrivers to winner portfolio
Arrivers reverse, Droppers under-perform
Arrivers to winner (decile 10) portfolio reverse in the
second month
Such arrivers do very well in the first month (over
3%)
But their performance quickly deteriorates from the
second month, especially if the arrivers are from
deciles 1, 2 and 3 (Table 2)
Arrivers to loser (decile 1) portfolio reverse in the first
month
New losers coming from deciles 2, 3 and 4
generates over 6% returns in the first month,
outperforming new winners (3.7%-4.6%)
Droppers (from both winner and loser portfolios) generally
do poorly in the first month, with mostly negative
Fama-French three-factor alphas

Equal weight each stock within long and short portfolios
Rebalance monthly and hold for one month
All improved strategies outperform traditional strategies
As a benchmark, traditional momentum strategy has a
monthly return of 1.2% with Sharpe ratio of 0.26 (Table
1)
For a (6,6) combination, average monthly return and
Sharpe ratio for a portfolio that is (Table 4)
Long (short) loser decile arrivers (loser decile
droppers) are 3.61% and 0.65
Long (short) winner decile arrivers (loser decile
droppers) are 2.94% and 0.55
Long (short) loser decile arrivers from (loser decile
droppers to) deciles 2, 3 are 6.82% and 0.76
Instead of (6,6), classifying arrivers and droppers
relative to a (12, 1) momentum strategy enhances
the return and Sharpe ratio of the above strategy
to 10.30% and 1.035
Fama-French regressions confirm the pattern (Table 5)
Lower turnover: examine migration of stocks to form
trading strategies that transact in only a small fraction of
the stocks comparing with conventional momentum
strategies
Robustness
Performance improves over time, stronger in recent
decade (2001-2010) (Table 7)
Robust to size (Appendices 1, 2)
Without skipping a month between ranking and holding
periods, profitability is generally higher
Because the short-term actions of the hidden stars
are more potent right after they are identified
(Table 6)
Discussions
This is an interesting idea, but some return numbers look
suspiciously high. E.g., the monthly return for a portfolio
that is long (short) 12-1 loser decile arrivers from (12-1
loser decile droppers to) deciles 2, 3 and 4 is 16.38% with
a Sharpe ratio of 1.05
Data
January 1, 1962 to December 31, 2010 daily and monthly
prices and volumes for NYSE, AMEX and NASDAQ common
stocks are from CRSP
Accounting data are from COMPUSTAT and transactions
data from ISSM
Stock order imbalance are from TAQ
Paper Type:
Working Papers
Date:
2012-03-30
Category:
Momentum, reversal, momentum conditioning on size and B/M
Title:
Momentum and Reversal: Does What Goes Up Always Come

Down?
Authors:
Jennifer Conrad and M. Deniz Yavuz
Source:
SSRN Working Paper
Link:
Summary:
Conditioning momentum on size and book-to-market ratio can

improve momentum returns. High past return stock with
small-cap and high B/M ratio has significant momentum profits
without subsequent reversals
Background
Many studies suggest intermediate-term momentum and
longer-horizon reversals
This study shows that winner (loser) stocks are chosen
from high (low) expected return stocks has significant
momentum profits without subsequent reversals
Expected returns are proxied by size and B/M ratio
Define a stock as a winner (loser) if its prior 6-month
return is higher (lower) than average (skipping 1 month)
Weight stocks by the absolute difference between its
lagged 6- month return and that of all stocks
Create three long-short portfolios
Long
Short
MAX portfolio
Past winners with

small cap and/or high
B/M ratio
Past losers with large

carp and/or low B/M
ratio
MIN portfolio
Past winners (losers)

with large cap and/or
low B/M ratio
past losers with small

cap and/or high B/M
ratio
ZERO
portfolio
Past winners with

similar size and B/M
ratio
past losers with similar

size and B/M ratio
More
Data
The three portfolios have similar past 6-month W-L return

difference (table 1)
Suggesting that any return differences between
MAX, ZERO and MIN are unlikely to be due to
significant differences in momentum
consistent returns for MAX portfolio
Strong momentum and no reversals for MAX
MAX earns average returns of 1.31% (t=6.43)
during months 0-6 and 0.49% (t=2.56) during
months 6- 12, with no evidence of reversal over
the next 2 years (table 3)
No significant momentum, just significant reversals for
MIN
MIN earns average returns of -0.18 % (t=-0.74),
-0.66% (t=-3.20), -0.73% (t=-4.63), and -0.33%
(t=-2.30) during months 0-6, 6-12, 12-24 and
24-36, respectively (table 3)
By contrast, traditional portfolios see 6-month momentum
and 12-24 month reversal
Month 0-6 return is 0.65% per month
Months 6-12, 12-24, and 24-36 return -0.11%,
-0.36%, and -0.16%, respectively (Table 2)
The sample includes all stocks trading on the NYSE, Amex

and Nasdaq between January 1965 and December 2010 in
the CRSP database
Paper Type:
Working Papers
Date:
2012-02-29
Category:
Dynamic momentum strategy, tail risk
Title:
Tail Risk in Momentum Strategy Returns
Authors:
Kent Daniel, Ravi Jagannathan, and Soohun Kim
Source:
Columbia University Working Paper
Link:
http://www.columbia.edu/~kd2371/papers/unpublished/djk3.pdf
Summary:
A dynamic momentum strategy, which applies a two state hidden

Markov model to avoid the turbulent months, generates a Sharpe
Ratio 0.32, double that of a traditional momentum strategy
Background
Momentum suffers from tail risk (i.e. infrequent but large
losses) (Table 1)
It has 13 months with losses exceeding 20% per
month and experiences a loss of 79% in its worst
month
Each of the 13 months with losses exceeding 20% per
month occurs during a turbulent month
Momentum returns -0.65 % per month during
turbulent months
This paper detects turbulent months using a two-state
(turbulent" and calm) hidden Markov model
Beta of momentum portfolio depends on past/current market
returns
Momentum beta is negative when past market return is
negative (i.e. in a bear-market)
Because when past market return is negative, then
losers (i.e. which moved down with the market) is
likely to have a higher beta than winners
Momentum portfolio beta is even more negative when
market recovers
Momentum strategy incur large losses when the
market recovers sharply following large losses
(Table 2)
Momentum beta in bull (i.e., non-bear) is positive and

significant though small
To summarize, momentum portfolio beta can be modeled
as
Where
represent the beta when past market

return (return from month t-12 to t-2) is positive/negative
(bulL vs Bear)
is 1 when the current market returns is positive (Up)

I is an indicator of whether the current market is Up, or
past returns are bulL vs BearMethodology
Use Hidden Markov Model (HMM) based on the formula
above
Assume that there are two possible states, Calm (C) and
Turbulent (T), allowing the coefficients to vary by state
Use Maximum Likelihood Estimation to estimate the
parameters, such as
and
Use
to detect market state:
(the parameter that
captures the effect of market recovery following sharp
losses) is significantly different across the two states
(Table 5)
Model can predict current market status in real time
Estimate the model parameters in real time to predict
probability of the next months state
Out of sample spans September 1977 to December
2010
The predicted probability of being in the turbulent state
captures extreme momentum returns
Data
5 months see losses exceeding 20%, all of them occur

during months with predicted probability of being in the
turbulent state in excess of 50%
4 months see gains exceeding 20%, 3 of them occur
during months with predicted probability of being in the
turbulent state exceeding 50% (Table 7)
Turbulent months are almost three times as volatile as
calm months
Average momentum returns average 1.71% during
calm months with an associated Sharpe Ratio of
0.31
This is twice the Sharpe Ratio for a classic
Turbulent months occur when the economy is in a
recession as well as when the economy is in an expansion
(Figure 3)
July 1927 to December 2010 stock data are from CRSP
Fama-French size and value portfolios SMB and HML, and

the momentum decile portfolio returns are all from Ken
Frenchs Data Library
Paper
Type:
Working papers
Date:
2011-03-29
Category
:
Momentum, Japan
Title:
Momentum in Japan: The Exception that Proves the Rule
Authors:
Clifford Asness
Source:
SSRN working paper
Link:
Summar
y:
Momentum does not work well in Japan, but this should not undermine the
belief in momentum investing, as overall globally momentum investing is

strong, especially when integrated with value
Another study shows a modified momentum strategy may work in Japan. The
proposed strategy long the best performing stocks within 100 large-cap
stocks and short the TOPIX index (as opposed to loser stocks)
Methodology
Limit universe to large cap stocks
Such stocks represent the top 90% of capitalization within each
of the U.S., UK, Europe-excluding-UK and Japan
Sort stocks into three groups by either
Value (book-to-market ratio, with book value lagged six
months)
or,
Momentum (12-month past return, skipping the most recent
month)
The value and momentum premiums is thus the value-weighted
returns spreads between the top and bottom terciles for each market
Value and momentum are substantial everywhere, except for momentum in
Japan
Sharpe Ratio
Value
Momentum
50% value
+ 50%
momentum
US
0.14
0.22
0.4
UK
0.38
0.48
0.84
Europe
0.35
0.48
0.82
Japan
0.71
0.03
0.65
All markets
0.57
0.38
1.01
Negative correlations between value and momentum helped the

combined strategy
The correlations are -0.59 for the U.S., -0.47 for the UK, -.050
for Europe, -0.55 for Japan and -0.63 for the markets
combined
Why weak momentum in Japan does
not
undermine a failure of momentum
investing?
Momentum works on average globally
For any solid statistic pattern there may be randomly unfavorable
observation. Japan is such an unfavorable observation
Even with perfect foresight, a value-momentum strategy optimizer
would still have given momentum a 30% weight in Japan, given the
negative relationship between value and momentum returns
Japan momentum strategy has a positive three-factor (market, size,
book-to-market) alpha
Modified momentum strategy may work in Japan
In a related study,
Feasible Momentum and 52-Week High Strategies
in the Japanese Stock Market
, it is shown that from 1994 - 2008, a
strategy that long the best performing TOPIX 100 large-cap stocks
(the best 1, 3, 5, 10 stocks) and short the index (as opposed to loser
stocks) generates significant abnormal returns of 0.52% - 1.01% per
month (table 1)
This strategy avoids high costs to hold short positions, especially in
small-cap stocks
The results are robust to various risk-adjustments
Data
This study covers US, European and Japanese stocks from July 1981
through December 2010
Paper
Type:
Working papers
Date:
2011-03-29
Category: Novel strategy, co-integration, momentum

Title:
Does Long-Run Disequilibrium in Stock Price Levels Predict Future Returns?
Authors:
Vivian Chen, Jungshik Hur, Vivek Sharma
Source:
Eastern Conference paper
Link:
/S-2-70.pdf
Summary
:
Stock returns tend to move in tandem with market returns in the long run.
Stocks with the most positive (negative) co-integration residuals continue to
generate risk-adjusted positive (negative) return in future 1 to 6 months
Background of co-integration
Co-integration means that the linear combination of two variables is
stationary
- Suggests that there is a long-run equilibrium relationship
between the two variables, and the stock returns and market
return drifts together with each other
Stock returns are usually an non-stationary processes, as their means
and variances are not constant over time
But difference between stock and market returns may be stationary
- I.e. there exists co-integration relationship between stock
returns and market returns
The error correction term (also called the residual term) in the
co-intergration regression is termed ECT
Constructing the ECT portfolio
Step1: each month t, run co-integration regression for each stock i
using observations in the past 60 months
where ei,t- (i.e., ECT) measures how much stock return deviates from its
long-run relationship relative to market returns
Step2: Each month t, form 10 ECT portfolios and hold portfolios t+1
to t+T
Thus the holding period starts 1 month after the portfolios are
formed
T = 2, 4, and 7, respectively, corresponding to 1 month, 3
months, and 6 months holding periods
ECT portfolio generates decent returns
From January 1965 - December 2005, stocks with lowest ECT decile
earns 0.61% a month, while stocks with highest ECT earns 1.70% a
month
The monthly return spread is 1.09% and is statistically significant
Robust to common risk factors (beta, value, size), though correlated
with momentum:
High ECT - low ECT portfolio has a 3-factor alpha of 1.17% per
month (table II)
The 4-factor (after adding momentum) alpha is 0.51% per

month. Despite the drop, it is highly statistically significant
(table III)
Past 12-month return for lowest ECT is D1 -18.8%, and
highest ECT is 88.3%
Robust to sub-periods: similar findings for the period of 1965-1985
and 19862005 (Panel C, table I)
Robust to different holding period: such as 1 month and 3 months
(Table I)
Higher returns among noncointegrated stocks (Table V)
Intuitively, non-cointegrated stocks are those, based on observations
in the past 60 months, the co-integration relationship are less stable
and regression error term deviate further away (Equation 7)
D10 D1 portfolio among non-cointegrated stocks earns 1.57% per
month on average over 6-month holding period,
D10 D1 portfolio using cointegrated stocks earns 0.81% a month
(Table V)
This is because levels of non-cointegrated stocks may deviate more
from the long-run equilibrium
Data
January 1965 - December 2005 NYSE and AMEX stocks with at least
24 months of returns are used
Paper Type:
Working papers
Date:
2011-01-23
Category:
Time Series Momentum, futures
Title:
Time Series Momentum
Authors:
Tobias Moskowitz, Yao Hua Ooi, Lasse H. Pedersen
Source:
NYU working paper
Link:
http://pages.stern.nyu.edu/~lpederse/papers/TimeSeriesMomentum.pdf
Summary:
A future contracts return over the past 12 months consistently and

significantly predicts its future return for up to a year before it partially
reverses. This finding holds for a large set (~60) of diverse futures and
forward contracts, which include country equity indices, currencies,
commodities, and sovereign bonds
Time Series (TS) momentum is different from the widely-used
(cross-sectional) momentum
Time series momentum is based on a securitys own past returns.

It seeks to long securities with positive past 12 month returns
The widely-used momentum is cross-sectional, which deals with
a securitys performance relative to other securities. It seeks to
long securities with better past 12 month returns
Positive results in time-series regression
Regressing volatility scaled returns on own volatility scaled
lagged returns (from 1 up to 60 months)
r (t) / vol (t) =+r (t - k) / vol (t - k) +
This is because volatilities across securities are quite
different(table 1)
All regression t-stats are positive for up to 12 months (Figure 1
Panel A)
Majority of lags beyond the first year are negative (in both
regressions), indicating longer-term reversals
TS profits not due to known risk factors
Goes long (short) any instrument s at month t, if the excess
return over the past k months is positive (negative)
For each security, the position size is inversely
proportional to the instruments ex-ante volatility
For each combination of look-back periods and holding periods
(k, h), each instrument, and each month, compute the
risk-adjusted average return rTS (k,h)
rTS (k,h) = + MKT + BOND + GSCI + sSMB + hHML
+ mUMD +
where the independent variables are: stock market MKT, the
bond market BOND, the commodity market GSCI, and the
standard Fama-French stock market factors SMB, HML, and
UMD for the size, value, and (cross-sectional) momentum
t-stats of the alphas from the above model are large and positive
for many look-back period - holding period combinations,
especially for shorter horizons (up to a year)
Each
single futures exhibits positive predictability
Focus on the 12-month time series momentum strategy with a
1-month holding period (k = 12 and h = 1)
The annualized Sharpe ratios for each futures contract is positive
(Panel A of Figure 2)
52 out of 58 futures contracts statistically significant returns
TS-MOM portfolio returns robust to liquidity and other risk factors
The correlation between return and liquidity is -0.16
across all contracts (panel B of Figure 2)
Suggesting that more liquid rather than less liquid
contracts exhibit greater time series momentum profits
Robust to other risk factors (volatility, market sentiment,
etc) consistently yields positive and statistically significant
alphas for the
Better performance during market extremes
As regressions on the market return squared yields a

positive, statistically significant beta on this variable
(Figure 3)
Higher return and lower correlation compared with passive long strategy
TS-mom return are 3 times of a comparable, passive long
strategy (Figure 4)
Within an asset class, TS momentum strategies are positively
correlated, but less so than passive long strategies
Across asset classes, TS momentum strategies exhibit positive
correlation with each other, while passive long strategies exhibit
zero or negative correlation across asset classes
Decent recent performance (Fig 4)
Some draw-down in 2008, but to a less extent than the passive
long-only momentum strategy
No draw-down in 2003, much better than the passive long-only
momentum strategy
Source: the paper
TS time series and cross-sectional momentum are related but different
Regressing TS returns on a cross-sectional momentum profit,
which is based on the relative ranking of each assets past
12-month returns
The two returns are correlated, as the coefficients are positive
and significant for all assets (Table 5 Panel A)
Yet the intercepts are significantly positive
So a portion of TS momentum is not captured by
cross-sectional momentum
Data
The study covers data from January 1965 through December
2009
24 commodity futures, 12 cross-currency pairs (with 9 underlying
currencies), 9 developed equity indices, and 13 developed
government bond futures from Datastream, Bloomberg, and
exchanges
MSCI World equity index, Barclays Aggregate Bond
Index, Goldman Sachs Commodity Index (GSCI), all from
Datastream
Paper Type:
Working papers
Date:
2010-12-20
Category:
Momentum, why momentum crash sometimes, option-like returns
Title:
Momentum Crashes
Authors:
Kent Daniel
Source:
Columbia Quantitative Trading & Asset Management Conference
Link:
http://www.cap.columbia.edu/pdf-files/Daniel_K_CAP_2010.pdf
Summary:
Momentum crashes sometimes because it has a negative beta

loading. When market reaches reflection points (e.g., March
2009), loser stocks experience strong gains, resulting in a
momentum crash. After momentum crashed during 1929-1945, it
took 35 years for momentum to recover the loss
Constructing momentum portfolio in the classic fashion
At the end of each month, form 10 value-weighted
momentum portfolios based on prior (12,2) return
Monthly rebalance
Generate daily returns for each of the ten portfolios, to
accurately estimate the conditional risk of the portfolios
Positive return for most of the time, but crashes happen at
market reflection points
During 1949-2007, momentum generates annual return of
16.5% with volatility of 20.2% (IR 0.82)
Negative beta loading: -0.125
During Mar 8 - Dec 31 2009, momentum suffered big
losses, mainly from the outperformance of loser stocks
(page 21)
Market turned: In March-May 2009, the market
was up by 29%
Losers outperform winners by 149%
This parallels the under-performance of momentum during
the Depression period (page 22)
Market turned: in July-August 1932, the market
rose by 82%
Over these 2 months, losers outperform winners by
206%
It takes 35 years for momentum to recover the
pre-Depression level (page 24)
Such negative skewness is much like the strategy of
selling out-of-the money put options: small return for
most of the time, but big loss may occur
This is due to the large differences in the market betas of the
winner and loser portfolios
In 2009, loser portfolio has a beta of 3.5+, and winners
has a beta of <0.5
In bear markets, momentum portfolio is much more
sensitive to (positive) market returns
In the words, the momentum factor will gain little when

market moves down, but will lose much when market
moves up (page 33)
Just like an option, momentum profits are lower when
market volatility is high (page 33)
Using forward-looking beta estimate to hedge is biased
since it calls for more hedge (i.e., buy more market) when
then market is going to rise, so its not realizable (page
31)
Paper Type:
Working papers
Date:
2010-11-22
Category:
Momentum, large-cap stocks
Title:
Feasible Momentum Strategies in the US Stock Market
Authors:
Manuel Ammann, Marcel Moellenbeck, and Markus M. Schmid
Source:
SSRN working paper
Link:
Summary:
Momentum profits are criticized as it is generally driven by short

positions in small and illiquid stocks. This paper presents a simple
and feasible momentum strategy that buys the top performing
1/3/5/10 stocks and short the S&P 100 index (instead of loser
stocks). A portfolio that buy the top 5 best stocks and short S&P
100 index generates a hedged return of 0.51% a month, even in
recent years
Momentum strategy is criticized for heavily relying on small and
illiquid stocks on the short side
Loser stocks on the short side rather than winners drive
the momentum profits
Short positions in small and illiquid stocks are responsible
for the high transaction costs
A simple, low-cost (hence feasible) momentum strategy
Only invests in the very liquid blue-chip stocks (S&P100
stocks)
Each month, buy the top 1/3/5/10 stocks with highest
returns in the past 6 months, and sell the S&P 100 index
(instead of the losing stocks)
Note that only 1/6 of portfolios are adjusted each
month (assuming holding a stock for 6 months), so
Data
even in the case where each month only one best

performing stock is picked, there are 6 stocks in
the portfolio
Buying the top one best performing stock and
selling short the S&P 100 index yield monthly mean
excess returns of between 0.41% and 1.33% (table
1)
When buying more stocks (the best 3, 5 or 10
stocks), the strategy excess returns decrease but
remain significant in most cases
Decent performance in recent years
When short loser stocks (instead of index), such short
positions contribute very little to the overall strategy
returns, yet are main contributor to high volatility
1982-2009 S&P 100 constituents are provided by Standard
and Poors
January 1982 to December 2009 stock return are from
Thomson Reuters Datastream
Paper
Type:
Working papers
Date:
2010-10-24
Category:
Novel strategies, news, momentum
Title:
News Articles and Momentum
Authors:
Nitish Ranjan Sinha
Source:
University of Alberta working paper
Link:
http://www.cba.ua.edu/assets/docs/efl/News_Articles_and_Momentum.pdf
Summary:
Using a Thomson Reuters news database, this paper shows that news
sentiment can predict stock returns. A strategy that buys (sells) stocks
with recent positive (negative) news sentiment generates a statistically
significant monthly alpha of 0.34% (4.1% annually) for the largest stock
decile
Number of news also predicts. Stocks with abnormally high or abnormally
low recent news counts underperform stocks with "normal" number of
recent news
Background of data source
News data is from the Thomson Reuters NewsScope dataset
For each firm mentioned in the news, Thomson Reuters provides a

probability of the article being positive, negative, and neutral
(probabilities adding up to 1)
The sentiment score is the difference of the probability of the article
being positive and being negative
As expected, sentiment score correlate with
contemporaneous return: for an extremely negative
sentiment score the stock is down 5% in the month, and is
up 5% for an extremely positive sentiment score
The relevant Score: Thomson Reuters also provides relevance
information for each firm named in the news (from 0 to 1, where 1
is highly relevant)
The date stamp: Additionally, the data source includes a time
stamp
News count is size-adjusted (standardized) since larger firms get
more news on average
With increasing standardized news count the probability of the news
being negative increases
Sentiment score can predict returns
Each month, sort stocks based on past 3 months sentiment score
Buy stocks in the top two deciles , and sell stocks in the bottom two
deciles, then hold for 5 months
Sentiment score predicts returns in market-cap sorted portfolios
(Table 6)
Using Fama-French plus momentum regressions, the hedged
portfolio return is obtained by taking out the exposure to the
Fama-French three factors and UMD
For the largest market-cap stocks (portfolio 10), the
long-short combined portfolio has a statistically significant
monthly alpha of 0.34%. Two other significant alphas are
0.38% for size 8 and 1.75% for size 3
Correlated with UMD (long-short momentum) portfolio: The
correlation is higher since 2006, when UMD has positive
returns
Sentiment score worked in momentum sorted portfolios (Table 7)
Run Fama-French plus momentum regressions in each of
momentum sorted portfolios
5 out of 10 momentum groups have statistically significant
alpha(from 0.40% to 0.74% monthly, corresponding to
momentum deciles 2,3,4,5, and 7)
As expected, momentum groups 3,4,5, and 7 are larger
stocks in the sample (since prices of larger stocks generally
move less)
Standardized news counts can predict returns
Each month sort stocks by past 3 months size-adjusted news
count, then hold for 5 months
Data
Buy stocks in the middle three deciles (4,5,6), and short position in
stocks in the top and bottom two deciles (1,2,9, and 10, i.e.
extreme deciles)
Stocks with "normal" amount of news earn higher alphas (Table 10)
Portfolio 1 has lowest amount of standardized
(size-adjusted) news
Portfolios 4,5, and 6 (stocks with "normal" amount of news
in the formation period) have statistically significant alphas
of 0.38%-0.49% per month
All the extreme portfolios have negative loading on UMD,
highlighting the role of too much news and too little news in
continuation of momentum
Newscount based strategy works across momentum groups (Table
11)
Of the ten momentum long short portfolios, five have
statistically and economically significant portfolio alphas
ranging from 0.28% to 0.80% in excess of the Fama-French
factors and UMD
2003-2008 news data are from Thomson Reuters NewsScope
dataset
News item with the relevance score of at least 0.35 is
retained in the sample
From the news database, monthly newscount, average of
the probability of being positive, negative and neutral at
stock level are obtained
587,719 stories over the entire sample period (197,188 firm
month observations)
Financial data
2003-2008 all US common stocks that are covered by
Thomson Reuters NewsScope news services
Returns from CRSP, accounting data from Compustat
through the Wharton research data services (WRDS).
Fama-French three factors and the UMD factor also from
WRDS\\
Paper Type:
Working papers
Date:
2010-10-24
Category:
Momentum, 1/N strategy (equal weighting)
Title:
Informed momentum investors vs uninformed \"naive\"

investors: Value of past return information
Authors:
Anurag Banerjee and Chi-Hsiou Hungy
Source:
Durham University working paper
Link:
http://www.dur.ac.uk/a.n.banerjee/WPapers/MomentumInfor.pdf
Summary:
A naive equal-weighting strategy, which simply equally invests

1/N in each of the N stocks available, performs just as well as the
momentum strategy does (about 1% per month)
The long leg of momentum perform better than the long-short
momentum trading
Constructing portfolios based on the two strategies
Naive investment strategy: equally invest 1/N weights on
each of the N securities
This equally weighted portfolio serve as a
benchmark for comparison purpose
Momentum strategy
Equally weighted portfolios based on past 6 month
compounded returns that are held for 6 months
In terms of statistics, momentum profits and 1/N profits are not
significantly different (Table 1)
Similar excess returns: Mean excess average return for
momentum strategy for the whole sample is 1.08%. For
the median strategy, it is 1.06%. (Table 1 Panel A)
Graphically similar: Differences between the two strategies
over time plot around 0 for the overall sample, with some
variations during the dotcom bubble and the Great
Depression (Figure 1)
Similar returns for large and small stock subsamples
Large and small stock subsample show that there are no
differences between the two strategies with respect to firm
size (Table 2)
Similar Fama-French-Carhart 4-factor regression results
(Table 3)
Momentum strategies have an alpha of 0.3%
compared to the median alpha of 0.25%
Difference in risk level and risk exposures
Variance of the profits of the 1/N strategy is 20 times
lower than that of the momentum profit
Different risk exposure: the momentum strategy has
statistically significant exposure to MOM factor (as
expected), the 1/N strategy has essentially 0 MOM
exposure
The 1/N and the momentum strategies are orthogonal:
graphically (Figure 3) momentum profits are not related to
1/N strategy
On a risk-adjusted basis, the winners outperform the

median strategies by 14 basis points per month, and the
losers underperform the median strategies by 18 basis
points per month
1/N better than long-short momentum, but worse than long-only
momentum
60% of the time the winner portfolio outperforms the 1/N
strategies
Yet by 50% chance the 1/N strategy would not perform
worse than the momentum strategies
So taking a long position in the winner stocks which is
financed at the risk-free rate is better than the long-short
momentum trading
Similar findings when measure the difference between
strategies using the Score Function (Score to a strategy is
the relative performance of the excess portfolio returns
against the percentiles of the profit distribution of the 1/N
strategies)
Discussions
1/N strategy is essentially a negative size factor:
compared with a cap-weighted portfolio, 1/N over-weight
smaller stocks, and over-weight larger stocks
Data
1926-2005 monthly stock data of the NYSE, AMEX and
NASDAQ stocks are from CRSP
Paper Type:
Working papers
Date:
2010-08-15
Category:
Novel strategies, commodity indices, momentum, term structure
Title:
Strategic and tactical roles of enhanced-commodity indices
Authors:
Georgios Rallis, JoLle Miffre, Ana-Maria Fuertes
Source:
SSRN working paper
Link:
Summary:
When investing in commodity indices, exploiting signals based on

1) momentum, 2) term structure, 3) a combination of the two, or
4) the time-to-maturity of the contracts can increase annually
returns by 0.49% - 6.18% relative to the baseline indices. The
time-to-maturity enhancement gives the best performance
Baseline indices: the S&P-GSCI and DJ-UBSCI commodity indices

Includes commodities such as aluminum, copper, Brent
Crude, lead, wheat, etc.
Momentum-enhanced indices
Strategy1: each month, relocate 50% of total weight of
loser commodities to winner commodities based on prior
month
returns
(Equation 1, 2)
Strategy2: under-weight and over-weight commodities
based on their prior month
return rank
This way dampens the influence of extreme
performers (Equations 4, 5)
Better performance than the baseline index (Table III)
On a yearly basis, the average outperformance
amounts to 1.64% relative to S&P-GSCI and 1.75%
relative to DJ-UBSCI
The reward-to-risk ratios of the enhanced indices
(at 0.24 on average) are 60% higher than the
baseline ones (at 0.15 on average)
Tracking error: 3.73% to 4.54% a year with an
average at 4.17%
Term structure(TS)-enhanced indices
Over-weight index constituents that are in relative
backwardation (i.e., roll-return is higher than peers)
Under-weight index constituents that are in relative
contango (i.e., roll-return is lower than peers)
Better performance of Term structure-enhanced indices
(Table IV)
Outperform the baseline index by an average of
2.09% against the S&P-GSCI and 1.27% against
the DJ-UBSCI
In terms of risk-adjusted performance, the TS
S&P-GSCI has an annualized alpha of 2.66%
(t-statistic = 3.33) and a reward-to-risk ratio of
0.31 (versus 0.17 for the baseline S&P-GSCI)
Tracking errors: the enhanced index tracking error
is 4.03% on average (Table IV)
Combining momentum and TS
Sort constituents into two groups based on prior months
returns, then assign portfolio weights based on their
roll-returns
Such two way sorting gives better return than enhancing
with only momentum or TS
The enhanced indices outperform the baseline
indices by 2.09% a year (versus 1.69% for the
momentum-only indices and 1.68% for the TS-only
indices) (Table V)
Long-short strategy: The spread between the enhanced

portfolio and the underlying index is 3.27% per year
(Table V, Panel B)
Robust to transaction costs and liquidity
The cost of trading commodity futures is small (less
than 0.033% per Fuertes, Miffre and Rallis (2010))
The assets that are being traded are in the
front-end of the curve, thus very liquid
Maturity-enhanced indices generates best performance
Choose to roll into contracts that are the closest to the
index maturity date
E.g., for aluminum, the 3-month maturity
S&P-GSCI spends on average 69% of the time on
the third contract and 31% of the time on the
fourth contract. So its average time-to-maturity is
2.83 months
This contrasts with rolling the constituents as
defined in the traditional S&P-GSCI and DJUBSCI
methodologies
Best performance with maturity enhancements
The annualized mean return is 3.68% for the
S&P-GSCI, the maturity- enhanced S&P-GSCI index
returns 8.66% (3-month) and 8.83% (12-month)
The annualized mean return is 1.97% for the
DJ-UBSCI, the maturity-enhanced counterpart
indices from 4.97% (3-month) to 6.29%
(12-month) (Table VI)
Data
The study covers the period of October, 24 1988 to
November, 20 2008 for the S&P-GSCI and January, 4
1991 to November, 20 2008 for the DJ-UBSCI.
The data are from Bloomberg: i) the daily futures prices
for all maturities of the 30 commodities that form the
S&P-GSCI and the DJ- UBSCI, and ii) the daily prices of
the two indices
Paper Type:
Working papers
Date:
2010-08-15
Category:
Momentum, corporate bond
Title:
Momentum in Corporate Bond Returns
Authors:
Gergana Jostova, Stanislava Nikolova, Alexander Philipov, and

Christof W. Stahel
Source:
FMA 2010 working papers
Link:
http://www.fma.org/NY/Papers/bond_momentum_FMA10.pdf
Summary:
Momentum effect exists in US corporate bonds: from 1991 to

2008, past six-month winners outperform past six-month losers
by 64 basis points per month. This effect is driven by a small
percentage (8.27%) of low-credit-rating bonds
Background of credit ratings
92% of all bond-month observations have credit ratings
Converting credit ratings of corporate bonds into numerical
scales
1 = AAA, 2=AA+, 3=AA, ..., 10=BBB, 11=BB+,
..., 21=C, 22=D
Investment grade corporate bonds (IG): 10 and
above (BBB)
Non-investment grade corporate bonds (NIG): 11
and higher
82.3% of rated bonds are investment-grade and
17.7% are non-investment grade.
A different "disposition effect" in bonds
Comparing Datastream quote data and TRACE trade data
shows that "... bonds with low returns are more likely to
trade than bonds with high returns ( Table 1 Panel B)
I.e., bond investors tend to hold on to winners but trade
losers
Such disposition effect in bonds is opposite to what has
been documented in stocks
Constructing the bond momentum portfolio
Each month t, bonds are ranked into decile portfolios, P1
(losers) through P10 (winners), based on their cumulative
returns over months t 6 through t 1 (formation
period)
Skip one month (month t) between the formation and
holding periods to avoid potential biases from bid-ask
bounce and short-term price reversal
The portfolios are then held for 6-months from month t +
1 to t + 6
Momentum exists in bond portfolios
The long P10 and short P1 portfolio earns a statistically
significant monthly return of 35 basis points (Table 2)
Positive performance after year 2000, close to 0 profit
before year 2000
The momentum strategy earns 64 basis points per
month during 2000 - 2008 (Table 2 and Figure 1)
Profits before year 2000 are not statistically

significantly different from zero.
Not driven by liquidity
Table 2 Panel B shows that when only traded (i.e.,
more liquid) bonds are used, momentum profits
remain. Thus, the results are not driven by illiquid
securities.
Not driven by risk factors
Risk-adjusted portfolio alphas reveal that the
momentum profits are not compensation for risk
factors such as the change in the term spread
(difference between 10-year and 1-year Treasury
yields); the change in the default spread
(difference between BBB and AAA corporate
yields); the market, SMB, and HML factors from
Fama and French (1993); and the momentum
factor from Carhart (1997) (Table 3)
Not driven by other robustness check factors
Such as duration, bond age and amount
outstanding, transaction cost, ratings changes,
survivor bias (Table 7)
Momentum driven by lowest-grade bonds and by long decile
When double sorting portfolios first by credit ratings and
then by momentum, the results confirm that momentum
profits are driven by lowest-grade bonds
For Q5, bonds with lowest ratings during the 1991 2008 subperiod, long-short portfolio returns
average to 173 basis points per month (Table 5)
The extreme portfolios consists of disproportionally higher
number of NIG (non-investment grade) bonds (Table 4,
Panel A)
B- or lower rated bonds, which make up 8.27% of
all bonds in the sample, drive the momentum
profits
When lowest-rated bonds are excluded, momentum
profits disappear. E.g., when D-rated bonds (2% of
the sample) are removed from the sample,
momentum profits fall from 63 basis points to 28
basis points (Table 6)
Momentum driven by long decile
The profits are mostly due to the long decile of the
strategy, i.e., P10 portfolios
In contrast, momentum profitability in equities is
largely attributable to losers
Data
This study uses five databases containing quotes and trade
prices for "regular" US corporate bonds (i.e., fixed-coupon,
not convertible, not backed by any assets,

dollar-denominated, not part of a unit, no warrants, etc)
Three quote-based databases
Lehman Brothers Fixed Income Database
[Lehman]: Private and government debt issues in
the US from 1973 to December 1997
DataStream: Starting January 1990
Bloomberg
Two trade-based databases
TRACE: covers more than 99 percent of the OTC
activity in US corporate bonds
Mergents Fixed Income Securities
Database/National Association of Insurance
Commissioners Database [FISD]: prices for all
trades in publicly traded corporate bonds made by
insurance companies since 1994
Paper
Type:
Working papers
Date:
2010-05-11
Category
:
Style rotation, momentum UK market
Title:
Quantitative or Momentum based Multi-Style Rotation? UK Experience
Authors:
Andrew Clare, Svetlana Sapuric, and Natasa Todorovic
Source:
EFA 2008 working paper
Link:
http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS
/2008-athens/Todorovic.pdf
Summar
y:
In UK, selecting style based on a logit model under-perform a simple style

return momentum strategy. Besides, the short leg of a long-short style
momentum strategy does not generate consistent profit
Forecasting style index performances
Selecting between value/growth and large/small-cap styles using 4
FTSE indexes
Forecasting using a number of macroeconomic variables: inflation,
interest rates, consumer confidence etc and lagged values of the four
indexes used (Table 1)
Multinomial ordered logit model
yt* = xt + t
Style
yt is the dependent variable, representing the ranking of the

style/size index performance (1, 2, 3 or 4) in a particular
month
xt is the explanatory variables
t is the independent and identically distributed random
variables. The random disturbance term in this case has a
logistic distribution
The observed yt is determined from yt* and follows the following
conditions:
y = 1 if yt* 1
y = 2 if 1< yt* 2
and so forth (details in pages 5 and 6)
The model parameters are estimated for each index (Table 2 shows
the parameters for the FTSE Small-Cap Index), then these
parameters, along with the out of sample data are used to forecast
the probability of each index being ranked 1st, 2nd, 3rd or 4th
The model parameters are re-estimated recursively, thus expanding
the estimation window each year
rotation strategies based on logit model
At the beginning of each month, an investor decides on what to invest
in, based on the model forecasts
IndexSelected
Strategy1
Theindexwiththehighestprobabilityofranking
Strategy2
thefirstandsecondrankedstrategy50%50%
Strategy3
Ontopofstrategy1,itusesempiricalcutoffrates:
Forexample,iftheprobabilityofFTSESmallCap
Indexisrankedfirst,andhigherthancutoff0.35,then
invest100%intheFTSESmallCapIndex.Otherwise,
leavetheportfolioinvestedinthesameindexasinthe
previousmonth
Strategy4
Longintheindexthathasthehighestprobabilityof
beingrankedfirstandshorttheindexthathasthe
lowestprobabilityofbeingrankedfirst
Strategy5
Longthetwohighestrankedandshorttheremaining
two
PerfectForesight
multistylerotation
strategy
Theinvestorhas100%forecastingaccuracy,i.e.
investingeverymonthinthewinningstyleindex
Transactioncosts:UsetheaverageleveloftransactioncostsforETFs(1220bps)
Strategy1performbest
Intermsofboththeendofperiodwealthof2,105,518.36andSharpe
ratio(0.261),perTable6
Itwillswitchbetweenindexes50times,aftertransactioncosts(15bps)it
breaksevenwiththebestperformingbuyandholdValueindexstrategy
Forecastingaccuracyis33%
Momentumbasedlongonlystylerotationperformbetterthanlogitmodel
SelecttheindexwiththebestperformanceinpastJmonthandholdfornextK
months
Thebestmomentumstrategyselectsindexbasedpast6monthsperformanceand
holdfor1month(Table8)
GeneratinghigheraveragereturnsandhigherSharperatios
Italsohasthehighestbreakeventransactioncostsof113bpsperswitch
Theshortlegoflongshortstrategiesnothelping
Thelongshortstrategyistobuy(sell)thestyleindexwiththehighest(lowest)past
returns
Theshorttermstrategy(J=1K=1)andthemediumtermstrategy(J=6K=1)have
thehighestaverageannualreturnsof11.73%and11.24%respectively,withhigh
Sharperatios
Theshortportfoliosreducestheoverallprofitabilityofthesestrategies(comparing
toTable9withTable7)
Data
MonthlydatacoveringFebruary1987toApril2006andthefollowing4indexes
FTSE350GrowthIndex
FTSE350ValueIndex
FTSE100(100largest(bymarketcapitalization)companieslistedonthe
LondonStockExchange)
FTSESmallCap(bottom5%oftheUKmarketcapitalization)
Paper Type:
Working papers
Date:
2010-03-31
Category:
Novel strategy, revenue momentum, earning momentum, price

momentum
Title:
Price, Earnings, and Revenue Momentum Strategies
Authors:
Hong-Yi Chen, Sheng-Syan Chen, Chin-Wen Hsin, Cheng-Few Lee
Source:
SSRN working paper
Link:
Summary:
This paper proposes a strategy that combines (1) revenue

surprise momentum (2) price momentum (3) earnings surprise
momentum. Such strategy yields an average monthly return of

1.57%, significantly outperforming strategies that use only price
or earning surprise momentum
Definitions
Earnings surprises (i.e., standardized unexpected
earnings, SUE)
SUE = [(quarterly earnings per share) (analysts
estimated quarterly earnings per share)] /
(standard deviation of quarterly earnings growth)
Based on the most recent earnings announcements
made within the last 3 months
Revenue growth surprises (i.e., the standardized
unexpected revenue growth (SURGE))
SURGE= [(quarterly revenue ) (analysts
estimated quarterly revenue )] / (standard
deviation of quarterly revenue growth)
Limited correlations among SUE, SURGE and past returns
SUE, SURGE and past returns are positively
correlated (Table 2)
But the positive correlations is limited: The average
correlation between SUE and SURGE is 0.32, while
the prior price performance is not as much
correlated with SUE or SURGE, with correlations
equal to 0.19 and 0.14 respectively
Single factor portfolios: Ranking stocks using SUE, SURGE, and
price momentum
All three strategies (momentum, SUE momentum, SURGE
momentum) yield statistically significant profits at all
investment horizons (3, 6, 9 and 12 months) (Table 3)
Both in terms of raw returns, and CAPM and
Fama-French-adjusted returns
Returns based on SURGE are somewhat smaller
than the other two metrics
While price and earnings momentum seem to persist for
up to 36 months, the revenue momentum effect seems to
diminish after first 17 months (Table 11), thus it is
somewhat short-lived relative to the first two measures
Small cap bias
Profits tend to be stronger and more significant for
small firms for all three strategies (which may be
wiped away when transaction costs are included)
Two-way sort portfolios
Sort stocks by any two momentum factors above
The three momentum effects exist independent of each
other (Table 6)
Stocks with high past returns and high SUE tend to

have higher returns in the future 6-months (Table
8)
Buy stocks with the highest prior returns and the
highest SUE (P5xE5) while sell short those stocks
with the lowest prior returns and the lowest SUE
(P1xE1), this price-and-earnings combined
momentum strategy yields a monthly return of
1.33%, which is greater than single factor
momentum returns (momentum: 0.83%, and SUE:
0.63%)
Revenue momentum is similar to earnings
momentum except for Loser stocks where SURGE
does not yield profits
Combining all three factors
Sort stocks first by price momentum(P1-P5), then SUE
(E1-E5) during the six-month formation period, forming 25
2-way sorted segments
Within each segment, construct portfolios based on SURGE
(R1-R5)
The strategy is to buying those stocks with the highest
prior returns, the most positive earnings surprises and the
most positive revenue surprises (P5xE5xR5), and selling
those stocks with the lowest prior returns, the most
negative earnings surprises and the most negative
revenue surprises (P1xE1xR1)
Combining the three strategies yield the highest average
returns: a monthly return of 1.57%
Each metric has incremental contribution
Collectively, three-way sorts work better than
two-way sorts which work better than one-way
sorts, underlying the incremental contribution of
each metric
Strong seasonality
Not even the three-way sorts appear to work in
January (Table 9)
Conditional sorts (sorting on one variable then the next)
seem to improve the performance of the portfolios by
"23% to 40%" (Table 10)
Data
Sample period: 1974 2007
All common stocks traded on NYSE, AMEX, and NASDAQ
(excluding regulated industries and financials). Penny
stocks are also excluded (Price < $5 on portfolio formation
date)
Data items collected from COMPUSTAT and CRSP
217,361 firm-quarters (Table 1)

Paper
Type:
Working papers
Date:
2009-10-15
Categor
y:
Value/momentum/corrrelation, financial crisis
Title:
The Changing Beta of Value and Momentum Stocks
Authors
:
Andrea S. Au, Robert Shapiro
Source: SSRN working papers

Link:
Summa
ry:
Thispaperfindsthatfrommid2007to200903,correlationbetweenvalue/momentum,
betweenvalue/beta,andbetweenmomentum/betahavegreatlydeviatedfromhistoric
norm.
Portfoliomanagerneedstobeawareoftheunintendedbetsonmarket(beta)in
constructingcompositemodels
Marketconditionshavepushedthecorrelationbetweenvalueandmomentumfactorstoan
extremeinpast30years(Exhibit1)
Correlation
betweenvalue
andmomentum
Correlation
betweenvalue
andbeta
Correlation
between
momentum
andbeta
Historicalpattern
Correlation
betweenvalue
andmomentum
ranksat
4050%
Highvalue
stocksare
less
risky
(typically
havealsolow
beta)
High
momentum
stocksare
morerisky
(typically
havealso
highbeta)
Mid200720090
3
Correlation
betweenvalue
andmomentum
ranksat
70%
Thatis,
high
rankinvalue
factoralmost
surelylowrank
inmomentum
factor
Highvalue
stocksare
morerisky
(typicallyhave
highbeta)
High
momentum
stocks are
less risky
(typically
have low
beta )
Thecorrelation(value/beta,momentum/value)isafunctionofrecent6monthmarket
performance
Followingperiodsofextendedmarketunderperformance,thebetacorrelationsare
morelikelytoexhibitabnormalrelationships
Source:thepaper
Implicationsforbalancingvalue/momentumincompositemodel
Therecentperiodshaveseenanunusualmarket
Momentummeanslowerbeta:sotoomuchmomentumweightwillproducethe
unintendedbetagainstthemarket
Valuemeanshighbeta:sotoomuchweightinvaluewillproducetheunintendedbet
ofbettingonthemarketrecovering
Data
December1978throughMarch2009Russell3000stockvalueandmomentum
loadingsarefromBarra
Paper
Type:
Working papers
Date:
2009-08-31
Categor
y:
Novel Strategies, Real Estate Market, Momentum, housing derivatives contracts
Title:
Momentum in Housing
Author
s:
Eli Beracha and Hilla Skiba
Source: FMA Conference 2009

Link:
http://www.fma.org/Reno/Papers/Momentum_In_Housing.pdf
Summa
ry:
ThepapershowsthatthereissignificantquarterlymomentuminUSrealestatemarket
during19832008.Theprofitabilityofthemomentumfactorisashighas8.92%per
annum.Thisstrategymaybeimplementedbytradingthehousingderivativescontractsin
ChicagoMercantileExchange(CME)
Thisstudyextendsearlierfindingsofhousingmarketmomentum
CaseandShiller(1989)documentpositivecorrelationinrealestatereturnsinUS
during19731986,limitedtoacoupleofmetropolitanstatisticalareas(MSAs)inUS
Thispaperdocumentsmomentuminhousingmarketforthemorerecenttimeperiod
andforalargersample(380MSAs)
Thereturnofthemomentumtradingstrategyissignificantlysuperiorcomparedto
theaveragebuyandholdaveragereturnoftherealestatemarketinUS(4.69%per
annum)
Constructingtheportfolio
ForeachMSA,calculatetherelativereturnsofthehousinginmetropolitanareas
(MSA)comparedtothegeneralaveragehousingreturnsinUS
Long(short)ontheMSAsthathaveperformedbetter(worse)comparedtothe
averageUSrealestatereturnsinthepast
quarter
Tradinghousingportfoliosarepossibleusinghousingderivativescontractsin
ChicagoMercantileExchange(CME)
Momentumfactoriscreatedforvariousportfolioformingperiods(m)andportfolio
holdingperiods(n)
formation
period(month)
holding
period
(month)
momentumprofit(longshortonpast
winnerslosers)perannum
7.37%
8.32%
6.32%
7.92%
1.34%
4.42%
Discussions
Unfortunatelytheauthorsdidnottestlongerhorizons(m=4,n=4isthelongest
horizontheyreport),thoughpresumablyhousingmarketshouldmoveslowerthan
stockmarket
ThispaperremindsusofREITsstocks(RealEstateInvestmentTrusts)momentum
documentedinearlierpapers.Thispaperisabouthousingindex,whichismuch
morebroader
OneotherrelatedpapertriestopredictCaseShillerindexusingGooglesearch
indexatcitylevel(ForecastingHousingPriceswithGoogleEconometrics,
)
OneneedstotestthestrategyusingtheactualmarketpricesonCME,insteadofthe
CaseShillerindex,toaccountforpossiblemarketattrition
Data
Thedatasetincludes19832008HousingPriceIndicesfor380MSAsfromFederal
HousingPricingAgency
Paper Type:
Journal Papers
Date:
2009-04-20
Category:
momentum, credit, novel strategy
Title:
Momentum and Credit Rating
Authors:
DORON AVRAMOV, Tarun Chordia, Gergana Jostova, Alexander

Philipov
Source:
Link:
62&iid=5&aid=1282&s=-9999
Summary:
Thispaperestablishesarobustlinkbetweenmomentumandcreditrating.
Momentumprofitabilityislargeandsignificantamonglowgradefirms,butit
isnonexistentamonghighgradefirms.Themomentumpayoffsdocumented
intheliteraturearegeneratedbylowgradefirmsthataccountforlessthan
4%oftheoverallmarketcapitalizationofratedfirms.
Themomentumpayoff
differentialacrosscreditratinggroupsisunexplainedbyfirmsize,firmage,
analystforecastdispersion,leverage,returnvolatility,andcashflowvolatility.
Paper
Type:
Journal Papers
Date:
2009-04-20
Categor
y:
momentum
Title:
Momentum Profits, Factor Pricing, and Macroeconomic Risk
Authors
:
Laura Xiaolei Liu, Lu Zhang
Source:
The Review of Financial Studies
Link:
http://rfs.oxfordjournals.org/cgi/gca?gca=21/6/2379&gca=21/6/2417&gca=2
1/6/2487&gca=21/6/2535&sendit=Get+All+Checked+Abstract(s)
Summar
y:
Recent winners have temporarily higher loadings than recent

losers on the
growth rate of industrial production. The loading

spread derives mostly from
the positive loadings of winners.

The growth rate of industrial production is a
priced risk factor

in standard asset pricing tests. In many specifications, this
macroeconomic risk factor explains more than half of momentum

profits.
We
conclude that risk plays an important role in driving

momentum profits.
Comme
nts:
Paper
Type:
Working Papers
Date:
2009-04-14
Category
:
Title:
Authors:
Ding Du
Source:
Link:
ntum_0908.pdf
Summar
y:
portfolio returns.
previous week
previous 6 months
Fama and French.
1)
are similar
Some

months)
momentum
reversals during 1- to 3-year period:
Commen
ts:
Concerns:
underlying stocks
Data:
Paper Type:
Working Papers
Date:
2009-04-14
Category:
Volatility, momentum, market status
Title:
Market Volatility and Momentum
Authors:
Kevin Q. Wang Jianguo Xu
Source:
SSRN Working paper
Link:
Summary:
The higher the market volatility, the lower the momentum profits.
In other words, market volatility negatively predicts momentum

profits
Momentum only works when market volatility is low
During low volatility periods, momentum average profit is
13%, while during high volatility periods, the average
profit is -5% (Table III )
Of all months covered in this study, 60% of the months
see low volatility, 40% of the months see high volatility
Volatility more effective than market returns in predicting
momentum profit
Earlier study (Cooper, Gutierrez and Hammed (2004))
shows that market returns predict momentum profits.
Momentum only exists in up markets
After controlling for volatility, better market return does
not lead to better momentum profit
After controlling for market returns, higher volatility still
leads to lower momentum profit
During high volatility periods, momentum does not exist
no matter the market state is bad, medium or good
Comments:
Discussions:
The changing profitability of momentum: Table II reports
that the annual profit in the 2000s is only 2.6%,
compared with 10%+ during each of the previous two
decades
This paper may help quant managers to optimally weight
their momentum factors
As we know, market volatility tends to exhibit strong
momentum (e.g., high volatility period are usually
followed by high volatility period). This paper suggests
that one can overweight momentum factors when the
market volatility is low
Data:
1926 2007 data for all NYSE and AMEX stocks are from
CRSP
Stocks are sorted at the end of each month t into deciles
based on their prior six month (t-5 to t) returns, and the
test-period profit is calculated for t+2 to t+6
The entire period of 1926~2007 is divided into some
5-year periods, and for each subperiod the correlation
between volatility and momentum is examined
Pape
Working Papers
r
Type:
Date: 2009-03-18
Categ
ory:
Title:
Auth
ors:
Sourc
e:
Link:
Sum
mary
:
and return.

expected returns
10% stocks
below)

more useful
Monthly Sharpe Ratios of the modified
momentum strategy
Expected returns used in the
optimization
Bench
mark
case
Meth
od1
Meth
od2
Metho
d3
Metho
d4
Risk
aver
sion
Long
(short)
on top
(botto
m)
10%
raw
returns
for
month
(t-7,t-2
)
10
bucke
ts
histor
ical
avera
ge
retur
n
(1965
-2006
)
20
bucke
ts
histor
ical
avera
ge
retur
n
(1965
-2006
)
10
bucke
ts
histor
ical
avera
ge
retur
n
(1965
till
last
mont
h,
mont
h(t-1)
)
20
bucke
ts
histor
ical
avera
ge
retur
n
(1965
till
last
mont
h(t-1)
)
100
0.106
0.469
0.617
0.469
0.617
500
0.314
0.469
0.617
0.469
0.617
1000
0.418
0.469
0.620
0.469
0.618
5000
0.531
0.498
0.646
0.462
0.586
1000
0
0.487
0.500
0.631
0.454
0.566
Discussions
The two graphs above are very thought provoking, since most
quant factors have similar problem, i.e., the forecast returns and
realized returns for different buckets are very different. For better
optimization results, it makes sense to use the past realized for
different buckets as expected returns.
Interestingly, the difference between method2 (with look-ahead
bias) and Method4 (without look-ahead bias) is relatively small
The study doesnt really beat the conventional momentum strategy
for high values of risk aversion parameter
Data
The study uses NYSE and AMEX stocks during the time period
1926-2005 from CRSP and Fama-French factors from Kenneth
Frenchs webpage.
Paper
Type:
Working Papers
Date:
2009-04-14
Category
:
Title:
Authors:
Ding Du
Source:
Link:
ntum_0908.pdf
Summar
y:
portfolio returns.
previous week
previous 6 months

Fama and French.
1)
are similar
months)
momentum
Some reversals during 1- to 3-year period:
Commen
ts:
Concerns:
underlying stocks
Data:
Paper Type:
Working Papers
Date:
2009-04-14
Category:
Title:
Authors:
Source:
SSRN Working paper
Link:
Summary:
The higher the market volatility, the lower the momentum profits.
In other words, market volatility negatively predicts momentum
profits
momentum profit
Comments:
Discussions:
decades
Data:
CRSP

Pape
Working Papers
r
Type:
Date: 2009-03-18
Categ
ory:
Title:
Auth
ors:
Sourc
e:
Link:
Sum
mary
:
and return.

expected returns
10% stocks

below)
more useful
Paper Type:
Working Papers
Date:
2009-02-25
Category:
Novel Strategy, style allocation, value, momentum
Title:
The Effect of Market Regimes on Style Allocation
Authors:
Manuel Ammann and Michael Verhofen
Source:
SSRN Working Paper
Link:
Summary:
The paper shows that in high-volatility markets, value stocks

yields higher returns. In low-volatility stock index and momentum
stocks generate higher returns
Methodology to detect volatility regime
The paper detects high/low volatility state using a
regime-switching model (for the Carhart four-factor
model) based on Markov Chain Monte Carlo
Methods
Low volatility occurs in 75% of the time, high
volatility 25% of the time
In high volatility regime, the market volatility is 2.6
times higher than the low volatile regime
Value and momentum perform differently in two regimes
Value perform better in high volatility state
Momentum perform better in low volatility state
Out-of-sample tests show that style switching is

profitable
Paper Type:
Working Papers
Date:
2009-02-25
Category:
Title:
Authors:
Source:
SSRN Working Paper
Link:
Summary:

As an
four categories: asset class beta, style beta, strategy beta,
and alpha
Asset class beta
Style betas
Style beta = expected return of the style x
exposure to the respective style
Strategy beta
Alpha
and asset classes
Diversifyingbasedontheriskpremiaofstyles,strategiesandassetclasses
Thestrategyis
equally
weightedinallthestyles,strategiesandassetclassesinabove
table
Thereismonthlyrebalancingbetween1995and2008
Thestrategyiscomparedtotheclassical60/40strategy,whichis60%longonMSCI
Worldand40%longonDomesticUSbonds
Thestrategybeatstheclassical60/40strategyintermsofSharperatio(0.94vs.0.26)
ThestrategyisalsosuperiorinextremeeventmonthssuchasAsianCrisis,LTCM,9/11,
etc.(Table7)
Data
Thepaperusesdatafortheperiodof1995to2008.MSCIindicesandMerrillLynch
DomesticMasterBondIndexarefromdatastream.

Paper Type:
Working Papers
Date:
2009-02-01
Category:
Momentum, historical high prices
Title:
Real Money from Momentum: Anatomy of a trading strategy

which has been well-known for more than 40 years
Authors:
Source:
2009 MFA conference paper
Link:
http://www.mfa-2009.com/papers/Real_Money_from_Momentum
.pdf
Summary:
This paper presents a momentum strategy based on two simple

rules. In U.S. stock market during 1965-2004 and after
transaction costs, such strategy yields 35% annually, outperforms
SP500 every year with little draw-down risk (worst case is -7.9%
in 2002).
The strategy
Buy those stocks once their prices have risen above
historical high
Sell the stock once it drops below the buying cost
or it drops below 90% of the highest price after
been bought
In essence this is a momentum strategy
Varied number of stocks in portfolio: sometime
there are hundreds of stocks, sometime only a few
(hold more cash)
Unusually good results
High returns: On yearly basis, a long-only, the
portfolio (with maximum 100 stocks) return is
44.18% and the after-tax return is 30.93%. This is
much better than the 8.14% for SP500
Low risk: standard deviations of both daily and

monthly returns are lower than those of market
indices
Little draw-down risk: positive return every year
except 2002 ( 7.9%)
The profit is not going down with time
Robustness
The strategy requires only long-position, and
relative few stocks are included in the portfolio
Stocks traded are mostly high-price stocks (since
they have to make historical high to be included in
the first place), average market size $3.6bn in
recent years
From intra-day data, it is found that buying and
selling signals occurs usually quite early in the day,
so only 50% of the first and last trading days
returns are used in the portfolio return calculation
The average one-way transaction cost estimated to
be ~0.5%
Data
1964-2003 daily stock return data for
NYSE/AMEX/NASDAQ stocks are from CRSP
IPO stocks are excluded since they frequently make
new highs just due to their short trading history.
Only those stocks with more than 3 years trading
history and prices over $10 are included.
The transaction cost estimated based on a data set
supplied by Joel Hasbrouck
Our concerns
The strategy may have a low capacity and high
turnover
We are just guessing - but the results looks too
good
Paper Type:
Journal Papers
Date:
2009-01-30
Category:
Title:
Day-of-the-Month Effects in the Performance of Momentum

Trading Strategies in the Foreign Exchange Market
Authors:
Source:
Link:
http://www.iijournals.com/JOT/default.asp?Page=2&ISS=25238&
SID=715864
Summary:

a very strong day-of-the-month effect in
the performance of momentum strategies in the foreign exchange
market
. It shows that this seasonality in trading strategy
performance is attributable to seasonality in the conditional
volatility of foreign exchange returns, and in the volatility of
conditional volatility. Indeed, a two-factor model employing
conditional volatility and the volatility of conditional volatility
explains as much as 70% of the intra-month variation in the
Sharpe ratio. The article further shows that the seasonality in
volatility is in turn
closely linked to the pattern of U.S.
macroeconomic news announcements, which tend to be clustered
around certain days of the month.
Comments:
Paper Type:
Working Papers
Date:
2008-12-20
Category:

Title:

Authors:
Source:
SSRN working paper
Link:
Summary:

investment strategy
that combines Value and Momentum factors generates positive

returns with given tracking error. This investment universe is the
177
in US, UK and Japan

Sharpe ratio is lower than the market index Sharpe
ratio, Table 1) and may display prolonged periods
of underperformance
months returns.
Forecasting 6-month momentum returns: using the
term structure (yield difference between 10 year
and 3 month US t-bills)
Forecasting 6-month momentum returns: using the
aggregate BM ratio of the market
structure, and value spread increases with BM ratio
(Table2)
Comments:

costs.
1. Discussions
reported.
None of the returns are reported in a risk-adjusted format.
The paper only reports average absolute returns and the
return of the market portfolio.
From Table 13, this Black-Litterman framework adds value
when the tracking error is at 400bps and 500bps, but not
at 300bps
2. Data
dollar values.
Paper Type:
Working Papers
Date:
2008-11-05
Category:
Momentum and Value strategies, asset classes, Global markets
Title:
Value and Momentum Everywhere
Authors:
Clifford Asness, Tobias Moskowitz and Lasse Pedersen
Source:
NYU working paper
Link:
http://pages.stern.nyu.edu/~lpederse/papers/ValMomEverywhere.pdf
Summary:
The paper shows that value and momentum strategies generate

profits across different asset classes: international stock markets,
government bonds, currencies and commodities.
Value and momentum profits are correlated within and across
asset classes
A long-short value (momentum) strategy in one asset

class is positively correlated with value (momentum) in
other asset classes
Value is negatively correlated with momentum both in
its own asset class and in other asset classes
These patterns across different asset classes and
geographic locations suggest the presence of global
factors
Stand-alone value/momentum strategies works, and so does a
combo strategy:
Long-short momentum and value portfolios are created
each month across different equity markets,
government bonds and commodities
Book value of stocks are the past six months BM
ratios for stocks
Book value of commodities, currencies and
government bonds are the price of the asset
from 5 years ago
Momentum portfolios are created by the past
12-month cumulative raw returns on the assets.
The combo strategy goes 50-50 on value and momentum
(which is diversified with respect to liquidity risk) in different
asset classes and countries
An aggregate strategy that

combines value/momentum
in different asset classes and
countries correlates with
major economic factors
Value and momentum
both load positively on
long-run consumption
growth
They also load
negatively load on a
global recession
indicator
Value loads
significantly on global
liquidity risk and
momentum is
negatively correlated
with global liquidity
Comments:
1. Discussions
The paper is very useful in documenting the

profitability of momentum and value strategy in
different countries and for different asset classes.
To us, the omni-presence of these two strategies
may be related to investors certain behavioral
patterns, which can be as old as mountains.
The combo strategy is meaningful because it has
very low loading on liquidity risk. We already
know that momentum has negative loading on
liquidity factor and value has positive loading,
therefore the combo strategy is hedged against
liquidity.
We found the book value measure for
commodities, currencies and government bonds
intriguing, and have a hard time to understand its
economic reason. Why are the price of the asset
5 years ago a good measure of the book value?
2. Data:
CRSP and COMPUSTAT for US data for the
period 1973-2008
BARRA and Worldscope for international
stocks (UK, Japan and Continental Europe)
during the time period 1985-2008.
Bond returns are taken from Datastream
and Bloomberg (1990-2008)
Currency data is taken from Datastream
and IBOR (1980-2008)
Commodities data is from London Metal
Exchange, Intercontinental Exchange,
Chicago Board of Trade, New York
Mercantile Exchange and Tokyo
Commodities Exchange (1980-2008)
Macroeconomic data for US is from NBER,
for other countries it is from Economic
Cycle Research Institute
Paper Type:
Working Papers
Date:
2008-11-05
Category:
Momentum strategy, volatility
Title:
Reversal Fear and Momentum
Authors:
Kevin Q. Wang
Source:
SSRN working paper
Link:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1099964#
Summary:
This paper proposes an improved momentum strategy based on

reversal fear measures(RFM, which measures how much prices
deviate from normal levels). Specifically, stocks with high RFM
generate higher momentum profits.
Intuition: RFM measures how much prices deviate from
normal levels
When prices deviate from their normal levels too
much, investors fear that this price shock is
transitory and thus will revert to the normal level.
This fear causes underreaction, which leads to
continuation in prices.
Thus stocks with high RFM may have higher
momentums
Definition of RFM (denoted ): a mean-reversal-based
measure
= (current stock price expected stock price
based on month (-66) to month (-6) regression) /
(standard deviation of past months forecast error)
Assuming normal distribution
Both high and low values of suggest great
reversal fears ( bounded between 0 and 1).
Smallest reversal fears are associated with medium
values (~0.5).
Higher momentum profits for stocks with very high and
very low RFM
Performing a two-way sort of stocks first on rfrom
(past 6 months returns, i.e., formation period
return) and then on
January excluded (Table 3 Panel A1)
There is a monotonous relationship (for both
winner and loser stocks) between the abnormal
return and .
A fear-fading-away effect is observed
Some stocks may have been at unusually high/low
price levels (compared to expected stock prices) for
some time, and investors may get used to it
Alphasofstocksfirstsortedonthenontheabsolutevalueofrform(lowabsolutevalue
ofpast6monthreturnmeansinvestorshavegotusedtotheprice)
Reason: low rform means

absolute returns have
been low, i.e. prices have
been sustained at their
high/low levels, which
convinces the investors
that such high/low price
may be normal
Robustness check
Not firm-size driven: high
and low portfolio
performances
significantly different for
large stocks as well as
small stocks (Table 3
Panels C and D )
Not explained by
Fama-French model: one
way sort based on
generates significant
alpha after adjusting for
Fama-French risk factors,
suggesting that the model
does not explain returns
fully (Table 3 Panel 4)
Comments:
1. Discussions
The model is intuitive, though not very
straightforward to implement. Here is
what we think may be a simplified
version. The definition of RFM can be
roughly viewed as a classic momentum
scaled by the stocks volatility, i.e.,
momentum = (past 6
month return)/volatility
instead of just momentum = (past 6
month return). It would be interesting
to test whether this simplified
definition yields similar results.
2. Data
Monthly data from January 1963
to December 2005 for stocks
that are traded on New York
Stock Exchange, American Stock
Exchange, and NASDAQ.
Excluding stocks priced below
$5 at the end of the ranking

period and stocks with market
capitalizations in the smallest
decile.
Standard & Poors 500
composite index used for the
market index value.
Paper Type:
Working Papers
Date:
2008-10-15
Category:
Momentum at the aggregate index level
Title:
Using Style Index Momentum to Generate Alpha
Authors:
Samuel Tibbs, Stanley Eakins and William DeShurko
Source:
SSRN Working paper
Link:
Summary:
The paper shows that momentum profits exist for Russell style
indices.
Six style indices are used
Each Russell index covers a certain size and BM
group:
Russell 2000 Growth Index and Value Index
Russell Mid-Cap Growth Index and Value
Index
Russell Top 200 Growth Index and Value
Index
Russell indexes are used because of their
popularity: 54.5% of US equity funds are
benchmarked against Russell indexes.
Methodology to build momentum portfolio
6 style indices are ranked by the holding period k
months (every k months)
The long-short portfolio is built by long the highest
winners and short highest losers
The long-short portfolio is held for n months
Significantly positive momentum profits (monthly returns)
Data
Styleindexdatafortheperiod19691996arefromChan,KrceskiandLakonishok
(2000).Foryears19972005Russell2000GrowthandValue,RussellMidCapGrowth
andValueandRusselllTop200GrowthandValueindicesareused.
Paper
Type:
Working Papers
Date:
2008-10-15
Category:
Momentum, value, market state, book-to-market profits
Title:
The Information in Book-to-Market Prots for Momentum
Authors:
Ryan McKeon
Source:
FMA Conference 2008
Link:
http://www.fma2.org/Texas/Papers/McKeon_value_momentum_interact.pdf
Summary: During August 1962 to July 2005, momentum profits tend to be lower if
they are preceded by changing market states, e.g., a shift from a "value
period" (where value stocks dominate growth stocks) to a "growth period"
(where growth stocks dominate value stocks).
State of the market measured as book-to-market profits
Change in the book-to-market profits identify changes in
market states
I.e., periods when low book-to-market ("growth") stocks
dominate and periods when high book-to-market ("value")
stocks dominate
Reasons why market states influence momentum profits
If people overvalue some securities during the portfolio
construction period and correct for this error during the
holding period, we would observe momentum throughout the
evaluation period and also throughout the holding period. But
across periods, we would see reversals, i.e., low momentum
profits.
Also, changes in expected returns due to changing market
conditions can lower momentum profits.
A driver of the book-to-market effect is value stocks whose
market values increase dramatically and so become growth
stocks, and growth stocks whose values decrease and
become value stocks" as quoted from Fama and French
(2008), i.e., book-to-market effect is partially driven by
momentum
Lower momentum profits following changing market conditions
Methodology: Regress momentum portfolio returns over

absolute change in book-to-market portfolio returns from
short term (2 months) to long term (6 to 18 months prior).
The results indicate that the absolute HML-change is strongly
negatively related to future momentum profits (Table 3).
For periods after a state change, the 6-month momentum
profits is 2.5% lower.
Paper Type:
Working Papers
Date:
2008-10-15
Category:
momentum, value, Fraud Detection Model, Stock Over-valuation
Title:
Identifying Overvalued Equity
Authors:
M. D. Beneish, D. Craig Nichols
Source:
SSRN working paper
Link:
papers.ssrn.com/sol3/papers.cfm?abstract_id=1134818
Summary:
This paper finds that stocks that are detected as overvalued by

PROBM, a model of overvalued equity, experience an annual
abnormal return of -9.2% over the next 12 months.
This paper also defines an overvaluation score (O-Score)
that
boasts one-year-ahead abnormal return of -27%. The O-score
combines factors include
1. earnings overstatement (PROBM, defined below)
2. prior merger activity (the firm has engaged in an acquisition in
the prior five years)
3. excessive stock issuance
4. manipulation of real operating activities (cash flow from
operations to total assets)
Proposed reason: managers tend to destroy value for
overvalued firms
Based on agency theory of overvalued equity
The authors draw on Jensens (2005) agency
theory of overvalued equity, which states that
managers react to overvaluation in a way to
destruct value which results in a fall in stock price
subsequently.
Definition of PROBM
It uses 8 financial statement variables capturing

manipulation of earnings, incentives related to
meeting benchmarks, and earnings overstatement
Specifically, per Table1, PROBM = -4.84 +
.920*DSR + .528*GMI + .404*AQI + .892*SGI +
.115*DEPI - .172*SGAI + 4.679*ACCRUALS
-.327*LEVI
They include the change of receivable/sales,
change of (gross margin)/to sales, change of
(selling, general, and administrative
expense)/(sales), change of sales, change of
(depreciation/depreciable base), change of
(non-current assets other than PPE)/(total assets),
change of (income before extraordinary itemsoperating cash flows)/( total assets), change of
(long-term debt +current liabilities)/(total assets)
High PROBM scores, low abnormal returns and robust to
known alpha factors
Table 3 reports the "hedge" portfolio returns on
PROBM and other variables associated with
overvalued equity. Sample stocks are first grouped
into ten deciles based on these variables. Then,
hedge portfolio returns are defined as long decile 1
portfolio and short decile 10 portfolio.
Table 3 Panel B: There is more variation within
deciles of accruals, momentum, and B/P conditional
on high PROBM
The performance of the flagged subsample (i.e.,
stocks with high PROBM = high likelihood of
earnings management) is systematically worse
than its not-flagged counterpart in each of the 60
deciles.
High PROBM score with merger

activity, low abnormal return
For firms with high PROBM
scores (predicted as potential
frauds), those that have
merger activity in the prior
five years experience poorer
one-year-ahead abnormal
returns (-11.55%).
This performance worsens if
the merger includes public
targets (-12.67%), and if the
acquisitions were paid in

stock (-13.31%)
High PROBM score with excessive
stock issuance, low abnormal return
High PROBM along with
excessive stock issuance and
manipulated operating
activities better predicts
overvaluation.
Comments:
1. Discussions
If anything, the whopping -27% return
spread of O-score only make people
question how realistic the papers findings
are. It seems too big to be true, and we
guess it may well have large small cap
biases in it.
Anything new here? The 8 ratios included
in the PROBM definition (see above) do not
seem to be based on any new data items.
2. Data
All firms that are in Compustat files for the
period 1993 to 2004, except for financial
services firms and small firms (less than
$100,000 in sales or in total assets or with
market capitalization of less than $50
million). Additional to the financial
statement data from Compustat, the paper
uses stock return data from CRSP.
Paper Type:
Working Papers
Date:
2008-09-25
Category:
Style Investing, stock co-movement, momentum
Title:
Style Investing, Co-movement and Return Predictability
Authors:
Sunil Wahal and Deniz Yavuz
Source:
SSRN Working Paper
Link:
Summary:
The paper finds that combining style investing measures with

traditional momentum can generate high alphas.
Style investing generates excess co-movement of (assets)
stocks within styles
Style is defined by sorting stocks into 5x5 size and
value-growth portfolios
A "hot style" is those enjoy high return during past
several months
Basic intuition: style investing can be a source of the
momentum
If the hot style does well in one period (3,6,9 or
12 months), it keeps attracting inflows fin the next
period and the assets does well the next period
Style investing generates momentum in individual
asset returns at intermediate horizons (3 and 6
months) and reversals at longer horizons (12
months)
Style based investing generates asset-level
momentum
Methodology to calculate co-movement beta
Each security is assigned to a size and
value-growth portfolio using a 5-5 grid to create
the style investing
For each security, the co-movement beta with its
style is calculated as its regression coefficient to its
style in the last 3 months.
The stocks are sorted into co-movement terciles by
their co-movement betas
Each month stocks are sorted into momentum
deciles based on past 3,6 and 12 month returns
Higher momentum returns within higher co-movement
stocks
Robusttoknownfactors:(Table6).
Sizeandbook,equal/valueweight,turnoverlevel
Onceidiosyncraticvolatilityandliquidityareusedtocreatethestylecomovements,the
differenceinmomentumreturnsshrink
Data:CRSPstocksbetween1965and2006aswellasFamaandFrenchfactorsfromKenneth
Frenchswebpage.BooktomarketvariablesarecreatedusingCOMPUSTATtapes.
Paper Type:
Working Papers
Date:
2008-09-03
Category:
Return Predictability, Momentum
Title:
Momentum is not Momentum
Authors:
Robert Novy-Marx
Source:
Link:
http://faculty.chicagogsb.edu/robert.novy-marx/research/MOM.p
df
Summary:
The paper presents a modified momentum strategy using the

largest and most liquid stocks that brings more than 12% per
year.
All momentum information comes from (-12,-6) months
There is no momentum in prior performance at
horizons beyond 12 months.
Stocks that have risen over the first 6 months of
the preceding year do well
Stocks that have fallen over the first 6 months of
the preceding year keep falling
The immediate 6-month past performance is
useless in terms of outperforming the market
Using (-12,-6) months outperform conventional
momentum strategies of (-12,-2) and (-6,-2) months for
400 largest firms at NYSE (Table 4).
The raw returns are 12% vs. 9.84% and 2.2% per
annum, respectively.
The Fama-French alphas are 14.3% vs. 11.7% and
3.37% per annum, respectively.
The Fama-French Momentum Factor alphas are
5.5% vs. -1.61% and -6.6% per annum,
respectively.
Comments:
1. Discussions:
This is a very interesting paper that addresses a widely used
strategy. The good results for large cap stocks only add to its
value. Our concern is whether it has any extra alpha beyond
known factors? This new momentum strategy doesnt create
significant alphas with respect to Carhart-Four-Factor Model
regression.
2. Data:
1974-2007 stock return data are from CRSP, factor series data
are from Kenneth Frenchs webpage and Book-to-Market ratios
are from COMPUSTAT.
Paper Type:
Working Papers
Date:
2008-07-20
Category:
momentum, Public News and Mispricing
Title:
Mispricing Following Public News: Overreaction for Losers,

Underreaction for Winners
Authors:
Ferhat Akbas, Emre Kocatulum and Sorin M. Sorescu
Source:
SSRN working paper
Link:
Summary:

1) only stocks with negative momentum
experience short-term reversal, and 2) for news stocks,
combining momentum (month t-6 to t-1) and current month
return (month t) can better predict stock returns.
Previous study has shown that stock returns demonstrates
reversal in 3-5 year horizon
momentum in 6-12 months horizon
reversal in 1-4 weeks horizon
News definition:
News stocks: stocks that were mentioned in the
headline or lead paragraph of an article from a
publication with more that 500,000 current
subscriber
No-news stocks: Stocks that were not mentioned in
the same publications
Only negative momentum stocks has short-term
(1-month) reversal
No reversal for high momentum stocks
The finding is robust to illiquidity, turnover, size
effects
Overreaction to public news following bad past
performance, and underreaction following strong past
performance
For news stocks,

combining momentum
(return from month t-6 to

t-1) and current month
return (return month t)
works:
A hedged portfolio
that is long in stocks
with high
momentum and high
current month
return, and short in
stocks with low
momentum and high
current month
return, earns
risk-adjusted returns
of 3.11% per
month(37% per
year)
The long leg (stocks
with high current
returns and high
momentum) earn an
average monthly
return of 2.35%
during subsequent
month
The short leg (stocks
with low momentum
and high current
returns) return is
-0.76% per month
Likely reasons: investors
behavioral bias
Intuitively,
overconfident
investors who hold
stocks with negative
momentum are
more likely to place
excessive weight on
public news
(over-estimate good
news), leading to
overreaction.
Similarly, investors
who hold stocks with
positive momentum
are more likely to

under-react to good
news.
Comments:
1. Discussions
The large profit in this paper seems too big to be
true for us, though it nevertheless presents a
methodology that is worth further study. The other
drawback is that the news database used here
(stocks that were mentioned in the headline or lead
paragraph of an article from a publication with
more that 500,000 current subscriber) is a black
box to most people.
2. Data
Data is collected from CRSP on NYSE, AMEX and
NASDAQ traded stocks for the period of 1980 to
2006. A count of public news is taken from Chans
(Stock price reaction to news and no-news: drift
and reversal after Headlines,
http://jfe.rochester.edu/02207.pdf
) dataset, which
covers a random sample of approximately
one-quarter of all CRSP stocks over the period from
1980 to 2000.
Paper Type:
Working Papers
Date:
2008-07-20
Category:
Momentum profits, index returns
Title:
Market Dynamics and Momentum Profits
Authors:
Ebenezer Asem and Gloria Y. Tian
Source:
Northern Finance Association Annual Meeting 2007
Link:
http://www.schulich.yorku.ca/SSB-Extra/NorthernFinance.nsf/Loo
kup/Ebenezer%20Asem1/$file/Ebenezer%20Asem1.pdf
Summary:

the finding that
momentum works following
up markets holds mostly in up markets following up

markets. There is no momentum profit when up markets are
followed by down markets. That is,
Monthly Momentum Profits Conditional on Past and Current

Market Conditions
Current 1 month
market index
return
Past
12-month
market
index
return
Po
siti
ve
(u
p
ma
rke
t)
Neg
ativ
e
(do
wn
mar
ket)
Positive
(up
market)
1.9
0
%
0.46
%
Negative
(down
market)
-2.
21
%
2.95
%
Methodology:
Market index return defined as CRSP value
weighted index return
This study covers 249 down markets and 699 up
markets
Past up (down) market means the 12-month lagged
market index return is positive (negative)
Current up (down) market means the current
1-month market index return is positive (negative)
Likely reason:
Investors expect loser stocks to reverse in the
future.
When investors do not observe reversals on loser
stocks (down market follows down market, Down
-> Down), they underreact to these stocks. Loser
stocks then have inferior returns relative to winner
stocks, which results in momentum profits for this
market continuation scenario.
Similar can be said for Up -> Up market.
Robust to several checks:
Using 3-year returns as opposed to 6-month
returns does not change the results,
Nor does explicitly controlling for potential bid-ask

bounce.
Low-priced stocks do not drive the results either.
Comments:
1. Discussions
While the paper does not provide a strategy, it is nonetheless
helpful to practitioners: for one, it shows that momentum
strategy is betting on a continuation of market returns.
We are not sure how convincing the proposed explanation is.
After all, one can find a behavioral story for any empirical finding.
Also one should realize that Down -> Down discussion (i.e., down
market follows down market, Down -> Down) is no longer in
relative terms, but rather in stock market absolute return terms.
2. Data
CRSP data from January, 1927 through December, 2005 (948
months). All stocks except those trading at below $5 at the
beginning of the holding period are included (24,036 firms). Date
items obtained are: monthly returns, stock prices, outstanding
shares, and CRSP value weighted index returns
Paper Type:
Working Papers
Date:
2008-07-20
Category:
Industry Momentum, ETF
Title:
Can Exchange Traded Funds be used to Exploit Industry

Momentum
Authors:
Laurens A.P. Swinkels, Liam Jong-A-T Joe
Source:
SSRN Working Paper
Link:
Summary:
This paper finds that transaction costs (bid-ask spread,

broker commission and short selling costs) erode
previously recorded industry momentum profit.
Ignoring transaction costs, the strategy exhibit 5% annual
profit during 2000-2007, but such profits will disappear
after transaction costs are taken in account.
This paper uses two sets of Exchange Traded Funds (ETF)
Comments:
Paper Type:
Working Papers
Date:
2008-07-20
Category:
Momentum profits, index returns
Title:
Market Dynamics and Momentum Profits
Authors:
Ebenezer Asem and Gloria Y. Tian
Source:
Link:
kup/Ebenezer%20Asem1/$file/Ebenezer%20Asem1.pdf
Summary:

the finding that
momentum works following
up markets holds mostly in up markets following up

markets. There is no momentum profit when up markets are
followed by down markets. That is,
Monthly Momentum Profits Conditional on Past and Current

Market Conditions
Current 1 month
market index
return
Past
12-month
market
index
return
Po
siti
ve
(u
p
ma
rke
t)
Neg
ativ
e
(do
wn
mar
ket)
Positive
(up
market)
1.9
0
%
0.46
%
Negative
(down
market)
Comments:
-2.
21
%
2.95
%
Methodology:
Market index return defined as CRSP value
weighted index return
This study covers 249 down markets and 699 up
markets
Past up (down) market means the 12-month lagged
market index return is positive (negative)
Current up (down) market means the current
1-month market index return is positive (negative)
Likely reason:
Investors expect loser stocks to reverse in the
future.
When investors do not observe reversals on loser
stocks (down market follows down market, Down
-> Down), they underreact to these stocks. Loser
stocks then have inferior returns relative to winner
stocks, which results in momentum profits for this
market continuation scenario.
Similar can be said for Up -> Up market.
Robust to several checks:
Using 3-year returns as opposed to 6-month
returns does not change the results,
Nor does explicitly controlling for potential bid-ask
bounce.
Low-priced stocks do not drive the results either.
1. Discussions
While the paper does not provide a strategy, it is nonetheless
helpful to practitioners: for one, it shows that momentum
strategy is betting on a continuation of market returns.
We are not sure how convincing the proposed explanation is.
After all, one can find a behavioral story for any empirical finding.
Also one should realize that Down -> Down discussion (i.e., down
market follows down market, Down -> Down) is no longer in
relative terms, but rather in stock market absolute return terms.
2. Data
CRSP data from January, 1927 through December, 2005 (948
months). All stocks except those trading at below $5 at the
beginning of the holding period are included (24,036 firms). Date
items obtained are: monthly returns, stock prices, outstanding

shares, and CRSP value weighted index returns
Paper Type:
Working Papers
Date:
2008-06-27
Category:
Commodity futures, momentum, tactical allocation,

Future/currencies
Title:
Tactical Allocation in Commodity Futures Markets: Combining

Momentum and Term Structure Signals
Authors:
Ana-Maria Fuertes, Joelle Miffre, Gergios Raliis
Source:
Link:
Summary:
This paper finds that a novel double-sort strategy in commodity

future that combines momentum and term structure earns 21%
annual abnormal return.
Definition:
Momentum strategy is to buy past winner and short
past loser
Term Structure strategy is to buy backwardated
commodities (highest roll return) and short
contangoed commodities ( lowest roll return)
Stand-alone strategy works:

The momentum and term structure strategies earn
10.14% and 12.66% abnormal return individually.
Combining two strategies works best:

Compute roll-return of all commodity futures at the
end of each month; split in three portfolios - High,
Medium, Low (1/3 break points)
Divide High portfolio into 2 portfolio based on mean
return of the commodities over the past R months call them High-Winner and High-Loser
Similarly, sort the commodities in Low portfolio in
two sub-portfolios based on their mean return of past
R months - call them Low-Winner and Low-Loser
Buy High-Winner and Short Low-Loser and hold for a
month
Low correlation, robust to transaction cost:

The return of the Double Sort Strategy is only weakly
correlated with the returns of traditional asset
classes; good for diversification
Considering transaction cost the Double Sort
Strategy earns 20.71% return
Comments:
1. Discussions
This paper presents an interesting strategy on commodities
futures. The paper profit looks fairly attractive. It would also be
interesting to expand the study to currency futures.
Our concern is, like all other quant research, the environment will
be changing for futures trading. For example, Future CFTC
(Commodity Future Trading Commission) or Senate regulations
might impose restrictions on institutional investors of commodity
futures (New York Times, June 12).
2. Data
Datastream International and Bloomberg for the period of January
1, 1979 to January 31, 2007; consists of daily closing prices on the
nearby, second-nearby and distant contracts of 37 commodities.
Paper
Type:
Working Papers
Date:
2008-06-27
Category: Momentum, 52-week high

Title:
The 52-Week High Strategy:Momentum and Overreaction in Large Firm

Stocks
Authors:
Ray R. Sturm
Source:
EFA conference paper
Link:
/S-2-55.pdf
Summary
:
we covered the 52-week high momentum strategy before (The 52-Week

High and Momentum Investing
http://www.cba.uh.edu/~tgeorge/papers/gh4-paper.pdf
). This paper finds
that
investors pay attention to prior highs and lows (eg, 3-month,

5-month) besides the 52-week high/low
yet 52-week high/low is most predictive
for portfolio based on prior highs (lows), profits exhibts reversal
(momentum)
the study is based on the 90 largest US stocks from 1987-2005
Paper Type:
Working Papers
Date:
2008-06-08
Category:
momentum, macro factors, S&P500 timing, Predictive Regressions,

Time-Varying Coefficients
Title:
Predictive Regressions with Time-Varying Coefficients
Authors:
Thomas Dangl, Michael Halling
Source:
Financial Management Association conference
Link:
http://www.fma2.org/Prague/Papers/DanglHallingPaper20071117.pdf
Summary:
The paper finds that a regression with time-variation of coefficients

significantly outperforms the regression with constant coefficients
and no-predictability benchmark.
The model proposed by the paper is the
posterior-probability-weighted average model (the
AVG-Model) and the horserace is done with the constant
coefficients model (the CONS-Model).
Both CONS-Model and AVG-Model predict S&P 500
index returns by regressing S&P 500 index returns on
predictive variables like dividend yield, momentum,
turnover, credit spread, etc.
The difference: AVG-Model incorporates the time
variation of the coefficients, yet CONS-Model estimates
the model once for the whole sample with constant
coefficients.
The AVG and CONS models work best during the early 1980s:
Before the oil price shock in 1974 and after 1990s, no
predictive model beats the benchmark.
Before the oil price shock, the classical CONS-Model
performs better than the AVG-Model proposed by the
paper, however afterwards AVG is consistently more
Comments:
powerful in out-of-sample forecasting the index

returns.
AVG performs better than CONS
The portfolio formed on the AVG-Model (excess
return=5.6% per annum) outperforms the one formed
on CONS-Model (excess return=2.6% per annum)
Table 3 reports the importance of the predictive variables
during different sub-periods:
The dividend yield has lost its importance significantly
from 1995 to 2005 (average coefficients of 0.159 and
0.027, respectively).
Turnover variable also shows as a poor predictive
variable in the latter part of the sample (average
coefficient of 0.014 in 1985 and 0.001 in 2005).
Inflation seems to be the predictor that increased its
importance the most during the sample (average
coefficient of -0.053 in 1985 and -0.244 in 2005).
1. Discussions
The paper explicitly accounts for the parameter instability for
predictive regressions and shows that time-varying coefficient
estimates improves the predictive power of the regressions. The
relevant portfolio implications of the method proposed paper are also
shown with high expected returns and Sharpe Ratios.
What looks troubling to us is AVG only starts to outperform CONS
after the 1980, we think more discussions on this finding will be
helpful.
2. Data
S&P 500 returns for 1951-2005 are used as the dependent
variable in the paper.
For US industrial production Ecowin and for all the other
variables (e.g. liquidity, interest rate and CPI) Global Financial
Data are used.
Paper Type:
Working Papers
Date:
2008-05-20
Category:
Earning announcement, momentum
Title:
Limited Attention and the Earnings Announcement Returns of Past

Stock Market Winners
Authors:
David Aboody, Reuven Lehavy, Brett Trueman
Source:
UCI working paper
Link:
http://catalyst.merage.uci.edu/tools/dl_public.cat?year=2007&fil
e_id=320&type=cal&name=5-11-07%20Trueman-Earnings%20A
nnouncements.pdf
Summary:
This paper finds that it is profitable to buy stocks with very high
momentum stocks 5 days before earning announcements, and
then sell short these stocks until 5 days after earning
announcements. The 10-day average profit is 3-6%.
Robustness: The finding is

robust to contemporaneous
pre-release/post-release analyst
earnings forecast revisions, and
negative earnings surprises.
May be drive by small investors:
Before announcements, there
exists an order imbalance for
small and medium investors, but
such imbalance disappears after
announcement
Likely reason: Stocks with
extremely high returns attract
individual investors attention
(particularly before their
earnings announcements), to an
extent that their stock prices
over-shoot due to mass
enthusiasm.
Comments:
1. Discussions
Some interesting additional tests:
Should we avoid the stocks with 1%
highest momentum?
How about combining momentum with
earning surprises?
Our concerns:
Are there longer term recovery? The
paper only shows that the prices for
high-fliers are likely to go down 5-days
after announcements.
Valid in recent years? Performance of
earning based strategies changed a lot
after 2003, arguably due to the hedge
fund booming.
Small-cap bias: perhaps it makes sense

to adjust the short-term return by only
substracting return relative to the
market, but these high momentum
stocks are likely to be smaller stocks.
(Table 2 panel A only reports the
average market size of highest 10%
momentum, not 1% momentum).
To us, this paper partially highlights the risk of
momentum investing: it works when it
works. It is always hard to detect when stock
prices will reverses. This is important since
although earning surprise strategies are less
popular nowadays, momentum is still a
must-have ingredient for many quant models.
2. Data
1971 2005 daily stock return data are from
COMPUSTAT, and earnings release/forecast
returns are from Factiva.
Paper
Type:
Working Papers
Date:
2008-03-16
Catego
ry:
Tax expense surprises (momentum), earnings momentum
Title:
Tax expense surprises and future returns
Author
s:
Source
:
UNC conference paper
Link:
http://areas.kenan-flagler.unc.edu/Accounting/fallcamp/Documents/Tax%20Ex
pense%20Surprises%20and%20Future%20Returns.pdf
Summ
ary:
This paper shows that

after controlling for book income surprises, the tax
expense surprises can predict future returns.
tax expense surprise (we think a better term may be tax expense
growth, since no analysts forecast is involved) is measured as
tax expense surprise = (tax expense per share in quarter q)

(tax expense per share in quarter q-4) / assets per share in
quarter q-4
Residual tax expense surprise is defined to be the residual of regressing
tax expense surprise on book income surprise, which is similarly defined
as the 4-quarter book income per share growth rate
Book income surprises can predict future three-month stock returns
Tax expense surprise is significantly and positively related to future
stock returns:
after controlling for the effect of book income surprise
,a
portfolio that is formed based on residual tax expense surprise yield a
hedged annualized return of 10.7%
Why higher tax expense surprise (ie, growth) can be good news? The
authors suggest that since
book income = pre-tax income - tax expense
so for two firms with same book income surprise, the one with a higher
tax expense surprise (hence higher pre-tax income surprise) should have
higher future book income and stock returns.
Comme
nts:
1. Discussions
This is a very interesting strategy with potentially large capacity.
Our concern is that we are not completely convinced by the authors discussion
regarding why high tax expense growth is good news. At first glance, a good
alternative explanation seems to be since some companies use tax tools to
manage earnings, a sudden increase in tax expense (hence high tax expense
surprise, or growth) may signal future reversal of such expense, hence a higher
future stock earning and returns. If this is the case, then we should see
correlation between this finding and accruals. The authors specifically address
this issue, and document a considerable serial autocorrelation (persistence) in
tax expense surprises.
2. Data
1977-2005 US stock accounting data (book income, tax variables, etc) are from
quarterly Compustat files, stock return data are from CRSP.
Paper Type:
Journal papers
Date:
2008-03-10
Category:
Momentum Asymmetries
Title:
Asymmetries in Stock Returns: Statistical Tests and Economic

Evaluation
Authors:
Yongmiao Hong, Jun Tu and Guofu Zhou
Source:
THE REVIEW OF FINANCIAL STUDIES, Vol 20 No 5, Pg

1547-1581.
Link:
http://rfs.oxfordjournals.org/cgi/content/abstract/20/5/1547
Summary:
We provide a model-free test for asymmetric correlations in which

stocks move more often with the market when the market goes
down than when it goes up,
and also provide such tests for
asymmetric betas and covariances.
When stocks are sorted by
size, book-to-market, and momentum, we find strong evidence of
asymmetries for both size and momentum portfolios, but no
evidence for book-to-market portfolios.
Moreover, we evaluate
the economic significance of incorporating asymmetries into
investment decisions, and find that they can be of substantial
economic importance for an investor with a disappointment
aversion (DA) preference as described by Ang, Bekaert, and Liu
(2005).
Comments:
Paper Type:
Journal papers
Date:
2008-03-10
Category:
Momentum
Title:
Firm-specific attributes and the cross-section of momentum
Authors:
Jacob Sagi and Mark Seasholes
Source:
Journal of Financial Economics, Vol 84 Iss 2, May 2007 Pg

389-434.
Link:
http://www.sciencedirect.com/science/journal/0304405X
Summary:
This paper identifies observable firm-specific attributes that drive

momentum. We find that a firms revenues, costs, and growth
options combine to determine the dynamics of its return
autocorrelation. We use these insights to implement momentum
strategies (buying winners and selling losers) with both
numerically simulated returns and CRSP/Compustat data.
In both
sets of data, momentum strategies that use firms with high
revenue growth volatility, low costs, or valuable growth options

outperform traditional momentum strategies by approximately
5% per year.
Comments:
Paper Type:
Working Papers
Date:
2008-02-18
Category:
Title:

Authors:
Source:
SSRN working paper
Link:
Summary:

value strategies.
value strategies yield produce annualized returns of
7.4%, 5.0% and 4.4%, respectively.
transaction costs.
Comments:
1. Discussions

2.Data
Paper Type:
Working Papers
Date:
2007-12-26
Category:
Momentum, Firm-specific attributes
Title:
Firm-specific attributes and the cross-section of momentum
Authors:
Jacob Sagi, Mark Seasholes
Source:
JFE forthcoming 2007
Link:
http://www.seasholes.com/files/Sagi_Seasholes_JFE_20070117.pdf
Summary:
The paper proposes an enhanced momentum strategy that

combines firm specific attributes (high revenue growth volatility,
low costs,
and valuable growth options), and that yield an
additional 5% profit
per annum compared to the traditional
method.
When first sort stocks into quintiles on one firm attributes (M/B,
revenue growth volatility and costs) and then on past quarterly
returns:
firms with high market-to-book ratios generates higher
momentum profits
low cost of goods sold (CGS, divided by total assets) firms
produce 2% - 9% points higher momentum profits than high
CGS firms
high revenue volatility firms generates 6% - 14% points
higher per annum momentum profits than low revenue
volatility firms. (revenue volatility is the standard deviation
of year-over-year quarterly revenue growth for the past 10
quarters)

Some
Comments:
quarterly momentum returns of 2.82% in up markets and

-1.11% in down markets.
theoretic rationales:
There exist positive return autocorrelations for firms with
high revenue growth volatility, low costs and valuable
growth options. The main economic intuition behind the
model is to see the firm as a portfolio of assets with
different levels of systematic risk loadings.
M/B represents valuable growth options held by the firm and
they constitute the risky part of the firms portfolio whereas
existing capital is the less risky portion. Once the firm
exercises its growth option the high contemporaneous
return is accompanied by high expected returns due to
higher systematic loading on the firms portfolio. Therefore
high risk projects and products induce positive return
autocorrelation for individual companies.
High costs reduce the positive autocorrelation by imposing a
leverage effect on the firms total portfolio.
1. Discussions
This paper not only contributes to the literature by bringing a
rational explanation for the momentum phenomena, but also
illustrates a practical portfolio strategy which earns superior returns
with the use of firm level accounting variables.
Our concern is that the authors did not do a robustness check in
terms of reporting sub-period results. Established momentum
spreads are marginally significant in the whole sample and
therefore consistency of this strategy can be questionable in a
potential out of sample use.
We are curious to see whether it makes a difference if we scales
CGS by total revenue instead of total assets. We also note that this
paper also varies from other studies in that it uses quarterly
returns as opposed to 6 month past returns.
2. Data
1963Q1-2004Q3 US stock data are from CRSP-COMPUSTAT merged
database. The study employs quarterly returns and accounting
measures for availability issues.
Paper Type:
Working Papers
Date:
2007-09-23
Category:
Momentum, seasonality
Title:
Stock Return Momentum and Reversal: A Comprehensive Study
Authors:
Ilya Figelman
Source:
SQA presentation
Link:
http://www.sqa-us.org/cde.cfm?event=161187 (abstract only)
Summary:
AlphaLetters could not find the full text for this presentation,
which looks very interesting.
Using stocks in
S&P 500 universe,
the author find

two new momentum effects of yearly and
quarterly periodicity which

are even stronger than the previously
known effects:
In the long term(yearly), stock returns tend to repeat a
pattern every twelve months,
In the intermediate term (quarterly), a pattern every three
months.
Paper Type:
Working Papers
Date:
2007-09-09
Category:
Momentum, transaction cost
Title:
Cost Momentum Strategies
Authors:
Xiafei Li, Chris Brooks, Jolle Miffre
Source:
University of Reading working paper
Link:
http://www.icmacentre.ac.uk/files/pdf/dps/dp2007_12.pdf
Summary:
Using 1985/12 2005/12 UK large cap and small cap stocks, this
paper finds that
momentum trading profits is highest among
stocks with the lowest total transaction cost,
and is practically
non-existing in stocks with

higher transaction costs.
Key findings:
Without considering trading costs, all momentum
portfolios (with 3 , 6 , 12 ranking and holding periods)
yields average significant 1.9%/month profit. Among the
portfolios 12 3 strategy (ranking 12 month and holding 3
months) has highest return of 2.2%/month.
Comments:
Most
profits are from short side: lowest
(highest)
momentum stocks yields

1.6% (0.3%) monthly returns.
It is prohibitively expensive to trade momentum stocks,

particularly lowest momentum stocks.
The trip trading
costs (includes commission, stamp duties and short selling
costs) is 6.7% (3.8%) for lowest momentum stocks.
It is still profitable
to
trade momentum strategy within
stocks with low transaction costs

. Within stocks with 50%
lowest transaction cost, momentum strategy yields annual
net returns of While 12 12 (ranking 12 month and holding
12 months) strategy within stocks with 10% lowest
transaction costs) yields annual net returns 28%.
1. Why important
This paper illustrates the importance of trading cost for any
higher frequency strategies. The findings that momentum is
robust within stocks with lowest transaction cost, if proven true,
may be of use to quant managers.
2. Data
2005/12 UK large cap (FTSE100) and small cap(AIM index) data
is from Primark Datastream.
Paper Type:
Journal papers
Date:
2007-09-05
Category:
Momentum, Earnings
Title:
Interaction of Stock Return Momentum with Earnings Measures
Authors:
Ilya Figelman
Source:
Financial Analysts Journal, May/June 2007, Vol. 63, No. 3: 71-78
Link:
http://www.cfapubs.org/doi/ref/10.2469/faj.v63.n 3.4692
Summary:
Examination of the interaction of stock return momentum with

various earnings measures finds that
large-capitalization
companies with poor past returns and high return on equity
(ROE) significantly underperform the market and companies with
poor past returns and low ROE.
Thus, the profitability of high-ROE
companies with poor past returns may have peaked. In addition,
companies with poor past returns and poor earnings quality (as
measured by accruals) significantly underperform the market and

companies with poor past returns and good earnings quality.
Therefore, the market may not fully recognize manipulation of
earnings. The findings are consistent with the explanation that
momentum is driven by slow reaction to news.
Comments:
Paper Type:
Journal papers
Date:
2007-09-05
Category:
Momentum, International Markets, Business Cycle
Title:
Profitability of Momentum Strategies in International Markets:

The Role of Business
Authors:
Antonios Antoniou, Herbert Y.T. Lam, and Krishna Paudyal
Source:
Journal of Banking & Finance, Vol. 31, No. 3: (March

2007)955-972
Link:
http://linkinghub.elsevier.com/retrieve/pii/S0378426606002159
Summary:
The paper investigates whether business cycle variables and

behavioral biases can explain the profitability of momentum
trading
in three major European markets.
Unlike previous studies,
the paper nests both riskbased and behavioral-based variables in
a two-stage model specification in an attempt to explain
momentum profits. The findings show that,
although momentum
profitability in European markets is unexplained by conditional
asset pricing models, it is attributable to asset mispricing that
systematically varies with global business conditions.
In addition,
behavioral variables do not appear to matter much. Thus risk
factors, which are undetected thus far and are largely attributable
to the business cycle, could explain the momentum payoffs in
European stock markets.
Comments:
Paper Type:
Working Papers
Date:
2007-08-23
Category:
Momentum, trading cost, UK, Global markets
Title:
The Post Cost Profitability of Momentum Trading Strategies:

Further Evidence from the UK
Authors:
Sam Agyei-Ampomah
Source:
Link:
Summary:
This paper find that in UK from 1988 2003,

short-term
momentum (up to 6 months) strategy profits largely disappears
after factoring out transaction costs, even for those large and
liquid stocks.
But longer term momentum strategy profits remains
Comments:
Paper
Type:
Working papers
Date:
2007-08-23
Categor
y:
Momentum, reversal
Title:
Sectional Pricing Power and Sources of Momentum Payoff
Authors
:
Qiang Kang, Canlin Liz
Source: 2007 Asia Finance Association conference paper

Link:
http://www.asianfa.org/Paper/momentum58.pdf
Summa
ry:
This paper proposes new momentum measures: instead of ranking past 6

month total return, it decomposes
a French factor adjusted return into one long term reversal component and two
short term
(month 7 to 2, and month 13 to 8) momentum components. Specifically
Where r is total return, G is the set of Fama French three factors ( market risk
free, size , and beta), D is a dummy variable that equals 1 for t = (month 2 to
7) and equals 0 otherwise, I is a dummy variable that equals 1 for t =
(month 8 to 13 and equals 0 otherwise. So by definition
c0 is affiliated with 2 to 7,
c1 is affiliated with 8 to
c2 is affiliated with month 61 to -14.
Key findings:
All momentum strategies based on the total return r c0 c1, and c0 c1)
yield significant returns. c2 yields negative momentum returns (ie, its a
long term contrarian factor
c0-based momentum strategy produces much stronger and more
significant profits than the total return based payoffs in each sub-period
Only c0-c1 is robust for various size/value portfolios and/or industry
portfolios, and the estimated risk premium is similar to total return
based momentum strategy. This is a very desirable asset pricing factor
property
About 50% of stocks in c0 or c1 portfolio is also in c0-c1 portfolio
These results suggest that both a (missing) factor related component
and a firm specific component of stock returns contribute to the well
documented momentum profits.
Comme
nts:
1. Why important
Previous study (Grundy and Martin (2001)) has shown that Fama French three
unrelated or factor adjusted return generates significant momentum. This
paper provides a nice extension by looking into momentum factors in
difference time horizons.
One other rather influential paper Do Industries Explain Momentum?
(http://www.stat.wharton.upenn.edu/~steele/Courses/956/Resource/Momentu
m/MoskowitzGrinblatt99.pdf) claims that momentum (based on total return)
exists only in cross industry portfolios, but not in within industry portfolios. The
conclusion in this paper offers a different perspective and shows that there
should be a firm level momentum component
2. Data
1925 2002 all NYSE/AMEX stocks data are from CRSP monthly database. The
Fama French factors and the momentum factor (UMD) from Ken French
website.
3. Discussions
Earlier in the newsletter we covered Momentum Meets Reversals
(http://gates.comm.virginia.edu/uvafinanceseminar/2006-McLeanPaper.pdf), it
proposes a strategy that is long in stocks that are both short term (6 months)
momentum winners and long term (5 years) reversal losers, short stocks that
are both momentum losers and reversal winners. This strategy is shown to
yield 1.5% monthly profit, which is much higher than the conventional
momentum or reversal strategies.
In this light, we are very curious to see what might be result if we use the
framework of this paper to test the conclusions in Momentum Meets Reversals
paper (ie, whether c0-c2 strategy can yield significant, hopefully better,
returns).
The findings here, like most papers are based on all available stocks for a long
history. Practitioners may want to test the new measure in their own stock
universes.
It is interesting to note that non of the momentum factors work over the 1965
1989, and the authors explains that the reason is probably due to a
particularly strong value effect in this sub period, and consequently, the value
spread HML has the dominant cross sectional explanatory power.
Paper Type:
Working Papers
Date:
2007-06-05
Category:
Accrual Anomaly, Market Efficiency, Multiple Hypotheses Testing,

Momentum Effect
Title:
Dissecting the Global Accrual Anomaly
Authors:
Source:
Link:
http://www.fma.org/Barcelona/Papers/AccrualAnomaly.pdf
Summary:
Sloan (1996) documents that investors' overestimation of accrual

persistency leads to abnormal positive (negative) returns for low
(high) accrual firms.
This paper test Sloan's accrual anomaly
using recent data from more countries,
and finds abnormal
returns (adjusted from size, b/p, beta and momentum) for 10

markets in a sample of 28 developed
equity markets.
To test whether findings based on each single country are driven

by chance, the authors combine the single hypotheses into
multiple hypothesis test procedure s (Romano, Shaikh and Wolf
(2005)). In this case, the accrual anomaly is not robust anymore.
As a comparison, international momentum strategies are quite
robust to this battery of tests.
Comments:
1. Why important
To us, the most interesting result is the testing of accruals
anomaly in multiple countries using more recent data. Different
countries have different accounting systems and definitions, so
it's perhaps not surprising that the effectiveness of accruals
varies from country to country. The results here may help
international equity managers build specific models. This said, we
are not very zealous about the "multiple hypothesis test"

methodology, since it seems to be a more sophisticated technique
for the entertainment of academia.
2. Data and methodology
2006 stock data for 28 equity markets are from Datastream. The
balance sheet method from Sloan (1996) is employed for
calculating accrual. The cash flow component is measured as the
difference between earnings and the accrual component.
3. Discussions
Our take from accruals' in significance in multiple hypothesis tests
is that "it works better in some countries than others". An
opportunity of capturing alpha exists in many of the nations
including US (34 bp), UK (85bp), Hong Kong (120bp), Japan
(35bp) and France(46bp) (Table VIII). The caveat is of course,
the volatility of these returns or low Sharpe ratios.
It is interesting to see the effect of law and political boundaries
on Fama French and accrual factors. The price of risk on each
factor, expectedly, varies among nations. The authors have a
period of 1989 2006 for testing. A test of structural breaks might
be useful to check if there are regime changes in factor pricing.
Another interesting experiment is to test the significance of the
accrual factor in more recent years, especially after the
publication of the influential Sloan(1996) paper.
Paper Type:
Working Papers
Date:
2007-04-17
Category:
Earning surprises, momentum
Title:
Earnings Announcement Returns of Past Stock Market Winners
Authors:
Source:
University of California Irvin working paper
Link:
nnouncements.pdf
Summary:
We mentioned this paper in earlier issue, now the ful text paper is
available. Key findings
Prior 12
month
momentum winners enjoy
a significant risk
adjusted return of 1.58% during the five
trading
days before
earnings announcements, and a significant risk
adjusted return of
1.86% in the five
trading days after the
announcements.
Comments:
Paper Type:
Working Papers
Date:
2007-03-18
Category:
Momentum
Title:
The Disappearance of Momentum
Authors:
Soosung Hwang, Alexandre Rubesam
Source:
SSRN working paper
Link:
Summary:
This paper studies the momentum effect for past 80 years

momentum portfolios are held for month
t
to
t+6
Based on return from month
t-6
to
t-1
):
Stock return momentum effect exists during 1939 to 2000
But it didn't exist before 1939
And it disappeared (turned negative) after 2000
Momentum profit is only significant in only 4 of 16adjacent
five
year intervals when adjusted for risks.
The following is a graphic description from the paper ( 8), note

that it plots the cumulative momentum profit per $1 long through
June 2005 for various starting date, i.e., it can be read starting
June2005 and goes backwards read backwards
Read backwards starting 06/2005

Source:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=968
176
Comments:
1. Why important
This paper put momentum profits from a historic perspective: it
shows the existence of momentum for along time. As importantly,
it confirms deteriorating performance of momentum for recent
years.
2. Data
1926 2005 stock data are from CRSP monthly database.
3. Discussions
Are we looking at another example of anomaly being arbitraged
away, just like small cap premium and earning based strategies?
The graph above shows that momentum went away during a
period of about 12months (Jan 2000 to Jan 2001). This suggests
that the disappearance of momentum is not likely solely done by
arbitrageurs, since its hard to imagine that something that lasted
for 60 years can go away in 12 months.
On the other hand, we are not sure of the authors conclusion
that the disappearance of the momentum effect since 2000
suggests that its discovery for 1939 2000 could be an artifact of
data mining bias. Our theory is that its a combination of a.)
Wide discussion and report of momentum anomaly since early
1990s, and b.) the fact that the crash of internet bubble broke
the overarching hi tech theme in economy
Two extensions that we think are very interesting:

This paper did not decompose the momentum profits into
long portfolio and short portfolio. This extension may yield
more insights.
This paper did not discuss the momentum profits in
January: for a long time momentum doesnt work in this
month. The most recent 5 years however are seeing a
different pattern.
Paper
Type:
Working Papers
Date:
2007-03-18
Categor
y:
Timing of value and momentum strategy
Title:
Style Timing in Emerging Markets
Authors: Stphanie Desrosiers, Mohamed Kortas, Jean Franois L\\\'Her, Jean Franois
Plante,
Source:
Cass Business School seminar paper
Link:
http://www.cass.city.ac.uk/emg/seminars/Papers/Desrosiers_Kortas_L\\\'Her
_Plante_Roberge.pdf
Summar
y:
This paper proposes a style timing strategy in emerging markets:

Use value strategy after market downturn
Use momentum strategy after market rally
This strategy consistently generates better risk adjusted profits than value or
momentum strategies. The psychological theory is that prior results affect
investors subsequent risk taking behavior.
Commen
ts:
Paper Type:
Working Papers
Date:
2007-03-02
Category:
Tax income surprise, earnings (book income) surprise,

momentum
Title:
Tax income momentum
Authors:
Source:
Yale working paper
Link:
http://www.som.yale.edu/Faculty/jkt7/papers/taxmomentum.pdf
Summary:
This paper first defines tax income surprise (we think a better
term may be tax income momentum)
Tax income surprise =
(tax income per share in quarter q tax income per share in
quarter q 4) / asset per share in quarter q-4
The study documents a tax income surprise effect:
a higher
tax
income surprise leads to higher future quarterly returns

the
annual hedged profit between extreme deciles

is ~10%.
This effect is similar to, but separate from, the well studied
(book) earning surprise and momentum effect, and is robust
when controlled for other anomalies (e.g. size, book market,
accruals).
Comments:
1. Why important
It seems to us that stock prices are driven more by book income
than tax income. This said, tax income remains a less studied
topic, and it may play an important role since it is less subjective
to management manipulation and will eventually impact book
income.
2. Data
1977 2005 US stock data are from quarterly Compustat/CRSP
databases
3. Discussions
What might be the reason of the predicting power of tax income
surprises. As we know, the difference between tax income and
book income results from difference in revenue recognition,
depreciation methods, etc. A manager may be able to boost book
income through, say, changing depreciation method, but they
have limited room when it comes to manipulate tax income. If

this is the case, then there should be correlation between this
strategy and accruals.
By way of regression on residuals, the paper finds through
regression that tax income has information that will be reflected
in the book income reported next quarter, and information that is
not reflected in next quarters book income and yet is relevant for
stock returns.
In essence, tax income is estimated as:
Tax income = book income + taxes paid/due * (1-
t
)/
= book income + (tax expense deferred tax expense) * (1-
t
)/
t
where
t
is the top statutory corporate federal tax rate in that
year.
Paper Type:
Working Papers
Date:
2007-03-02
Category:
Stock return correlation with market return, R2, momentum
Title:
R2 and Price Inefficiency
Authors:
Kewei Hou, Lin Peng, Wei Xiong
Source:
Link:
http://www.princeton.edu/~wxiong/papers/R2.pdf
Summary:
This paper documents

that
stocks with lower R2 shows
much
stronger momentum.
R2 is the statistic of the weekly return regression:
Stock return = a0 + a1 * market return + a2 * industry return +
error term
A high R2 indicates that a higher proportion of stock return can
be explained by market and industry return.
Stocks with lower R2 also shows stronger long
run price reversals
The authors claim that the reason for the finding may be that R2
could be related to price inefficiency,
lower R2 means that stocks are held more by individual investors

and thus its price show lower efficiency
Comments:
1. Why important
This paper can help people determine whether this R2 is a new
factor, or a combination of other known factors.
2. Data
1963 2002 US stock data are from CRSP/COMPUSTAT database.
3. Discussions
In essence, a high R2 suggests a high statistical significance to
the beta coefficient, and it indicates that a stock's return is driven
less by idiosyncratic risk, but more by market and industry risks.
What new information is there in R2? What could be the economic
story behind the finding? It is found in previous study that stocks
with lower R2 are smaller, less covered by analysts, and have
lower institutional ownership. Does this mean that lower R2 is
merely a fancy term for low quality stocks whose prices tend to
be more impacted by its own in. Of course momentum works
better here, every strategy tends to work better in this segment.
We do not know the answer to these questions, but before we
find uneconomically sensible explanation, we suspect that this R2
may be another case of data mining.
Paper Type:
Working Papers
Date:
2007-02-01
Category:
momentum strategy, bull/bear markets
Title:
Momentum Profits when Mean Stock Returns Vary across

Economic Regimes
Authors:
Chris Stivers Licheng Sun
Source:
University of Georgia working paper
Link:
http://www.terry.uga.edu/~cstivers/ss_momentum401d.pdf
Summary:
This paper studies the relationship between momentum profits

and economic status (good/bad, bull/bear).Key findings
Momentum profits deteriorate during

economic-state
transition and weak economy, both

empirically and
analytically
A decrease in momentum profits may suggest a higher
probability of switching regimes
The regime identification is done by maximizing a probability
density likelihood function of a two regime. The authors use the
returns of a high-beta portfolio and a low-beta portfolio to
estimate the regime parameters (mean, variances, transition
probability, and correlations).
Comments:
1. Why important
We believe the most important question for momentum is not to
tweak its definitions, but to find when it will work. This paper may
help us find the answer. The result is inline with empirical
observations, and the finding that momentum profits signal
economic status may help researchers build regime detection
strategy.
2. Data
1962 to 2002 U.S. individual stock return data are from the CRSP
monthly return file. U.S. 48 industry
return data are from Kenneth French data library
3. Discussions
The authors did not report whether one can enhance momentum
strategy performance from this strategy although it seems very
likely as the bull/beat market situation tend to last for years.
A related paper we reviewed studies the relationship between
profits of value and size in bull/bear markets. "Analyzing Regime
Switching in Stock Returns: An Investment Perspective",
,
where it is shown that for the period of 1963 2006, value
premium is less in bull markets, but size premium is higher in
bear market
Paper Type:
Working Papers
Date:
2007-02-01
Category:
Earnings Announcement Returns momentum winners
Title:
Authors:
Brett Trueman
Source:
JOIM conference paper
Link:
http://www.joimconference.com/conferences/spring07/abstracts.asp
(abstract only)
Summary:
Prior 12
month
momentum
winners
enjoy
a significant
risk -adjusted
return of 1.58%
during the
five trading days before
earnings
announcements
and a significant
risk-adjusted return of
1.86%
in
the five trading days after the

announcements.
Paper Type:
Working Papers
Date:
2007-01-16
Category:
Order flow, trading volume, momentum
Title:
Institutional Order Flow and Stock Return Correlations
Authors:
Tarun Ramadorai, M. Ederer
Source:
Oxford working paper
Link:
http://sbs-xnet.sbs.ox.ac.uk/tarun_ramadorai/Ederer-Ramadorai
_total.pdf
Summary:
This paper finds that:

Cross volume sorted portfolios, a trader should buy (sell)
low volume stocks following a positive(negative) shock to
high volume stock returns.
Within volume sorted portfolios, a trader should buy (sell)
stocks with a high (low) return
Comments:
1. Why important
Earlier we reviewed Campbell, et al. (Caught On Tape:
Institutional Order Flow and Stock Returns,
http://econweb.fas.harvard.edu/hier/2005papers/HIER2080.pdf),
which estimates
daily
institutional flowsby matching the daily
Transactions and Quotes (TAQ) database with quarterly
institutional holding filings.
This study is an interesting extension, and offers unique empirical
evidence in volume based strategies: the lag relationship between

high/low stocks may be driven by institutional investors.
2. Data
1993 to 2000 stock data are from CRSP . Daily transaction data
are from TAQ, quarterly institution holding are from
CDA/Spectrum.
Note that only mid sized stocks are covered in this study, since
the return correlation between volume sorted portfolios are
present in mid -sized stocks, but not in large stocks.
3. Discussions
We are curious to see whats the pattern of institution trading in
terms of sector/style (e.g., size, P/B), the reason being that
institution investors arguably tend to build their views on
sector/style first before they go into individual level stock picking.
This said, we may refine this study and examine the interactions
between institutional trading volume and sector/style. For
example, if institution investors picks sector first, one may expect
a strong sector rotation pattern in volume terms. In this case,
high volume stocks will concentrate in few sectors, and one may
wonder if momentum is still a good way to go in volume sort
portfolios (within sectors)
The stock universe here may be a concern to many practitioners.
The authors find return correlation among sorted portfolios are
present only in mid sized stocks, but not in large stocks.
Consequently, the conclusions apply only to mid sized stocks.
Paper Type:
Working Papers
Date:
2006-12-17
Category:
Value, momentum, financial health
Title:
Sentiment and financial health indicators for value and growth

stocks: the European
Authors:
Bird Ron, Casavecchia Lorenzo
Source:
Link:
Summary:
This paper is based on the findings of an earlier paper ( Value

Enhancement using Momentum Indicators:
The European Experience,
http://www.fma.org/Siena/DSS/Style_InvestingforSiena.pdf
),
where it is found
that:
Most value stocks
under-perform the market
The profit of the value strategy comes from few value

stocks
Price momentum acceleration can best improve value
strategy (we covered Acceleration Strategies in previous
issue,
http://www.fma.org/SLC/Papers/Acceleration_Strategies.p
df
This paper extends the previous study and finds that the
momentum is more powerful than financial health indicators in
enhancing the widely used value strategy. But both momentum
and financial health indicators can help picking growth stocks.
Comments:
1. Why important
Value + momentum perhaps is not something new. We find this
paper interesting since it shows that the 8020 rules (for many
phenomena 80% of consequences stem from 20% of the causes)
applies for value strategy as well. This indicates the potential of
value strategy and also the importance of combining value with
other factors.
This is a study on European market, we think it would be
interesting to test in any universe that you are interested in.
2. Data
2004 stock data for 15 European markets are from Worldscope
database.
3. Discussions
We are not sure whether timing factor is the right word for
momentum and financial health indicators.Given the authors
finding that most value stocks will underperform, what one needs
is some factor that can identify
which stocks
have high potential
(from a large pool of value stocks , not
when
to buy all the
valuestocks. The fact that momentum helps most shows that
(fundamental) investors on average are starting to realize the
value in those value stocks. In other words, the behavior of other
(fundamental) investors serves as an indicator of the potential of
stocks.
Paper Type:
Working Papers
Date:
2006-11-18
Category:
rebalance strategy, momentum, Black-Litterman
Title:
Incorporating Trading Strategies in the Black Litterman

Framework
Authors:
Fabozzi, Frank J. Focardi, Sergio Kolm, Petter N.
Source:
The Journal Of Trading
Link:
http://www.iijournals.com/JOT/default.asp?Page=2&ISS=21815&
SID=628192 ( abstract only)
Summary:
The beauty of BlackLitterman framework is that it can

incorporate view (private information) for better estimation.
This paper proposes a methodology to combine a momentum
strategy Black-Litterman model.
Comments:
Paper Type:
Working Papers
Date:
2006-11-03
Category:
Stock recommendations, momentum
Title:
Is the Market Mad? Evidence from Mad Money
Authors:
Joseph Engelberg, Caroline Sasseville and Jared Williams
Source:
SSRN working paper
Link:
Summary:
This paper studies the performance of stocks recommended by

Jim Cramer, a famous TV stock show hosting US. The prices of
recommended stocks generally jump after the show broadcast,
but revert over the next12 trading days.
Comments:
Paper Type:
Working Papers
Date:
2006-10-06
Category:
Title:
Authors:
Source:
SSRN working paper
Link:
Summary:

curve is inverted.
Comments:
1. Why important
such as the performance of value/momentum in different periods.
It also sheds light on the impact of macro-economic indicators
(yield curve shape) on the profitability of different strategies.
2. Data
from DataStream.
3. Discussions

Paper Type:
Working Papers
Date:
2006-10-06
Category:
Momentum, weekly returns
Title:
Evidence to the Contrary: Weekly Returns Have Momentum
Authors:
Roberto C. Gutierrez Jr., Eric K. Kelley
Source:
University of Utah working paper
Link:
http://home.business.utah.edu/finea/Weekly_02242006.pdf
Summary:
This paper finds robust momentum in a "new and seemingly

unexpected" place - weekly returns.
Following extreme weekly returns, stock price on average will
reverse for two weeks. Such reversal is later more than offset by
return momentum over the coming 12 months.
The one-year momentum profit (based on weekly returns) is
~3%.
Comments:
1. Why important
This one-week momentum appears to be a new finding, and it is
independent of the monthly momentum documented in the
famous Jegadeesh and Titman (1993). It may interest quant
managers with a short (weekly) holding period.
2. Data
1983-2003 US stock weekly return data are from ISSM (1983
-1992), and the TAQ (1993 - 2003). The returns are measured
from Wednesday to Wednesday, and are based on based on
average of closing bid and ask quotes.
3. Discussions
Can people profit from these findings directly? The authors
acknowledge that the ~1.3% paper profit may not withstand the
trading costs. People should be especially cautious given the
regime shift in volatility.
Paper Type:
Working Papers
Date:
2006-09-22
Category:
Strategy, momentum
Title:
Acceleration Strategies
Authors:
Eric Gettleman, Joseph M. Marks
Source:
2006 FMA Annual Meeting
Link:
http://www.fma.org/SLC/Papers/Acceleration_Strategies.pdf
Summary:
This paper finds that stocks with both high 6-month momentum
and high 6-month momentum change (i.e., "acceleration", first
derivative of momentum) offers significant excess returns.
Acceleration is defined as return (month -6 to month -1) - return
(month -6 to month -12).
Strategy 1: Long (short) stocks with high (low) price acceleration,
the annual risk-adjusted (including adjust for momentum) profit
is shown to be 4.5%.
Strategy 2: Long (short) stocks with both high (low) momentum
and high (low) price acceleration. The annual risk-adjusted profit
is 6 percentage points higher than momentum strategy.
Comments:
1. Why important
Besides proposing a new strategy, this paper reminds us that
momentum strategy may be improved by studying the stock price
path. Conventional strategy in essence merely compares the
stock prices at point A and point B. We now know that we can
benefit from studying HOW price moves from point A to B.
The 52-week high strategy
(http://ww
.bauer.uh.edu/~tgeorge/papers/gh4-paper.pdf
), the n-day low
strategy
(ftp://snde.rutgers.edu/Rutgers/wp/2006-10.pdf
,
reviewed in this issue), and scaling momentum by volatility are
all efforts along this logic.
2. Data
Monthly data for the period of 1926-2003 are from CRSP.
3. Discussions
Given the discussion above, we suspect that this new strategy
may be correlated with other strategies that are based on stock
price paths. For example, both this one and the strategy that
scales momentum by volatility are trying to find stocks with
smoother uptrend/downtrend paths.
We note that this strategy may be used to find those
turn-around stocks, i.e., stocks that have been suffering for
some time but recently starts to go up (due to a variety of
reasons, e.g. new corporate strategy). Presumably, those
turn-around stocks are most likely those with low past return
(month -6 to month -12), and high recent return (month -6 to
month -1). That is, they are very likely high acceleration stocks.
Why would this strategy work better? One reason may be that,
compared with stocks with same momentum but lower
acceleration, stocks with high acceleration demonstrate a
stronger price uptrend pattern, thus will be more attractive to
trend-following investors.
Paper Type:
Working Papers
Date:
2006-09-22
Category:
Strategy, n-day lows, momentum
Title:
Highs and Lows: A Behavioral and Technical Analysis
Authors:
Bruce Mizrach and Susan Weerts
Source:
Rutgers University working paper
Link:
ftp://snde.rutgers.edu/Rutgers/wp/2006-10.pdf
Summary:
The strategy: long stocks for up to 6 days after stock prices hit an
n-day low (n = 10day to 52 week), the 1- day risk-adjusted
return ranges from 0.46% (for 10-day low) to 1.15% (for
52-week low)
This paper also finds that momentum strategy stops to work
when n-day highs are reached, and reverses
itself when n-day lows are reached.
Comments:
1. Why important
In an information-rich age, investors are most likely to be
attracted to attention grabbing stocks, e.g., those that just past
certain milestones. As anecdotal evidence, news headlines such
as IBM near its 5 year high certainly can generate much interest
in investors. This said, we think it makes sense to study the
impact of milestones (n-day high/lows) on stock prices.
The short-term reversal strategy is very interesting. Perhaps
more importantly, this paper may help us improve momentum
strategy. If the authors are right, momentum stops to work when
n-day highs are reached and reverses itself when n-day lows are
reached. A quant manager, especially those with a shorter term
horizon may benefit from this finding.
2. Data
1993/01 to 2003/10 data for 1,00 randomly selected stocks were
from CRSP.
3. Discussions
This is perhaps not the best organized paper we have read, but
we may benefit from its perspective. We definitely need to see
more evidence on the performance of momentum strategy in the
presence of n-day highs/lows.
The data sample covered in this study is rather unique - 1,00
randomly selected stocks from NYSE/NASDAQ. Like with any
other potential strategies, one needs to repeat the back testing
on his own universe.
This paper extends previous studies on 52-week high strategies.
Readers may recall two such papers, one on US markets
(http://www.bauer.uh.edu/~tgeorge/papers/gh4-paper.pdf), and
the other on international markets
(http://asianfa-admin.massey.ac.nz/paper_org/810302_org.pdf
).
Paper
Type:
Working Papers
Date:
2006-09-22
Categor
y:
Portfolio optimization, Black-Litterman Model, value, momentum
Title:
Incorporating Value and Momentum into the Black-Litterman Model
Authors
:
Elton Babameto, Richard D.F. Harris
Source:
Inquire seminar paper
Link:
http://inquire.org.uk.loopiadns.com/inquirefiles/Attachments/inquk06/Harris/B
ababamento&Harris.pdf
Summar
y:
This paper proposes incorporating value/momentum strategy into

Black-Litterman portfolio construction framework. When applied to US, UK and
Japan national industries, this strategy generates 1.3-1.7% over benchmark
(0.3-0.7% after transaction cost)
This model can solve many practical issues faced by quant managers: it can
be easily programmed to track benchmark within a specific risk tolerance, and
under various constraints (e.g., full investment, long only, or beta neutral).
Comme
nts:
1. Why important
When most quant managers are using similar factors, the way these factors
are combined in portfolio plays an important role. In our view, this paper may
be helpful since it incorporates the value/momentum combination with
Black-Litterman model. The Black-Litterman model is mathematically elegant
and far more user-friendly than the mean-variance model. As we all know, the
portfolios based on mean-variance framework are highly input-sensitive and
can be highly concentrated.
2. Data
The Morgan Stanley Capital International (MSCI) national industry indices (59
industries for US, UK and Japan indices) are used. The time period covered is
1995-2004.
3. Discussions
One of the key challenges is to forecast security expected returns (equilibrium
returns, or ). The methodology used in the paper looks rather naive on the
first glance; it uses US term spread (the difference between the 10-year US
treasury bond yield and the US T-Bill three-month rate) to forecast
momentum returns, and US market aggregate book-to-market spread to
forecast value return. We know that the value premium and momentum
premium are believed to be linked with stock market returns, volatility as well
as macro-economy factors. A refined forecast model may yield better results.
Paper Type:
Working Papers
Date:
2006-09-22
Category:
Momentum, earnings
Title:
Tale of Two Anomalies: The Implication of Investor Attention for

Price and Earnings
Authors:
Kewei Hou, Lin Peng and Wei Xiong
Source:
Princeton University working paper
Link:
http://www.princeton.edu/~wxiong/papers/momentum.pdf
Summary:
This paper documents that price momentum profits are higher

among high volume stocks and in up markets, while earnings
momentum profits are higher among low volume stocks and in
down markets. In the long run, price momentum profits are
reversed, while earnings momentum profits are not. The reason
seems to be that investors have limited attention and earnings
generate more attention.
Paper
Type:
Working Papers
Date:
2006-09-08
Category:
Strategy, momentum
Title:
Authors:
Doron Avramov, Tarun Chordia, Gergana Jostova, Alexander Philipov
Source:
GWU seminar paper
Link:
http:/ home.gwu.edu/~alexbapt/Jostova.pdf
Summary:
This paper shows that momentum is significant only among low credit
rating firms, and virtually nonexistent among high rating firms. Such low
rated firms account for less than 4% of market.
Comments
:
1. Why important
This paper adds to our understanding of momentum by linking momentum
and credit rating. Momentum
profit in the US has been very volatile these past years, and the debate of
its real existence has never
settled. An example is "The Illusory Nature of Momentum Profits", which
suggest that momentum profit is not robust after accounting for trading
cost
http://dolphin.upenn.edu/~pupa/Beida_news/jan2004/news_jan2004_jfe.p
df
).
The authors of this paper claim that momentum works for a small portion of
stocks. This may be meaningful to managers whose universe covers lower
credit rating stocks.
2. Data
~3,500 firms rated by S&P during 1985-2003.
3. Discussions
Given that low credit rating stocks generally are less liquid and may incur
higher trading cost, we would like to see more robust testing: will the
1.29% monthly profit (table 1) sustain after considering round-trip trading
cost?
Two results we find very interesting:
1.) Table 10 suggests that the papers conclusion holds in large cap
universe as well.
2.) The operating performance of low rating losers deteriorates while that of
the high rating winners
improves.
Paper Type:
Working Papers
Date:
2006-08-24
Category:
Strategy, momentum, reversal
Title:
Momentum Meets Reversals
Authors:
R. David McLean
Source:
Virginia seminar paper
Link:
http://gates.comm.virginia.edu/uvafinanceseminar/2006-McLean
Paper.pdf
Summary:
Long in stocks that are both short term (6 months) momentum

winners and long term (5 years) reversal losers, short stocks that
are both momentum losers and reversal winners. This strategy is
shown to yield 1.5% monthly profit, which is much higher than
the conventional momentum or reversal strategies.
Comments:
1. Why important
Momentum strategy is widely used by quant managers. It would
be very meaningful if this paper can help improve performance.
2. Data
1940 to 2003 stock data are from CRSP.
3. Discussions
Why would this strategy outperform the classic momentum
strategy? As we mentioned in previous letters, one of the
challenges to improve momentum strategy is to identify/avoid
high momentum stocks that will reverse themselves, i.e., those
glamorous stars that experienced price rally but eventually fall.
This paper seems to provide an answer: avoid those stocks with
bad short term returns but good long term returns, as both
measures indicate underperformance.
The consistency of this new strategy is yet to be tested - as we
know the momentum profit has been very volatile for the past
years.
We are impressed by the author's discussion on arbitrage costs
(the impact of idiosyncratic risk, market value, price, volume,
institutional holdings). It has been found that, for the
conventional momentum strategy, losers are hard to sell short
due to transaction cost. It seems to us that this paper has
addressed this issue.
Paper Type:
Working Papers
Date:
2006-08-10
Category:
Title:

Asset Growth Effect
Authors:
Source:
Link:
Summary:

Comments:
1. Why important
2. Data
from CRSP/COMPUSTAT
3. Discussions
Paper Type:
Working Papers
Date:
2006-08-10
Category:
Strategy, momentum, institutional investors
Title:
Does Positive-Feedback Trading By Institutions Contribute to Stock

Return Momentum?
Authors:
Tao Shu
Source:
University of Texas working paper
Link:
http://phd.mccombs.utexas.edu/tao.shu/Papers/Mom_07_25_06.pdf
Summary:
This paper evaluates impact of institutional positive-feedback trading

on momentum strategy. The annual risk-adjusted momentum profit
of stocks with highest institutional trading is 6% higher than the
profit of those with lowest institutional trading.
Comments:
1. Why important
We think this new factor may improve momentum factor. The
influence of institutional investors is non- negotiable. Anecdotal
evidence suggests that, to limit market impact, a large fund may
take weeks if not months to build or unload their holdings on a
stock. This continuous buying/selling activity shows that those "big
guys" are definitely playing a key role on momentum profit.
2. Data
1980 - 2005 institutional holding data are from CDA/Spectrum
Institutional 13f database. Stock data (price,
volume, etc) are from CRSP/CompuStat.
3. Discussions
In essence, the author groups stocks by whether institutions were
momentum traders on these stocks before. Specifically, the author
creates a measure, MT (stands for momentum trading) for each
stock to evaluates the level of institutional positive-feedback trading.
A higher MT indicates that in the past two years, institutions are
more likely to buy (sell) the stock when its past performance is good
(poor).
Most usual suspects in evaluating the statistic robustness are
addressed in the paper, e.g., controlling for size, BE/ME, and
turnover. As usual, a quant manager needs to apply the strategy on
their own universe before they bet money on it.
Paper Type:
Working Papers
Date:
2006-07-27
Category:
Momentum, funds
Title:
Inheriting Losers
Authors:
Li Jin and Anna Scherbina
Source:
Link:
http://www.people.hbs.edu/ascherbina/dispositionJune22006.pdf
Summary:
This paper is based on an appealing story that, when new mutual

fund managers take over portfolios, they tend to sell those
inherited stocks that have been underperforming. Consequently,
the strategy of "short inherited losers, long all momentum losers"
is shown to produce 2% risk-adjusted in 3 months following fund
manager change (8% annualized return).
Comments:
1. Why important
Mutual funds now account for 50%+ of total US stock market
value. The behavioral patterns of fund managers definitely have
an impact on stock prices. One of such patterns, the disposition
effect (unwillingness to admit ones wrong decisions and sell
losers), has been well documented. On the other hand, people
seem to have no problem in acknowledging other peoples
mistakes and sell the inherited losers. Anecdotal evidence: to
avoid such "self-pride" trap, some funds deliberately ask fund
managers to evaluate each others losing stocks.
This paper provides a study on these patterns, which in our view
may also improve momentum strategy.
2. Data
Managerial changes (1991-2004) are from Morningstar. Mutual
fund holdings data are from the Thomson Financial Spectrum
SP12 database. Stock-specific data are from CRSP.
3. Discussions
We note that the claimed profit (2% return in 3 months) is based
on equal-weighted portfolio, and the universe is all the publicly
traded stocks. Different quant managers care about different
stock universe, which could lead to a smaller profit.
For a practitioner, one concern may be that how many stocks
could be impacted by such management changes. The authors
document ~1450 such changes for the past 15 years. We could
not find the number and characteristics of stocks in the two
portfolios depicted in Figure 7 (inherited losers and all momentum
losers) - though the paper did say that a fund that undergoes
managerial change on average holds 71 stocks.
Paper Type:
Working Papers
Date:
2006-07-27
Category:
Momentum, moving average
Title:
Moving Average Ratio and Momentum
Authors:
Seung-Chan Park
Source:
2006 FMA Annual Meeting
Link:
http://www.fma.org/SLC/Papers/movingaverageSeungChanPark.pdf
Summary:
Long (short) stocks with higher (lower) ratio of the 50-day moving
average to the 200-day moving average. The holding period is next
six months. The profit is claimed to be 17% annually and is better
than momentum and the 52-week high strategy.
Comments:
1. Why important
The 50-day and 200-day moving average are widely used by
investors and can be found in almost any technical analysis
software/platform. Assuming that people actually make trade
decisions on this factor, it is not very surprising if it can predict
returns. We think this strategy may potentially improve the
conventional momentum strategy, as the author claims a better
performance.
2. Data
Stock data from the period of 1962/07 - 2004/12 are from CRSP
3. Discussions
We have some usual questions regarding this strategy:
What's the performance of this strategy in different size,
style, sector, period? The performance enlarge cap universe
will be especially interesting because that's the focus of most
quant managers and that's a place where profit is harder to
find.
This factor has shown a strong correlation with the
conventional momentum factor and also the 52-week high
factor, both of which have a volatile performance recent
years.
On a separate note, we reviewed twp related paper in past issues of
AlphaLetters.
"Simple Technical Trading Strategies: Returns, Risk and Size",
which claims that a moving- average strategy works on small cap
index
Fortune Favors the Confident: A Global Evidence of the 52-Week

High Momentum Strategy, which shows that the 52-Week High
Momentum Strategy works rather consistently in many? different
countries.
Paper Type:
Working Papers
Date:
2006-07-13
Category:
Title:
Authors:
Source:
SSRN working paper
Link:
Summary:
This paper studies "style migrants", i.e. stocks with large changes
in their style characteristics (size/book- to-market/momentum) in
the past years. Such stocks seem under-valued as they exhibit a
higher return compared with other stocks, and a higher
covariance with the style cohort.
Comments:
1. Why important
2. Data
necessary data.
3. Discussion
(size/book-to-market/momentum) can all be driven by large price
changes. Is the "high style risk" merely another name for "high
price volatility stocks"? A quant manager would also need to look
at the Sharpe ratio and recent performance (given the changing

volatility environment these past 3 years).
Paper Type:
Working Papers
Date:
2006-06-29
Category:
Strategy, accruals, momentum, anomalies overview
Title:
Dissecting Anomalies
Authors:
Source:
SSRN working paper
Link:
Summary:
In this paper, the two renowned professors review some stock

price anomalies, namely, net stock issues, accruals, momentum,
profitability, and asset growth. They conclude that some
anomalies (net stock issues, accruals, and momentum) are
pervasive, as evidenced by the back testing portfolio results and
cross-section regressions. Others (asset growth anomaly,
profitability) are less consistent.
Comments:
1. Why important
This paper is worth reading for two reasons: first, it gives an
overview of some well-studied anomalies from July 1963 up to
December 2005. Second, it offers insights in terms of how to
improve the robustness test in financial empirical research.
2. Data
The data are from CRSP and Compustat.
3. Discussions
The authors pinpoint two common problems with many empirical
research studies:
1.) The big impact of the extreme (return) values of "tiny" stocks
(defined as those with market cap below the 20th NYSE
percentile). Many existing papers compare the performances of
top and bottom segments, both of which tend to be filled with
these tiny stocks whose extreme (return) values can be
misleading.
2.) Different anomalies can be correlated. To address this issue,
the authors examine sorts of regression residuals on each
explanatory variable.
In our view, a sound robustness test should answer the following
questions:
Is the anomaly real? Is it driven by certain size, style,
sector, period (eg. internet bubble time)?
Is the anomaly new? Whats the correlation with other
existing factors?
What would be extra alpha if this new factor is added to
the existing quant model?
Paper
Type:
Working Papers
Date:
2006-06-29
Category:
Modeling, global stocks, momentum, risk
Title:
What Factors Drive Global Stock Returns?
Authors:
Kewei Hou, G. Andrew Karolyi, Bong Chan Khob
Source:
Link:
http://finance.wharton.upenn.edu/department/Seminar/2006Spring/micro-
Summary:
The authors test what factors are important for explaining stock returns in
49 various stock markets. Three factors are identified: momentum, cash
flow/price, a global market risk factor. These three factors explain
cross-section of stocks returns on stock, country and industry levels.

With investors interest in overseas stocks going up, we are seeing more
quant managers in international arena. This paper may be of help to
factor-picking in building an international stock model.
2. Data
Data of stocks in 49 countries from 1981 to 2003 period are from
DataStream International and Worldscope. Sector/Industry classifications
are based on FTSE Global Classification system.
3. Discussions
Can we improve such an all-inclusive model? Here are potential things one
can consider:
1.) Different modeling universe for different stocks some stocks are better
modeled on country-by-country basis, while some may be on sector-basis
(eg markets where there is cross-border integration (like EU)).
Practitioners need to judge what the best modeling universes are.
2.) Different factors for different stocks
The difference can be significant. Sector-based models are promising in our
view. Country-based models may also be feasible, now that the paper
shows a different (stronger) impact of B/M, momentum, cash flow/price in
developed countries than emerging market.
3.) A "contemporary" model
It should best reflect the current situation, as opposed to a model that is
statistically significant based on a 20-year history. After all, practitioners
want to predict what will happen next quarter.
4.) Adding extra factors, such as liquidity as mentioned in the paper.
Paper Type:
Working Papers
Date:
2006-06-29
Category:
Strategy, Momentum
Title:
The vanishing abnormal returns of momentum strategies and

front-running momentum strategies
Authors:
Thomas Henker, Martin Martens and Robert Huynh
Source:
Link:
http://www.fma.org/SLC/Papers/Frontrunning_FMA06.pdf
Summary:
This paper proposes a 'front-running momentum strategy where

portfolios are formed one week prior to the end of month, as
opposed to the traditional month-end methodology. This strategy
generates comparable returns, but is consistently less volatile.
Comments:
1. Why important
We do not know whether this 'front-running' strategy is solid, and
we know that many quant managers are not basing their
momentum strategies on month-end stock prices. But this paper
may well show us a new way to improve momentum strategy, if

we consider the following two pieces of information:
1.) Many have read papers on the calendar effects of stock
returns, particularly the turn-of-the month effect, where
returns/volatility are higher on the last trading day (e.g., Cadsby
and Ratner (1992) "Turn-of-Month and Pre-Holiday effects on
Stock Returns: Some International Evidence," Journal of Banking
and Finance, 16, 497-509).
2.) Generally people use past
n
-month return as momentum
measure, hoping that this return can be indicative of the
performance of stock prices for the past
n
months. In reality this
return number is inevitably noisy due to stock price volatility. We
can potentially device new ways to calculate a more indicative
momentum measure.
What we learned from this paper is that we may improve
momentum strategy by avoiding using high volatility dates as
beginning or ending dates. One potential way is to calculate
return by comparing the average prices of multiple days (adjust
for dividends of course), as opposed to using prices on one single
beginning and ending date. Another improvement we have seen
is to scale momentum factor by stock price volatility.
Paper Type:
Working Papers
Date:
2006-06-15
Category:
Strategy, trader composition, momentum, earnings, value
Title:
Trader Composition and the Cross-Section of Stock Returns
Authors:
Tao Shu
Source:
SSRN working paper
Link:
Summary:
This paper proposes a measure to estimate a stocks trader

composition (ie, how much trading is generated by retail
investors vs. institution investors), based on the fraction of
institutional trading volume (FIT) in the total trading volume. The
author claims and empirically confirms that stock mis-pricing
anomalies (momentum, value, earning surprise) are stronger in

the stocks with low FIT. The behavioral theory is that institutions
are better informed and their trades correct stock mis-pricing.
Comments:
1. Why important
We think this new FIT measure may potentially improve the
institution ownership breadth measure, and may also help
practitioners refine existing momentum and value strategies. One
insight we learnt from this paper is that "trader composition
could have stronger impact on stock market than does
shareholder composition, because trading stocks is a much more
effective way to move stock prices than holding stocks." This
claim is supported by the empirical finding that trader
composition predicts market anomalies better than does
institutional ownership.
2. Data
Quarterly institutional data is from the CDA/Spectrum
Institutional (13f) database. Stock data are from
CRSP/COMPUSTAT. Analyst coverage data are from IBES.
3. Discussions
We think that the impact of FIT on existing mis-pricing anomalies
should be studied in a setting where FIT is at least size-adjusted.
This is because FIT shows a close relationship with size and the
old institution ownership breadth. For this reason, we question
the validity of the authors conclusion since the impact of FIT on
anomalies is intertwined with size effect.
We do not necessarily agree with the authors discussion on the
impact of investors inertia on stock return. The auto-correlation
in traders composition shows that collectively there are little net
trade between institutions and individuals, but not necessarily
less trade volume. If anything, many previous researches has
shown that the investors are too active, and their frequent
trading has cost them dearly.
Is the authors behavioral theory a sound one? The notion that
institutions are more sophisticated and their trades can correct
market mis-pricing is also inviting questions. At least for US large
cap stocks, institution managers on average are proven not able
to add value.
Paper Type:
Working papers
Date:
2006-06-07
Category:
Short-term momentum, reversal, novel strategy, news
Title:
Does Public Financial News Resolve Asymmetric Information?
Authors:
Paul C. Tetlock
Source:
WFA 2009 program
Link:
Summary:
This paper shows that news and trading volumes can help
predicting short term (10day) momentum/reversals
Less
reversal
for news-driven daily returns that are accompanied
by high volume
News matters for predicting reversal
If day-0 return is associated with news release, it is
less likely to reverse on days 2-10
Specifically, 10-day reversals of daily returns are
38% lower on news days
Volume matters
If news stories are associated with higher volume
on news day, then there is even less of a reversal
Intuition: news resolve asymmetric information, thus
prices do not reverse subsequently
For smaller stocks, 10-day momentum exists only for
news-driven returns accompanied by high volume
Reason: the high daily returns with high volume suggest
the news is indeed reflect new information for the stock,
and public will "catch on" following the announcement,
leading to momentum in returns
News is important for small firms momentum, because for
large firms more alternative information sources exist
Less news, less correlation between abnormal returns and
abnormal turnover
Such correlation declines by 35% in the 10 days after firm
news
Returns and volume are more highly correlated on news
days than no-news days, especially on earnings
announcement days
Turnover falls following the announcement which reduces
information asymmetry among the trading public
Methodology
Cross-sectional Fama-MacBeth style daily regressions to
control for risk factors
Parameter estimates are obtained from the time series
averages from these regressions
Data
The Dow Jones (DJ) news archive, which contains all DJ
News service and all Wall Street Journal (WSJ) stories
from 1979 to 2007
Additional data: returns and volume (CRSP), accounting

(CompuStat), analyst forecast (IBES), institutional
holdings (Thomson 13f), and stock transaction data (TAQ)
Comments:
Paper Type:
Working papers
Date:
2006-06-07
Category:
Title:
Authors:
Paul C. Tetlock
Source:
WFA 2009 program
Link:
Summary:
Less
reversal
by high volume
Volume matters
abnormal turnover

news
announcement days
Methodology
Data
from 1979 to 2007
Paper Type:
Working Papers
Date:
2006-05-05
Category:
Strategy, momentum
Title:
Do Momentum Strategies Generate Profits In Emerging Stock

Markets?
Authors:
Jorge L Urrutia, Joseph D Vu
Source:
2005 European Financial Management Association meeting paper
Link:
http://www.efmaefm.org/efma2005/papers/269-vu_paper.pdf
Summary:
This paper empirically test whether momentum strategies worked

on national stock indices of emerging
markets of Africa, Asia, Europe, Latin America, and the Middle
East. The authors find larger momentum
profit for emerging markets than for developed markets, and also
find higher profit in the pre-market
liberalization period than in the post liberalization period.
Comments:
1. Why important
With the extraordinary performance of emerging market in 2005,
many investors start to consider more a diversified asset
allocation and shift money to emerging markets. In this
perspective, this paper offers valuable insights on the
performances of one of the most widely used strategy.
2. Data source
The weekly equity market index returns for 48 countries are from
the Global Financial Data service.
3. Discussions
We note that this paper adds to the international momentum
evidences documented in the papers of Rouwenhorst (1997,
1999, which reports statistically significant profits momentum in
12 European markets as well as 20 emerging markets), and
Chan, Hameed, and Tong (2000, which reports the profits of
4-week
momentum on 23 international equity market indices). An
important difference is that the Rouwenhorst papers are based on
stocks portfolios, while this paper and Chan, Hameed, and Tong
(2000) are based on stock market indices.
The relatively low momentum profits, high turnover of this
strategy and higher transaction cost invite the question of
whether momentum will be profitable in reality. Also the time
span is just 1/2/1987 to 12/31/2001 - practitioners definitely
need study recent performance.
Paper Type:
Working Papers
Date:
2006-03-22
Category:
Novel strategy, momentum, innovation index
Title:
Corporate Innovation, Price Momentum, and Equity Returns
Authors:
Maria Vassalou, Kodjo Apedjinou
Source:
Columbia working paper
Link:
http://www2.gsb.columbia.edu/faculty/mvassalou/CI7.pdf
Summary:
Long stocks with high corporate in ovation index (CI, defined as
the proportion of a firms change in gross profit margin not

explained by the change in the capital and labor), short
otherwise. The profit is shown to be over 10% annually.
Comments:
1. Why important
In theory stock prices are driven by earnings, which in turn are
(at least partially) driven by firms product margin and how in
ovative the companys products are. This paper is interesting
because its one of the first to directly test the impact of
innovativeness on stocks returns, and the empirical test results
certainly look encouraging.
2. Data
Prices, returns and accounting data are from CRSP/COMPUSTAT.
3. Next steps
The correlation with momentum strategy is a concern in
implementation. We do notice that however, within CI-sorted
quintiles, price momentum is still profitable if performed using
high CI stocks. The authors also show that that this strategy has
low correlation with earnings-based strategies.
We would like to see a test at the performance within and cross
value/growth stocks. Growing companies tend to be more
innovative (ie, higher CI), and we know that value has
outperformed for a long time. A two-way sort should offer more
insight.
Paper Type:
Working Papers
Date:
2006-03-09
Category:
Trading cost, momentum, volatility
Title:
Market Impact Costs of Institutional Equity Trades
Authors:
Jacob A. Bikkera, Laura Spierdijkb, Pieter Jelle van der Sluis
Source:
University of Twente working paper
Link:
http://wwwhome.math.utwente.nl/~spierdijkl/marketimpact.pdf
Summary:
This article presents market impact costs of Q1, 2002 equity

trading by ABP, a top 5 largest pension funds in the world. It also
shows a significant impact of momentum, volatility as well as
timing of trades.
Comments:
1. Why important
We think this is a valuable study for portfolio managers given its
useful information of world-wide equity trades of a large investor.
People may trade in a completely different market and trade in
different sizes, but the insights from the paper should be com on:
an asymmetric market impact (higher impact for sell than buy),
funds cost much higher than the market impact, spread out of
trades lowers market impact but increases impact volatility.
2. Next steps
We are not sure how applicable the trade day study (trading cost
analysis on Monday, Tuesday, January, February, etc.) is to other
managers. Rather we believe this maybe specific to that specific
period (Q1 of 2002), and a more relevant study should how the
market trading volume and liquidity impact the trading cost.
Paper Type:
Working Papers
Date:
2006-02-23
Category:
Strategy, momentum, value
Title:
Firm-Specific Attributes and the Cross-Section of Momentum
Authors:
Jacob S. Sagi, Mark S. Seasholes
Source:
Link:
http://faculty.haas.berkeley.edu/sagi/momentum_vC20_all.pdf
Summary:
Long companies with high momentum and high revenue growth

volatility, low cost of goods sold/total assets and price/book, and
short otherwise. This strategy is shown to outperform traditional
momentum strategy by 5% annually.
Comments:
1. Why important
Ask any quant portfolio manager and they will tell you they use
value and momentum. This paper is important since it may
improve the widely-used momentum strategy. Using accounting
data is a smart way to differentiate good/bad momentum stocks.
2. Data sources
Data are from CRSP/Compustat
3. Next steps
Of the three firm-specific factors (revenue volatility, cost of goods
sold/total assets, and price/book), price/book seems to make
most intuitive sense. In other words, momentum works better in
growth stocks. Revenue volatility is a bit puzzling - its obviously
correlated with stock price volatility. So one would expect lower
momentum profit for high volatility stocks, for which past return
is less informative (i.e., a high past return more likely to be
caused by chance) compared with a more stable stock.
In our view there are two challenges to improve momentum
strategy:
a.) whats the relationship between momentum profit and market
macro indicators (like market return), and how do we devise the
strategy to minimize such correlation.
b.) how to identify/avoid high momentum stocks that will reverse
themselves, i.e., those glamorous stars that experienced price
rally but eventually fall. It would be interesting to test whether
certain financial health indicators (leverage, debt coverage,
over-investment spending, etc) will take this old strategy further.
Paper
Type:
Working papers
Date:
0000-00-00
Categor
y:
Momentum, consumer/producer countries
Title:
Trade Credit and International Return Comovement
Authors: Rui Albuquerque, Tarun Ramadorai and Sumudu W. Watugala

Source:
Darden working paper
Link:
http://forms.darden.virginia.edu/emUpload/uploaded/tradecredit01november2
010_total.pdf
Summar
y:
Exporting (ie, Producer) countries stock returns can be predicted using their
firm level trade credit and their consumer countries stock returns. A stock
selection strategy (note not necessarily a country selection strategy) that sort
stocks by consumer country returns and trade-credit generates 12-15%
annualized risk-adjusted returns
Identify producer and consumer countries using trade flows data
Countries are classified as producers or consumers
Producer countries are those with 20%+ of GDP in exports
The associated consumers are those consuming 5% or more of
the producers exports in any given year
Trade flows data are from the IMF Direction of Trade Statistics
and the IMF World Economic Outlook Database
In total there are 33 producer countries and 42 consumer countries
Measuring stocks sensitivity to consumer country with three firm-level
trade-credit factors
Accounts receivable turnover = "accounts receivable" / "total
sales"
Accounts payable turnover= "accounts payable" / "the costs of
goods sold"
Net trade credit = (Accounts receivable turnover - Accounts
payable turnover) / "total assets"
Constructing portfolios based on consumer country returns and trade-credit
Step1: Sort consumer countries into terciles based on their prior month
stock index performance
Step2: For each consumer country within each tercile, sort all stocks of
each associated producer countries by the three trade credit measures
Step3: Calculate value-weighted returns for stocks with higher/lower
than the median trade credit measure
When consumer country suffer, higher trade credit means lower return
For those with consumer countries in the lowest return tercile, low net
trade credit predicts higher returns (0.5% per month), and high net
trade credit predicts lower returns (0.1% per month)
A hedge portfolio for stocks with lowest tercile consumer country
return, generates statistically significant 7.7% - 8.3% annually (Table
III), even higher when it is risk-adjusted
No significant pattern found for stocks whose consumer countries have
top tercile of returns
Accounts receivables measure works better than accounts payables
Double sort on customer return and trade credit works best
Long high trade credit firms with highest consumer returns, and short
high trade credit firms with lowest consumer returns
Such portfolio generates 12% annually risk adjusted returns (Table III)
Similar patterns confirms when using Panel regression (Table VI)
Related studies
Country selection strategy: An earlier study we reviewed,
Predictable
Trade Flows and Returns of Trade-Linked Countries

, show that at the
country index level, countries with high consumer returns generate
8.4% higher returns than those with low consumer returns
Similarly,
Return Predictability along the Supply Chain: The
International Evidence
and
Economic Links and Predictable Returns
documents profitability of trading strategies using customer stocks

returns
Another study we reviewed,
Complicated firms
shows that returns of

multi-sector firms can be forecast by the returns of pureplay firms
which operate in single sector only
Concerns
High turnover: this strategy is essentially a momentum strategy
Data
January 1993 to March 2009 trade flows data are from the IMF
Direction of Trade Statistics and the IMF World Economic Outlook
Database
Only covers stocks with general industry classification in Worldscope:
consumer goods and services, health care, industrials, oil and gas,
technology, telecommunications and utilities
Stock price and accounting data for all stocks in the producer countries
are from Worldscope and Datastream

Paper Type:
Working Papers
Date:
2015-05-03
Category:
Novel strategy, S&P 500, Volatility Risk Premium
Title:
Timing (And Trading) Implied Volatility
Authors:
Trading The Odds
Source:
Trading The Odds blog
Link:
http://www.tradingtheodds.com/2015/01/timing-and-trading-imp
lied-volatility/
Summary:
A three-day and 10-day mean reversion VIX strategy yields

significant returns
Five strategies evaluated
(1) VIX with 10d EMA vs. 10d SMA: blue line
(2) VIX with 3d EMA vs. 10d SMA: grey line
(3) VIX before 1/1/2008, VXMT after 1/1/2008 with 3d EMA
vs. 10d SMA: red line
(4) 120% of VIX | 20% of VXMT with 3d EMA vs. 10d
SMA: black line
(5) 120% of VIX | -20% of (VIX + 10%) with 3d EMA vs.
10d SMA: green line
The 10-day EMA | 10-day SMA mean reversion strategy
can be boosted by utilizing a 3-day EMA instead of a
10-day EMA (grey line)
Even better works a mixture of 120% VIX minus 20% of
VXMT, regularly (artificially) reducing the index value
(black line)
Source: the paper

VIX trading is more about limiting loss
Note that the curves below shows the respective
Summation Index, getting an index move right: +1 ;
getting it wrong: -1
The red line has been winning small and losing big, though
the number of winning rates are similar to others
VIX trading is less about the percentage of being right or
wrong (means getting the direction right), but all about
magnitude of winning/losing trades (effectiveness)
Source: the paper
Paper Type:
Working Papers
Date:
2015-03-26
Category:
Novel strategy, Short-interest
Title:
Days to Cover and Stock Returns
Authors:
Harrison Hong, Weikai Li, Sophie Ni and Jose Scheinkman

examine
Source:
SSRN
Link:
Summary:
Days-to-cover short interest (DTC) predict stock returns, better
than the widely used short interest ratio (SR)

Other things equal, short-sellers prefer shorting stocks
with low DTC, so that they can close short positions
quickly
When DTC is high, it takes longer time to recover the
short position
Hence DTC is a sign that short sellers believe strongly that
the stock is overpriced
Define DTC = monthly short interest / same-month
average daily share turnover
Define short interest ratio (SR) = shares shorted /
shares outstanding
DTC is not SR: early in the sample period, the correlation
of monthly SR and DTC is 0.3, rising to 0.5 after 2000
Each month long (short) the equally weighted or
value-weighted 10% stocks with the lowest (highest) DTC
or SR
DTC better predicts than SR
Higher hedged returns: an equal-weighted hedge portfolio
based on DTC generates a monthly return of 1.19% (vs
0.71% when using SR), for value weighting its 0.67% (vs
0.29% when using SR) (Table 3)
Higher Sharpe Ratio: the annualized Sharpe ratio for the
equally weighted DTC (SR) hedge portfolio is 1.3 (0.5)
(Table 3)
Same pattern in most years: DTC better predicts than SR
in 20 of 25 years. DTC (SR) portfolio yields positive
returns in 23 (17) of 25 years (Figure 6)
Same pattern in sub-periods: the equally weighted DTC
hedge portfolio outperforms SR by 0.37% (0.53%) per
month in the first (second) half of the sample period
(Table 4)
Works better post-2000: SR has been weak and
insignificant, whereas DTC remains statistically significant
Not subsumed by stock loan fee: Since 2003, DTC is as
powerful a stock return predictor as stock loan fee, but is
distinct from it
Robust to stock illiquidity
However, DTV suffered loss in 2008 due to the ban on
shorting financial stocks
Source: the paper

Data
1988 - 2012 monthly returns, short interest, shares
outstanding, turnover, stock loan fees, stock/firm
characteristics and institutional ownership and daily
trading volumes are from CRSP
Paper Type:
Working Papers
Date:
2015-03-26
Category:
Novel strategy, seasonality, FOMC cycles
Title:
FOMC Cycle Trading Strategy in Quantstrat
Authors:
Return and Risk blog
Source:
Return and Risk blog
Link:
http://www.returnandrisk.com/2015/03/fomc-cycle-trading-strategy-in.
html
Summary:
The FOMC cycle strategy, which buys the SPY on even weeks (weeks 0,
2, 4, 6) and holds for 5 calendar days, generates 30% higher Sharpe
Ratio after assuming 5 basis points (0.05%) in execution costs
Background
FOMC
AlphaLetters reviewed Stock Returns over the FOMC Cycle

(http://faculty.haas.berkeley.edu/vissing/CieslakMorseVissing.pd
f)
Over the last 20 years, the returns of stocks in excess of bonds
were earned entirely in weeks 0, 2, 4 and 6 in FOMC cycle time,
with week 0 starting the day before a scheduled FOMC
announcement day
A strategy of holding stocks only in these weeks yields an annual
excess return of 11.58%
This study backtests a trading strategy from 1994 to March 2015
before and after trading cost
cycle pattern confirmed
The chart below clearly show the bi-weekly pattern over the
FOMC Cycle
This is based on calendar weekdays (i.e. day count includes
holidays), with week 0 starting one day before a scheduled FOMC
announcement day (i.e. on day -1)
Economic Significance
Backtest a long only strategy that buys the SPY on even weeks
(weeks 0, 2, 4, 6) and holds for 5 calendar days only, and
compare it to a buy and hold strategy
Assume 5 basis points in execution costs (including commission

and slippage)
Below is the FOMC strategy before and after transaction cost (the
lower graph is drawdowns)
Before transaction costs, this strategy ourperformed 2% annually

relative to index, with a 30% lower volatility and 70% higher
Sharpe ratio (0.82 vs 0.47)
After 0.05% in execution costs, the strategy underperform index
by 0.60% annually (9.15% to 8.55%), with a 30% higher Sharpe
ratio (0.62 vs 0.47)
Data
This study uses 1994 to 2015 S&P500 ETF (SPY) data during the
FOMC dates
Paper
Type:
Working Papers
Date:
2015-03-26
Catego
ry:
Novel strategy, momentum, absolute returns
Title:
Absolute Strength: Exploring Momentum in Stock Returns
Author
s:
Huseyin Gulen and Ralitsa Petkova
Source
:
Purdue University
Link:
http://finance.bwl.uni-mannheim.de/fileadmin/files/areafinance/files/FSS_2015
/Petkova_2015_AbsoluteStrengthMomentum.pdf
Summ
ary:
Stocks with higher returns relative to historic range outperform. A strategy that
buys(sells) stocks with significantly positive(negative) returns over the previous
year generates a monthly risk-adjusted return of 1.51% between 2000 - 2014
Intuition
Traditional relative momentum ranks stocks based on relative returns
Sometimes stocks with negative returns maybe classified as
winner stocks
Though such stocks did not experience a large positive move
Absolute strength momentum tries to identify stocks with most
positive/negative returns (instead of relatively higher/lower returns)
The break points are determined using the historic range
For example, at the beginning of January, rank all stocks on the basis of
the historical distribution of January to November cumulative returns
10% of the historical distribution, it is classified as an absolute winner
(loser)
Intuitively, an absolute winner is a stock that has done well over the
recent 11 months according to the historical range
Note that by construction, there may be instances in which none of the
stocks meet the criteria to be defined as absolute winners or losers
Portfolio formation
Each month t, compute the cumulative returns of all stocks over the
period t-12 to t-2
Compare these to all previous non-overlapping 11-month cumulative

returns
10% of the historical distribution, the stock is classified as an absolute
winner (loser)
Go long in absolute winners and short absolute losers
Hold for month t, rebalance monthly
Switch to risk-free asset if there are less than 30 stocks in either
portfolio
Absolute strength momentum outperforms relative strength momentum
Absolute
Strength
Momentum
Relative
Strength
Momentum
196
5201
4
20
00
20
14
196
5201
4
20
00
20
14
Loser
s
-0.3
8%
-0.
81
%
-0.
25
%
0.
01
%
Winn
ers
1.74
%
0.
69
%
1.6
0%
0.
76
%
Winn
ers Loser
s
2.16
%
1.
51
%
1.8
5%
0.
75
%
Source: The Paper

Absolute strength momentum subsumes relative strength and time
series momentum strategies; the reverse does not hold (Tables 3, 5)
Much better drawdown relative to the classic momentum strategy
Source: the paper

Data
1965 2014 U.S. stock data from CRSP
Paper Type:
Working Papers
Date:
2015-02-17
Category:
Novel strategy, size, quality
Title:
Size Matters, if You Control Your Junk
Authors:
Clifford S. Asness, Andrea Frazzini, Ronen Israel, Tobias J.

Moskowitz, and Lasse Heje Pedersen
Source:
SSRN Paper
Link:
Summary:
On average, size factor is weak. But after controlling for the

quality factor, size premium is strong and on roughly equal
footing with value and momentum Background
Size factor (SMB) is suffering from these observations:
Weak returns in the U.S.: from 1926 - 2012, the
average month gross return spread between
small-big deciles is 0.55% (Table 1)
Not consistent: did not work during 1980 - 1999
(Table 1)
Only works within small stocks (Figure 3)

Only works in January: SMB in January are 2.3%
per month and the 1-10 spread in size decile
returns is 6.8%. In February through December
SMB delivers only 0.04% and the 1-10 portfolio
spread -1 basis point (Table 1)
Is subsumed by illiquidity: in regression, when
adding the liquidity risk variables to size, the alpha
declines to 6 bps with a t-stat of 0.42 (Table 5)
Is weak internationally
Why adding quality may improve size: stocks with very
low quality are typically very small, have low average
returns, and are distressed and illiquid
This negative size-quality relationship largely
explains unfavorable findings for the size effect
Quality (QMJ) is defined using a profitability, profit growth,
safety and payout
Ranking stocks into value-weighted tenths (deciles) each
month
Value weight portfolio and reconstructed every month
Significant size premium after controlling for quality
Significant premium: in regression, SMBs alpha jumps
from 14 to 49 bps per month (t-stat = 4.89) (Table 2)
Source: the paper

QMJ helped in every single industry (Figure 2)
Stable over time: even during 1980 to 1999 when SMB did
not work, adding QMJ restores SMBs positive alpha to a
robust and sizeable 50 bps (t-stat of 3.06) (Table 2)
QMJ helped in 9 out of 10 size deciles
Source: the paper

Worked in non-January months: adding QMJ to the
regression delivers a positive and significant size premium
outside of January of 38 bps (t-stat = 3.62)
Worked in international markets: increase in SMB alpha for
23 out of 24 countries once controlling for QMJ (Figure 7)
Data
Covers US stocks from July 1957 through December 2012,
and stocks in 23 other
developed country during January 1983 through December
2012
Data are from CRSP tapes and the XpressFeed Global
database
Paper
Type:
Working Papers
Date:
2015-02-17
Category: Novel strategy, non-investment grade bond prices, post-announcement

returns
Title:
Can the Bond Price Reaction to Earnings Announcements Predict Future

Stock Returns?
Authors:
Omri Even-Tov
Source:
UCLA Anderson School of Management
Link:
http://www.gsb.stanford.edu/sites/default/files/documents/Even%20Tov_JM
P.pdf
Summary
:
Bond price reacts to stock earnings announcements. For non-investment

grade firms, a long-short trading strategy based on bond price reaction
generates a 4%+ market-adjusted return for the 60-day period after
earnings announcements
Intuition
Since earnings announcements provide information about the value of
firms assets, both bond and stock prices should react
The bond market is more heavily dominated by sophisticated
investors
Therefore, bond prices may incorporate earnings news more
efficiently than do stock prices
Bond price reaction to quarterly earnings announcement,
Bondiq(-1,1), is calculated as the average of the cumulative returns of
the firms bonds over the three-day announcement window
The cumulative post-announcement stock return is measured over the
period beginning two trading days after the earnings announcement
and ending 60 trading days later
A firm with at least one non-investment grade bond is referred to as a
non-investment grade firm
Level of sophisticated trading in a firms stock is proxied by the
fraction of shares held by institutional investors
Level of sophisticated trading in a firms bond is proxied by the
fraction of bond trades that have a par value of at least $1 million
(during the earnings announcement window)
Portfolio formation
Sort stocks into quintiles based on the bond price reaction to earnings
announcement
Go long into stocks in the highest quintile and short stocks in the
lowest quintile
Hold for the 60-day post-announcement period
Strategy generates 4%+ market-adjusted return during the 60-day period
Quintil
e bond
price
reactio
n
1
(Low)
Cumulative market-adjusted 30-day return %
All bonds
Non-inves
tment
grade
firms
Investment
grade firms
-0.32
-1.15
0.34
Data
5
(High)
1.65
3.00
0.64
High Low
1.97
4.15
0.3
The predictive power is:

Incremental to that of accruals and unexpected earnings
(Table 4)
Stronger for non-investment grade firms (Table 6)
Stronger the lesser the presence of sophisticated stock
investors (Table 7)
Stronger the greater the dominance of sophisticated traders in
the trading of a firms bonds (Table 8)
Still significant after including a range of controls or excluding
2008 2009 (Tables 4, 5, 6)
Bond-specific data from the Mergent Fixed Income Securities (FISD)
database
Bond returns from TRACE database
(CRSP)
U.S. firm accounting data from Compustat
Data range: January 2005 December 2012
Pap
er
Typ
e:
Working Papers
Dat
e:
2015-01-16
Cat
ego
ry:
Novel strategy, Profitability momentum
Titl
e:
The Trend in Firm Profitability and the Cross Section of Stock Returns
Aut
hor
s:
Ferhat Akbas, Chao Jiang, Paul Koch
Sou
SSRN working paper
rce:
Lin
k:
Su
Firm gross profitability trend, or gross profitability momentum, predicts stock
mm returns
ary: Definitions and statistics
Quarterly gross profit = (sales cost of goods sold) / total assets
Profitability is the average gross profit over the past eight quarters
Trend in profitability is the linear slope over the past eight quarters
On average, the average level of profitability is 10%
On average no trend: The average trend in profitability is -2.2% to +2.9%
per quarter
The average correlation between level of and trend in profitability is slightly
negative
Profitability trend predicts gross stock returns
Each month long (short) the 10% stocks with the highest (lowest)
profitability trends
Skip-month between portfolio formation and holding period
The average gross next-month return of 0.83% (Table 3)
For large (small) stocks, hedge portfolio average gross monthly return is
0.34% (0.89%) (Table 3)
The four-factor (market, size, book-to-market, momentum) adjusted alpha
is 0.64% (Table 3)
Predicts over the next eight quarters: with no subsequent return reversal
over the ensuing three years
Robustness: the effect is robust to alternative measures of profitability, size,
book-to-market ratio, momentum, return volatility, volatility of profitability,
earnings momentum,
Source: the paper Profitability trend is not subsumed by profitability level

Controlling for profitability trend, stocks with high profitability levels
outperform those with low profitability levels by up to 0.73% per month
(Table 3)
Data
Controlling for profitability level, stocks with high profitability trends

outperform those with low profitability trends by up to 0.85% per month
(Table 3)
A broad sample of U.S. common stocks during January 1977 through
December 2012
Paper Type:
Working Papers
Date:
2014-12-03
Category:
Novel strategy, seasonality, school holidays, large-cap stocks
Title:
School Holidays and Stock Market Seasonality
Authors:
Lily H. Fang , Melissa Lin , Yuping Shao
Source:
SSRN
Link:
Summary:
Globally, market returns are 0.5% - 1% lower in the month after

major school holidays. This is due to the market being collectively
less attentive during holidays, and (negative) news is slowly
incorporated into prices
Lower returns after major school holidays
Define major school holidays as those longer than 2
weeks. E.g., US has three major holidays: summer,
winter, and spring
Strong September effect: for many countries, the
difference between September and other months is
significantly negative (Table 1)
Weak January effect: for the US, the average difference
between January and other month is 0.53%, and not
statistically significant. (Table 2)
Lower returns after school holidays: in 47 countries,
returns during the month after major school holidays are
1.1% lower than other month, with a t-stat of 9.61. (Table
3)
Robustness
Not driven by September alone: even after excluding
September, the after-holiday month returns are still 0.6%
lower than other times (Table 4)
Irregular holidays in some south states in the US: some
states in the south have school years that begin in early
August. For stocks headquartered in these states, it is

August, rather than September, that exhibit particularly
low returns. (Table 4)
Irregular holidays in France and Chinese New Year
holidays. E.g., CNY holiday is shorter than 2 weeks but
holds paramount cultural importance to ethnic Chinese.
Market return in Hong Kong, Singapore, China, and Taiwan
are 2% lower after the festival than other times (Table 5,
6)
Stronger patterns in large stocks and bad-news stocks
The effect is stronger among larger stocks and stocks with
higher institutional holdings. (Table 13)
Opposite pattern found for small stocks
Stronger pattern among stocks that release bad news
during holidays: good news stocks yields after-holiday
return of 0.286% (significantly positive), and the bad
news stocks have monthly after-holiday return of -0.13%
(insignificantly different from zero), the nonews group
have an average monthly after-holiday return of 2.75%
(Table 11)
Not driven by seasonality in macro factors or earnings:
such as industrial production, unemployment, and
consumption growth, monetary conditions such as
inflation, shortterm interest rate (3-month T-bill rate), etc.
( Table 7)
Likely caused by investors inattention
Lower trading volume for institutional investors after
school holidays
During holidays, abnormal institutional buys, sells, and
short selling around earnings announcements are 8%,
14%, and 18% lower than other times (Table 9, Panel A)
Data
US data is from CRSP and covers the period
1/1926-12/2012
International data is from MSCI Total Return Index and
covers 1/1970-12/2012
Pape
r
Type
:
Working Papers
Date: 2014-12-03
Cate
Novel strategy, momentum, short-sell levels
gory:
Title: Crowded Trades, Short Covering, and Momentum Crashes
Auth
ors:
Philip Yan
Sour
ce:
Link:
http://dataspace.princeton.edu/jspui/bitstream/88435/dsp01j098zb26x/1/Yan_pri
nceton_0181D_10916.pdf
Sum
mary
:
Momentum crashes can be alleviated by shorting only non crowded loser stocks
Intuition
Momentum crashes. E.g., momentum portfolio formed on March 2009 lost
66% over just a two month period
Most of the crashes occur when market recovers from bear markets, when
the losing stocks bounce back more than winning stocks
Hence, momentum crashes may be alleviated by shorting only those loser
stocks that are less crowded. E.g., those stocks that have been sold by
institutional investors
When stock is crowded-shorts, short covering increases significantly by
0.155% of total shares outstanding in the next month (Column (2) of
Table 1.6)
No crowd-ness in futures, so no crash: using a set of 63 futures contracts,
momentum crashes do not exist in futures market after market exposure
is hedged
The other way to improve is to hedge market exposures
Definitions and portfolio construction
SIR = (shared shorted) / (# shares outstanding)
EXIT= (# of shares completely liquidated by institutional investors in the
past quarter) / (# shares outstanding)
A crowded loser portfolio consists of loser stocks having top 20th
percentile SIRi,t1 and top 20th percentile EXITi,t1, in addition to the
classic winner stocks
A non-crowded loser portfolio consists of loser stocks with top 20th
percentile SIRi,t1 and bottom 80th percentile EXITi,t1, in addition to
the classic winner stocks
Intuitively, institutional investors have already sold and are already
shorting those crowded loser stocks
Better return and lower risks for non-crowded portfolio
Non-crowded strategy yields much higher return, comparable volatility and

much higher Sharpe Ratio
Hedging out market exposure improved performance for all strategies both
before and post 2001 period
The non-crowded portfolio outperformed the baseline slightly before 2000,
and substantially outperformed the baseline post 2001 even before the
crash in 2009
Source: the paper

Smaller drawdown: non-crowded hedged strategy has a drawdown of
-24.57% vs -45% of crowded hedged strategy (Table 1.3)
No crash pattern in futures momentum strategy
Momentum in futures market should suffer less from crashes, because no
short covering in the futures market
Futures momentum displays comparable (if not better) average return,
volatility and Sharpe ratios
Compared with stock momentum strategies, the hedged futures strategy
has a significantly better skewness of positive 1.27 compared to the
hedged baseline in equity of negative -0.88( Table 1.7)
Data
January 1980 to September 2012 data on daily and monthly stock returns
are from CRSP/Compustat
Quarterly data on institutional holdings is obtained from the Thompson
Reuters Institutional 13F Holdings
Monthly short interest data for NYSE, NYSE MKT, and NASDAQ stocks is
obtained from COMPUSTAT and Bloomberg
January 1981 to June 2013 28 commodity futures, 6 bond futures, 10
currency futures, and 19 index futures, a total of 63 futures contracts
obtained from Bloomberg
Paper Type:
Working Papers
Date:
2014-12-03
Category:
Title:
Trading The S&P 500 Index (via Implied vs. Historical Volatility)
Authors:
Trading The Odds
Source:
Link:
http://www.tradingtheodds.com/2014/11/trading-the-sp-500-ind
ex-via-implied-vs-historical-volatility/
Summary:
An improved Volatility Risk Premium (VRP) strategy yields

significant returns with Sharpe Ratio of 1.6 during 2003-2014
When no leveraged used, VRP strategy with 2-day historical
volatility (HV) yields best results
Three Volatility Risk Premium (VRP) Strategies
DDN VRP strategy: Long S&P 500 when 5-day
average of [VIX (10 -day historical volatility of
SPY * 100)] > 0, Short S&P 500 when 5-day
average of [VIX (10 -day historical volatility of
SPY * 100)] < 0
VRP strategy with 2-day HV: Long S&P 500 when
5-day average of [ VXMT ( 2-day historical
volatility of S&P 500 * 100)] > 0, Short S&P 500
when 5-day average of [ VXMT ( 2-day historical
volatility of S&P 500 * 100)] < 0
Benchmark is S&P 500
Hold until a change in position
VRP strategy with 2-day HV yields best results, with
Sharpe Ratio 1.05 and -30% drawdown
From 3/25/2004 to 09/2008, all strategies were close
Most outperformance occurs mostly during the 2009
financial crisis periods
DDNs VRP Strategy flattened out 1.5 year ago, due to a
subpar 10-day historical volatility
Source: the paper

In a leveraged version, the VRP (trading VXX and XIV) works best
Note the graph below show equity curves that have been
leveraged by factor of four
Four strategies tested
VRP (trading VXX and XIV) - VXMT index version
with a 2-day historical volatility - (black line)
VRP (trading the S&P 500 index, in combination
with the S&P 500 2-day RSI): Long S&P 500 when
[ 5-day average of [VXMT - (2-day historical
volatility of S&P 500 * 100)]> 0 OR S&P 500
RSI(2-day) < 1 ] AND S&P 500 RSI(2-day) < 95,
Short S&P 500 otherwise (blue line)
VRP (trading the S&P 500 index) - VXMT index ve
with a 2-day historical volatility (red line)
VRP (trading VXX and XIV) yields Sharpe Ratio of 1.6, but
with a high drawdown of 46% (Image IV)
Source: the paper
Paper
Type:
Working Papers
Date:
2014-09-02
Categor
y:
Novel strategy, earnings announcement timing
Title:
Time Will Tell: Information in the Timing of Scheduled Earnings News
Authors
:
Eric C. So
Source:
SSRN Papers
Link:
Summa
ry:
Firm-initiated revisions in expected earnings announcement dates predict

firms future earnings news and returns. A strategy of buying (selling) stocks
that advanced (delayed) the announcement can yield a market-adjusted return
of 2.69% over the month following the revision
Intuition
Managers delay announcing bad news and advance the announcement
of good news
Hence firm-initiated earnings announcement date revisions convey
information about subsequently reported earnings
Earnings calendar revisions (REV) = the number of trading days
between the previously expected announcement date and shifts
The revision date has to occur in the month ending two weeks
prior to firms expected announcement date
REV>0 indicate the firm moved forward their expected date
For each value of REV, R-Score is defined as follows:
Advancers subsequently announce greater profitability

R-score
RO
A
Change
in ROA
Earnings
surprise
0
(Delaye
rs)
-0.3
16
-0.824
-0.028
1
(Advanc
ers)
0.5
25
0.854
0.124
Source: the paper

The extent to which firms advance (delay) announcement dates is
proportional to the magnitude of good (bad) news
Advancers outperform delayers in the month following the revision
E
q
u
a
l
w
V
al
u
ew
ei
g
e
i
g
h
t
e
d
ht
e
d
Rsc
or
e
R
a
w
r
e
t
u
r
n
s
Ma
rke
t-a
dju
ste
d
ret
urn
s
R
a
w
re
tu
rn
s
Ma
rke
t-a
dju
ste
d
ret
urn
s
0
(D
ela
ye
rs)
0
.
7
7
3
%
-1.
30
4%
0.
5
8
4
%
-0.
49
2%
1
(A
dv
an
ce
rs)
2
.
2
6
3
%
1.3
84
%
2.
7
4
5
%
1.2
61
%
Ad
va
nc
er
sDe
lay
er
s
3
.
0
3
6
%
2.6
88
%
2.
1
6
2
%
1.7
57
%
Source: the paper

Returns are concentrated in the three-day window surrounding
announcements dates
Prices adjust to the information content of calendar revisions at

the time earnings are announced, rather than at the time of the
revisions
Three-day market adjusted Advancers Delayers return is
1.578% (Table 4)
Results are robust to controlling for standard risk proxies, using
alternative proxy for calendar revisions, and ranking firms based on the
distribution of calendar revisions (Tables 5, 7, 8)
Returns are stronger for firm-initiated revisions (Table 9)
Return
in
month
followin
g
revision
Three-day
earnings
announce
ment
return
N
o
n
i
n
i
t
i
a
t
e
d
F
i
r
m
i
n
i
t
i
a
t
e
d
No
n-i
nit
iat
ed
1
.
6
0
%
1
.
5
8
%
0.
82
%
Source: the paper

Data
Financial data from Compustat
Daily snapshots of earnings calendar data from Wall Street Horizon
Analyst-based earnings surprise data from the I/B/E/S
Data range: 2006 - 2013
Paper
Type:
Working Papers
Date:
2014-09-02
Category: Novel strategy, recency bias, 52-week high, post-earnings announcement

drift
Title:
Recency Bias and Post-Earnings Announcement Drift
Authors:
Qingzhong Ma, David Whidbee, Wei Zhang
Source:
SSRN Papers
Link:
Summary
:
A strategy based on post-earnings announcement drift (PEAD) and the

timing of the 52-week high can earn an abnormal monthly return of 1.67%
Intuition
If a stocks 52-week high price occurred in the recent (distant) past,
then investors are less (more) likely to bid up its price
As a result, stocks with recent(distant) 52-week highs are
underpriced (overpriced) and earn higher (lower) returns in the future
Earnings surprise is proxied be the four-day earnings announcement
period abnormal return (two days before to one day after)
Recency ratio (RR) is calculated as follows:
o RR is between 0 and 1
o RR close to 1 means the stocks 52-week high price has occurred

recently
o RR close to 0 means the stocks 52-week high price has occurred
long time ago
Small (large) firms are stocks with market capitalization below
(above) the NYSE median
Portfolio formation
The classic PEAD strategy:
Each month, sort stock into deciles based on earnings surprise
(top decile: ESH=1, bottom decile: ESL=1)
Buy stocks with ESH=1, and sell stocks with ESL=1
The enhanced strategy:
Each month, sort stocks into terciles based on recency ratio
(tercile1: RRH=1, tercile3: RRL=1)
Buy stocks with ESH=1 and RRH=1, sell stocks with ESL=1
and RRL=1
Hold for three months (strategy generally holds three
portfolios simultaneously)
Remaining strategy
Buy stocks with ESH=1 and RRH1, sell stocks with ESL=1
and RRL1
Enhanced strategy outperforms PEAD
Monthly
profits
(equal-wei
ghted)
PEAD
Enhance
strategy
Ramaining
strategy
Full sample
returns
0.72%
1.52%
0.10%
Full sample
alphas
0.76%
1.67%
0.06%
Small
firms
0.92%
1.82%
0.23%
Large firms
0.29%
0.88%
-0.13%
1977-1989
0.98%
1.62%
0.48%
1990-1999
1.07%
2.49%
-0.03%
2000-2013
0.27%
0.82%
-0.19%
Source: the paper

Over half of PEAD profits can be attributed to investors recency bias
(Tables 2, 3, 4, 5)
PEAD is stronger among smaller firms (Table 4)
Data
PEAD puzzle is disappearing (see returns from 2000 2013) but the
impact of recency bias on PEAD remains strong (Table 5)
Results remain significant for value-weighted portfolios (Table 3)
Results are robust to including control variables (Tables 6, 9), using
alternative measure of earnings surprise (Table 7) or alternative ways
of portfolio formation (Table 8)
(CRSP)
Earnings announcement dates from the quarterly Compustat data
Analyst forecasts from the I/B/E/S
Sample: all U.S. common shares traded in NYSE, AMEX, and NASDAQ
Paper Type:
Working Papers
Date:
2014-07-21
Category:
Novel strategy, earnings seasonality, anomalies
Title:
Being Surprised by the Unsurprising: Earnings Seasonality and Stock

Returns
Authors:
Tom Y. Chang, Samuel M. Hartzmark, David H. Solomon, Eugene F.

Solte
Source:
SSRN Papers
Link:
Summary:
Firms earn significant higher abnormal returns in seasonally strong

earning quarters. A long-short strategy of going long (short) into
stocks whose upcoming earnings were historically larger (lower) than
other quarters yield an abnormal monthly return of 0.55%
Intuition
Earnings of some stocks are higher in certain quarters, such
as earnings of retail stocks are higher in holiday seasons
However such seasonality may neglected by investors, who
place too much weight on the lower average earnings that
follow a high seasonal quarter
As a result, companies earn significant abnormal returns in
seasonally strong earning quarters
Variables definition
Earnings seasonality is measured by ranking each earnings
quarter over a 5-year period
Compute firm EPS for each of the 20 quarters from quarter

t-23 to t-4
Rank the 20 quarters of earnings data from largest to
smallest
Define EarnRank for quarter t = average rank of (quarters
t-4, t-8, t-12, t-16, t-20)
Each month, sort stocks into quintiles by EarnRank
Long stocks with the highest EarnRank and short stocks with
the lowest EarnRank
Abnormal monthly return of 0.55%
Data
Equal-weighted
portfolios
Value-weighted
portfolios
Low
30.6 bp
35.8 bp
High
65.3 bp
90.9 bp
High
-Lo
w
34.7 bp
55.1 bp
Stronger pattern when recent earnings are more negative

relative to earnings 12 months ago and in firms who have not
recently broken an earnings record (Tables 7, 8)
Abnormal returns are robust to the overall return seasonality,
January effect, momentum, short-term reversals, etc. (Tables
2, 3, 9, 10, 11, 14)
EarnRank does not predict high returns outside of months
with a predicted earnings announcement (Table 3)
Higher earnings forecast error when seasonality is high (Table
6)
U.S. stock data from the Center for Research in Securities
Prices (CRSP)
Earnings data from the Compustat Fundamentals Quarterly
File
Data on analyst forecasts from the I/B/E/S
Data range: 1972 - 2013
Paper Type:
Working Papers
Date:
2014-07-21
Category:
Novel strategy, quality measure, large-cap stocks
Title:
Quality Investing
Authors:
Robert Novy-Marx
Source:
Rochester working papers
Link:
http://rnm.simon.rochester.edu/research/QDoVI.pdf
Summary:
Combining quality and value factors yields much higher returns

than the traditional value factor alone. Gross profitability is most
powerful among popular quality definitions
Definitions and background
Various measures of quality
Gross profitability(GP): defined as gross-profits /
total assets = revenues - cost of goods sold /
assets
Grahams quality criteria
Granthams high return, stable return, and low
debt
Greenblatts return on invested capital (ROIC)
Sloans accruals-based measure of earnings quality
Piotroskis F-score measure of financial strength,
Low volatility/low beta
Value is defined as book-to-market
Quality is negatively correlated with value
In other words, high quality firms tend to be
expensive, while value firms tend to be low quality
Quality generates significant returns (Table 1)
Of the 7 quality measures, only GP generates a significant
excess return spread of 2.7%/year, compared with the
3.5%/year value spread (Table 2)
GP consistently subsumes all the other quality measures
and is robust to standard risk factors (Table 3)
Within the Russell 1000 stocks, only GP generates
consistently significant abnormal risk-adjusted returns
relative to the Fama and French factors and the other
measures of quality (Table 5, Panel A)
Within the Russell 2000 stocks, Grahams measure and GP
generates significant risk adjusted returns (Table 5, Panel
B)
In factor investing, quality can reduce the tracking error for
long-only value investors
A 50/50 mix of value and quality portfolio increases the
information ratio from 0.45 to 0.68 (Table 7, Panel C)
Driven by a dramatically reduced tracking error, and a
smaller decrease in the average active returns. Note that
Sharpe ratio decreases
In stock selection, combining value and quality works even better
Higher returns with much lower draw-downs

Stronger effect within large-cap universe than within
small-cap (figure 2)
Consistent performance in different periods
(Source: the paper)

Data
1963 to December 2013 stock data are from Compustat
Paper
Type:
Working Papers
Date:
2014-06-12
Category
:
Novel strategy, hedge fund doubling down stocks
Title:
Doubling Down
Authors:
Jonathan Rhinesmith
Source:
Link:
http://scholar.harvard.edu/files/rhinesmith/files/rhinesmith_2014_doubling_d
own_0.pdf
Summar
y:
When hedge fund managers double down on stocks with recent

underperformance, these stocks outperform by 5%-15% annually
By adding to a losing position (Doubling down, DD) managers are
risking their career reputation and are signaling that they are
particularly confident
In other words, DD stocks are more likely to have higher expected
returns in order to offset this career risk
For each manager, DD stocks are those with at least 2.5% weight in
portfolio and whose weight at least doubled over the past q quarters
(q=1, 2, 3)
Limited number of DD stocks: on average 30-60 stocks annually out of
~1500 stocks exited by hedge funds (Figure 2)
DD stocks are liquid: these are long positions in stocks and reflect ~$2
billion of actual manager positions
Hedge fund managers avoid adding to losing positions in general (Table 2)
For each DD stocks, hedge funds in aggregate holds roughly 200
sizable non-DD positions
Constructing DD portfolio
Identify DD stocks using the criteria above
Hold a DD stock until the stock is no longer a sizable position for
manager m
In other words, hold the position until the investment thesis
plays out for the manager, or until the manager exits the
sample (whichever comes first)
DD portfolio outperforms
At 6 or 9 months (q=2 or 3 quarters), the outperformance of 4-factor
alpha is 48 to 83 bps per month (5.8% to 10.0% Annualized) (Table 4)
Source: the paper

Weaker at 3 months (q=1 quarter), where monthly outperformance is
39 to 78 bps (Table 4)
This is because there are fewer stocks that fall a full 10%
relative to market and that managers double in holdings in such
a short time frame
Higher past losses, higher outperformance
A portfolio formed of the stocks that fell short of the market by 5%
over the last 6 months, which a manager doubles down on, generates
a 4-factor alpha of 46bps per month
By contrast when the past loss is 15%, such DD stocks generates a
4-factor alpha of 101 bps per month (Table 5)
Data
12/31/1980 - 12/31/2013 hedge fund holding data are from Thompson
Reuters database of publicly available Form 13Fs
Hedge fund list are based on the comprehensive list of funds from
Agarwal, Fos, and Jiang (2013)
Stock data are from CRSP
Paper
Type:
Working Papers
Date:
2014-03-10
Catego
ry:
novel strategy, liquidity
Title:
Liquidity as an Investment Style: 2014 Update
Author
s:
Roger Ibbotson and Daniel Kim
Source
:
Zebra Capital white paper
Link:
http://www.zebracapm.com/files/Liquidity%20as%20an%20Investment%20Styl
e%20-%202014%20Update.pdf
Summ
ary:
Low liquidity stocks generate higher returns. Liquidity as a style yields higher
return than size and momentum, though trailing value
Why liquidity outperforms: Investors want more liquidity and are willing
to pay for it
The liquidity style rewards the investor who has longer horizons and is
willing to trade less frequently.
Illiquid does not equate higher risk: illiquid stocks less volatile than the
more liquid portfolios
Other things equal, illiquid stocks are usually out-of-favor stocks, not
those heavily traded glamour stocks, both of which tend to revert to
more normal trading volume over time
Define Liquidity = number of shares traded / number of shares
outstanding
Better return at comparable risks
Liquidity factor yields better return than size and momentum, but trailing
value
20% return standard deviation vs 23-27% for size, momentum and value
(table 1)
Source: the paper

Liquidity is not subsumed by size, value factor and momentum (table 2, 3, 4)
Independent of the value and momentum
Robust to controlling for size, though weaker
Within the quartile of smallest(biggest) stocks, low-liquidity stocks
generate annual return of 16.3% (11.8%) compared to 1.5%
(9.2%) for high-liquidity stocks
Four-factor (market, size, book-to-market, momentum) regression
shows that the liquidity four-factor alpha is 0.35% per month (table 5)
Low turnover
Less liquid portfolios were formed only once per year, and 64% of the
stocks stayed in the same quartile in consecutive years.
Combining with other factors yields even better returns
Tested combingin liquidity with size, momentum and value
Highest value quartile and the least liquid quartile yields best returns
(Figure 2)
Data
1971-2013 monthly data for the 3,500 largest US stocks are from CRSP
and Compustat
Paper
Type:
Working Papers
Date:
2014-01-07
Category: Novel strategy, Google search, co-attention, supplier-customer relationship

Title:
Co-Searching and Stock Cross-Predictability
Authors:
Alvin Leung, Ashish Agarwal, Prabhudev Konana
Source:
Boston University working paper
Link:
http://smgworld.bu.edu/wise2013/files/2013/12/wise20130_submission_148
.pdf
Summary
:
If two stocks are economically linked but do not get similar attention from
investors, then there may exist information lag. A trading strategy generates
returns 22.7% higher than those obtained from a pure supplier-chain
relationship strategy
Intuition and background
Yahoo! Finance lists top six co-viewing stocks in each stock summary
page
Source: The paper
If two stocks are economically linked but do not exhibit significant

search co-attention, then that may reflect investors inattention, and
the impact of one on the other may lag
In other words, if investors do not pay sufficient attention to a partner
stock, information diffusion may be slow
Define Supplier dependency = Trading amount between supplier
and buyer / Total revenue of supplier
Define Customer exposure = Trading amount between supplier and
buyer / Total cost of goods sold to customer
Define Search intensity = total number of appearances a partner
firm appearing on the co-searching list of a focal firm
Calculate Supplier dependency and Customer exposure using

trading data of each supplier-buyer pair
Compute supply-chain strength weighted lagged partner returns
Represent supply-chain relationship by network diagram in which
relationship strength is denoted by the size of supply-chain partners
Compute supply-chain strength weighted partner returns with one lag
for each buyer (RBi,t-1) and supplier (RSi,t-1) group:
Where Depi,j denotes is dependency on buyer j and Expi,j denotes is

exposure to j
Lagged returns of supply-chain stocks can cross-predict contemporary
returns of focal stocks
Supply-chain relationship works: Not surprisingly, without
consideration of attention, lagged supply-chain partner returns has a
positive relationship with contemporary focal firm returns. The
coefficient is 0.02 significant at 5% (Table 3)
Attention alone does not work: when including attention, search
frequency does not help in cross-prediction (Table 3)
Only lagged returns of partner stocks with low attention can
cross-predict focal firms returns
A weekly strategy yields positive arbitrage returns
Sort all stocks according to their previous week average partner
returns and group into deciles
Low attention portfolio yield weekly abnormal return (alpha) of
0.18%, and that of pure supply-chain relationship portfolio is 0.15%
Suggesting a 23% higher alpha (Table 4)
Data
September 2011 - December 2012 Russell 3000 stocks
supplier-customer relationship data sourced from Bloomberg Supply
Chain Analysis (SPLC)
Co-search data sourced from Yahoo! Finance
Total sample covers 1,620 stocks
Paper Type:
Working Papers
Date:
2013-12-04
Category:
Novel Strategy, Stock Returns, Geographical
Title:
Regional Economic Activity and Stock Returns
Authors:
Esad Smajlbegovic
Source:
SSRN
Link:
Summary:
Economic conditions of U.S. regions impact stock returns of

related firms. A firm-specific macro variable based on regional
economic indicators predict stock returns
Constructing firm-specific economic indicators
For each firm, define a CitationShare as the sum of the
number of citations for the given state in companies
annual reports/ the sum of total number of citations for
all states in companies annual reports
Define contemporaneous regional economic activity
(CREA) measures by weighting monthly State Coincident
Indexes (SCI, a Fed-published index measuring current
economic conditions in a state) by corresponding citation
shares
Where
is the growth rate of the State Coincident Index
of state s in month t
CREA
Similarly define predicted regional economic activity

(PREA) using the forecast of the SCI for the next six
months
Cross-sectionally regress stock excess returns on CREA
and control variables (including industry momentum, state
dispersion and headquarter state activity, etc)
Monthly return spread between bottom and top decile is
0.6% (Table 3)
Results robust to common and stock characteristics (Table
3), as well as industry momentum, state dispersion and
headquarter state activity, etc
Returns slightly decline after risk-adjustments but remain
significant (Table 5)
A equal-weighted long-short portfolio earns a
monthly return of 8.3% whereas the
PREA
Data
value-weighted portfolio yields a lower return of

6.0% (Table 4)
The risk-adjusted alpha is 7.6% and 5.9% (Table
5)
Results indicate lagged PREA significantly predicts
individual stock returns (Table 6)
Results are robust to standard controls, such as market
capitalization (Table 6)
Portfolio tests confirm regression results (Table 7)
Long-lasting impact: the pattern lasts for 10 months
(Figure 5)
Consistent performance in recent years, see graph below
January 1995 - December 2011 stock data are from

CRSP/Compustat
Fama-French (1993) factors are from Kenneth Frenchs
website
Paper Type:
Working Papers
Date:
2013-12-04
Category:
Novel Strategy, Informational Networks, complicated firms
Title:
Centrality and Lead-Lag Relationships in the U.S. Equity Market
Authors:
Binying Liu
Source:
SSRN Working Paper
Link:
Summary:
Stocks located centrally in an informational network lag other

stocks, due to the complexity of their informational environment.
A trading strategy based on this lead-lag relationship yields
annualized abnormal returns of 12%
Intuitively, stocks of more complicated firms are harder to
price and may lag other simple firms
Define complexity using a stocks return correlation with
other stocks
For any stock s, its network is made up of other
stocks whose idiosyncratic returns are significantly
correlated with stock s
Stocks with higher number of connected stocks are more
complicated, while in theory the simplest firms are those
whose returns are not correlated with any other firms
Constructing informational network
Step1: find connected stocks
Each month t, regress stock is past 25 month
returns on risk factors and stock js monthly
returns over the same time period
Where ri, is the excess return of stock i at time

mkt, smb and hml are the excess returns of the three
Fama-French risk factors
Two stocks are connected if coefficient is statistically
significant
Step2: define the distance dijt between two stocks as the
shortest number of links from one stock to another. Two
stocks are directly connected if dij =1
Step3: for each stock, define its centrality
where NFt is the total number of stocks

High centrality stock have larger cap, higher
book-to-market ration, lower profits, lower leverage and
more volatile returns (Table 2)
Peripheral stocks predict 1-month ahead central stocks
A 1% increase in the most peripheral portfolios returns
predicts a 53 basis point increase in the most central
portfolio (Table 4)
Central stocks do not predict peripheral stocks (Table 4)
Stronger effect within smaller stocks (Table 5)
Momentum strategy yields significant returns
Risk-adjusted performance of cross-momentum strategy is
estimated by
where
is the benchmark momentum strategy
returns
Risk adjusted alpha is positive and highly significant for
both value- and equal-weighted portfolios (Table 9)
The equal weighted strategy earns risk-adjusted
annual return of 11.9%, the value weighted
strategy 6.2%
Robustness
Not driven by investor inattention or complicated firms
effect (Table 12)
Not driven by momentum and time series momentum
(Table 10)
No significant influence from liquidity factor (Table 10)
Robust to different idiosyncratic groups: after controlling
for idiosyncratic volatility, a 1% increase in the least
central portfolio corresponds to 20 basis points increase in
the most central portfolio (Table 6)
Robust to the customer-supplier network (Table 8)
Data
January 1981 December 2010 stock data are from
COMPUSTAT
Mutual fund holdings data from Thomson Reuters
Analyst forecasts are from I/B/E/S
Paper Type:
Working Papers
Date:
2013-12-04
Category:
Novel strategy, increasing earnings on decreasing revenue
Title:
Defying Gravity: Costly Signaling to Mislead or to Inform?
Authors:
Messod Daniel Beneish, Vedran Capkun, Martin S. Frids
Source:
SSRN Working Paper
Link:
Summary:
Some firms defy gravity by reporting higher earnings on lower

sales from continuing operations. Such firms earn higher
one-year-ahead abnormal returns, and produce better operational
performances
Intuition
Sales are monitored by investors, and lower sales is
usually not a good sign
Arguably, reporting increasing earnings on decreasing
sales is a sign of earning manipulation
Such behaviour may be signals from managers to convince
investors that the decline in sales is temporary instead of
permanent
During 1988-2011, 6.1% firm years are defying gravity
(DG), while 8.2% firm-years experience declining sales
but do not defy gravity (DD, Table1)
In the year prior to defying gravity, DG firms have similar
market size, but underperform relative to non-DG and DD
firms in terms of profitability, cash flow from operations,
etc
DG firms are riskier with higher BTM (Table 2)
DG firms do manipulate their earnings
DG firms exhibit higher accruals: performance-matched
accruals (PM_ACC) are significantly positive with mean of
2.1% (panel A, Table3)
Suggesting that DG firms artificially increased
reported ROA by 40-90 basis points
DG firms also uses real earnings management tools (in
addition to accounting tools)
They use discretionary expenses (RM_DISX) and
production expenses (RM_PROD) (panel B, Table3)
Suggesting that DG firms increased reported ROA
by 194 basis points using real activity management
DG firms have better future operational performance
Compared with all non-DG firms, DD outperform in ROA by
60 basis points 1-year ahead
Compared with all DD firms, DG firms 1-year ahead ROAs
are 900 basis points higher (panel A, Table4)
Similar magnitude of 2- and 3-years ahead
Similar findings for operating cash flow (CFO/TA)

DG firm CEOs are more likely to be net buyers in year they
defying gravity (Table 7)
DG yields higher one-year-ahead abnormal returns
DG firms outperform non-DG by 3.1%
DG firms outperform DD firms by 5.8%
In line with the better future ROA of DG firms
(Table 5)
Better earning announcement returns: the 3-day return of
DG firms is 1% higher than DD firms (Table 7)
Data
1988 - 2011 U.S. stock data are from COMPUSTAT
Paper Type:
Working Papers
Date:
2013-12-04
Category:
Novel Strategy, Volume, Momentum
Title:
Trading Volume, Return Variability and Short-Term Momentum
Authors:
Umut Gokcen, Thierry Post
Source:
SSRN Working Paper
Link:
Summary:
Stocks with increasing volume and/or return variability see

stronger short-term momentum
Intuitively, momentum is strongest when accompanied by
significant news
Volume and return variability can be indirect measures for
such significant news
Define return variability as the variance of daily returns,
estimated over rolling three-month periods
Significant alpha spread between winner and loser stocks
For the classic momentum strategy, the return spread is
11.6% per year (Table 3)
Higher return spread in high volume tercile: the return
High return spread in high variability tercile: the return
Triple-sort show even stronger return spread

Return spread for high volume + high variability
stocks is 19.6%
Return spread for low volume + low variability
stocks is 2.2% (Table 4)
Results hold in alternative holding periods (Table 5)
Momentum stronger for longer windows (Table 6)
Robustness
Results are robust to alternative factor models (Table 7)
Stronger effect (13% return spread) for mid-cap and small
stocks, while only 4.9% for large-cap stocks (Table 8)
Conditioning on informational arrivals is more effective for
medium- than low-liquidity segments (Table 9)
Data
1965 - 2012 stock data are sourced from
COMPUSTAT/CRSP and WRDS
Pap
er
Typ
e:
Working Papers
Date
:
2013-12-04
Cate
gory
:
Novel Strategy, Insider Trading, option trading
Title
:
Insider Trading and Option Returns Around Earnings Announcements
Aut
hors
:
Chin-Han Chiang and Sung Gon Chung
Sour
ce:
National University of Singapore
Link
:
http://bschool.nus.edu/Portals/0/images/Finance/Spore%20Scholars%20Symposi
um/28%20Nov%202012/Paper%201%20-%20ChiangChung_Nov2012.pdf
Sum
mar
y:
During earning announcement months, call (put) options of stocks purchased

(sold) by insiders earn significant return premium. Such pattern is weaker is recent
years, though still significant for put options
Definitions
Insiders buy/sell may be indicative of future stocks returns
Calculate option return as:
where St+1 is the underlying stock price at the end of the option trading
window; K is the option strike price
Ct and Pt are the option premium of the call and put, respectively,
calculated using the midpoint of the bid and ask price
Two strategies
Buy and hold call option if insider purchases observed
Sell and hold put option if insider sales observed
Estimate return using regression:
where INSi,t is an indicator function equal to one if insider purchases (sales)

and zero otherwise
Significant returns
Regardless of insider trading, call options earn 13% (Table 2)
For insider-purchased stocks, call options earn up to 16.5% return premium
(Table 2)
Without insider tradings, put options earn insignificant returns 9.9% (Table
2)
For insider-purchased stocks, put options earn a significant return premium
of 7.7%
Robust to systematic risk, volatility risk and transaction costs
After controlling for volatility and systematic risk, call options of
insider-purchased stocks earn a 12% abnormal return premium (Table 3)
Puts exhibit premium of 4.7%, though not significant (Table 3)
After controlling for transaction costs, call option investors earn 14.3%
significant premium (Table 4)
Such abnormal return comes from stock price movements and volatility
Insider-sold stocks see significantly price decreases, whereas
insider-purchased stocks see small price changes (Table 5)
Insider-sold stocks exhibit much higher volatility (Table 5), whereas
insider-purchased stock experience considerably lower volatility (Table 5)
Weaker performance after Sarbanes-Oxely Act
Following introduction of SOX Act, magnitude of call option premium
decreases to 11% and becomes insignificant in some cases (Table 8)
Put option premium does not change considerably and still significant
(Table 8)
Data
January 1996 - October 2010 daily U.S. stock data are from CRSP
Daily U.S. option data from OptionMetrics Ivt DB
Paper
Type:
Working Papers
Date:
2013-12-04
Catego
ry:
Novel Strategy, Portfolio Spillover, Diversification
Title:
Portfolio Spillover and a Limit to Diversification
Author
s:
Bronson Argyle
Source
:
Columbia Business School
Link:
http://www8.gsb.columbia.edu/phd_profiles/sites/phd_profiles/files/publication
s/Spillovers_Argyle_jmp.pdf
Summ
ary:
Returns of stocks held by same mutual funds are connected when such funds
face in/outflows. A strategy based on flow-induce price pressure earns 6.8%
risk adjusted return. This study proposes also a methodology to estimate
mutual fund daily holdings
When facing redemption, managers are more likely to liquidate those
holdings that are more liquid
Such price pressure are temporary and may reverses in short
term
Hence membership to same mutual funds may be a source of stock
returns correlations
In other words, firms experience positive (negative) price
pressure when firms in common portfolios experience positive
(negative) returns
Assuming that managers only use liquidity and size measures to manage
flows, the daily portfolio holding changes can be estimated as
where main_effects is the effects of flow, illiquidity and size
Define FIPP (flow-induced price pressure) as the flow weighted average

of stock i in fund n. V is the value of stock i in fund n, MV is the market
cap of stock i
Define a stocks portfolio return as the weighted idiosyncratic returns

of funds that holds stock i
where TNA is the total net assets of fund n
Such portfolio return measures the impact of fund flows on stock i

return
It in essence measure the weighted cumulative return of other stocks
that belong to same mutual funds as the stock in question
Lagged idiosyncratic returns predict future flows
At daily level, flows determined by past 1-5 day portfolio returns (Table
2)
Holding changes are driven by flow, illiquidity and size (Table 3, 7)
More significant when there is a net outflow
Fully reverses over one week
Suggesting that the price pressure is caused by liquidating
holdings
A one standard deviation increase in FIPP leads to a 0.6% daily
abnormal returns (Table 5)
Stocks portfolio return predicts
Data
Sorting firms by
. Long the top decile and
short the bottom decile
The annualized return is 6.8% (Table 11)
Similar results when using risk-adjusted alphas
The 4 factor adjusted alpha is 6.7% (Table 11)
Suggesting that abnormal returns are significantly impacted by
the shocks to other firms in common portfolios
2003-2010 quarterly holdings for open-end mutual funds are from CRSP
Survivor-Bias-Free US Mutual Fund Database
Summary statistics in Table1
Daily stock data are from CRSP
Daily mutual fund flows are from TrimTabs
Paper Type:
Working Papers
Date:
2013-11-03
Category:
Novel Strategy, Sentiment Analysis, Crowdsourcing
Title:
Generating Abnormal Returns Using Crowdsourced Earnings

Forecasts from Estimize
Authors:
Leigh Drogen, Vinesh Jh
Source:
SSRN
Link:
Summary:
Estimize, a crowd-sourcing earnings estimate community, is more

accurate than traditional sell side estimates. A strategy exploiting
such differences earns abnormal returns
Estimize is an open online community where contributors
supply their quarterly EPS and revenue estimates on U.S.
stocks
Contributors include buy-side investment
professionals, independent researchers, individual
traders, or students
100-800 stocks have three or more estimates
Sell-side estimates are biased
Reputation risk: analysts are unlikely to give very
different estimates from the consensus, for fear of
analysts being exposed as incorrect
Slow changes: estimate changes are gradual due to
the number of compliance steps (graph on page10)
Estimize takes advantage of the wisdom of the crowds
and therefore provides a diversifying source of information
Self-promotion is one of the incentives to be
accurate
Define Estimize Delta = (Estimize consensus - sell-side
consensus) / sell-side consensus
Measured over the period leading up to the
earnings announcement
Adjust daily return to the following common risk factors:
industry, dividend yield, volatility, momentum, size, value,
growth, and leverage
Estimize estimates slightly more accurate than sell-side
consensus
When require at least 3 Estimize contributors, the average
error of the Estimize consensus is 14.1%, vs the 14.6%
error of sell-side (page 4 table)
Estimize Delta of over 5% predicts future changes in the

Wall Street consensus (Top Graph Page 10)
Abnormal returns
before
announcements
Long(short) stocks after a 10% or larger Delta signal is
generated, close the positions the day before the company
reports
Stronger effect in large cap stocks that last up to a month
20-day abnormal returns exceeding 0.4% (Top
Graph, Page 11)
Little return within mid- to small-cap names
May be due to much smaller sample size (2/3
smaller compared with large-cap stocks)
Abnormal returns
after
announcements
Long if actual earnings exceeds the Estimize consensus
but falls short of the sell-side consensus, short if the
opposite is true
The 3-day abnormal return is 0.5% (graph on page 7)
Three times stronger drift after surprises
Estimize drift lasts for several days without
reverting; the first day return is 41bps for 10%
surprises
Sell-side drift lasts only for one day and is fairly
small at 15bps
Data
November 2011 to July 2013 Estimize dataset, which
covers 2,100 to 2,500 names depending on month
In sample include all fiscal periods with report dates in
2011 and 2012, with 2013 being out of sample
Paper Type:
Working Papers
Date:
2013-11-03
Category:
Novel strategy, quality measures
Title:
What is Quality?
Authors:
Michael Hunstad
Source:
Northern Trust commentary
Link:
http://www.northerntrust.com/documents/commentary/insightson/defining-quality-investing.pdf
Summary:
A new quality score based on seven factors outperform other
popular quality measures

Definitions of well-known quality definitions
AQR: Total profits/assets, Management, Gross margins,
Free cash flow/assets
DFA: 1) Operating income before depreciation and
amortization minus interest expense, scaled by book value
MSCI: 1) Return on Equity (ROE), 2) Debt to equity 3)
Earnings variability
S&P: adjust past 10-years earnings and dividends by a
set of predetermined modifiers for changes in the rate of
growth, stability with long-term trends and cyclicality
F-Score: 1) Return on assets 2) Operating 3) Cash flow 4)
Quality of earnings 5) Net income 6) Leverage 7) Liquidity
equity issuance 8) Gross margins 9) Asset turnover
Defining a new quality measure using seven factors (Table 2)
Cash flow from booked assets: measure the gross asset
efficiency
Higher earnings per dollar of total assets: measures the
earnings efficiency of total asset
Higher profit over equity
Higher invested capital returns
Long-term liquidity: measures financial aggressiveness
and overall leverage of the firm
Internal liquidity (to avoid costly alternative sources of
funding)
Growth prudence: measures the growth trajectory and
sustainability
Higher quality predicts higher returns with lower risk
The universe is all stocks that received an S&P Quality
Ranking from 1985 to 2012
1000 per average month
In the US, Sharpe Ratios five times that of low-quality
stocks
Similar patterns for international developed and emerging
markets
Much higher Sharpe Ratio over other popular quality
measures
Source: the paper

Discussions
Compared with the F-score, this new quality score
outperforms only before 2002, but not in recent years
Quality is not volatility
Correlation between low-quality stocks and high volatility
stocks was a very strong 0.8
Yet the correlation between high quality and low volatility
stocks was a very modest 0.23. (Chart 7
Paper Type:
Working Papers
Date:
2013-11-03
Category:
Novel strategy, gaps, 5-20 day technical strategy
Title:
Analyzing Gaps for Profitable Trading Strategies
Authors:
Julie R. Dahlquist, Ph.D., CMT and Richard J. Bauer
Source:
MTA Dow awards paper
Link:
http://www.mta.org/eweb/docs/pdfs/2011-dowaward.pdf
Summary:
Gap days predict higher abnormal returns in future 5-20 days

Definitions and intuitions
Gap up: occurs when today (Day 0)s lowest price is
greater than yesterday (Day-1)s highest price
Gap down: occurs when today (Day 0)s high is lower than
yesterday (Day-1)s low
Intuition: gaps signal that stock prices suddenly breaks
through a formation boundary, and may be the beginning
of a trend
Candle color: White candles are those stocks that closes
higher than it opens, Black candles are those stocks that
closes lower than it opens
Calculate 3-day return as buying at the open of Day 1 and
selling at the close of Day 3
Gap-up predict higher 20-day returns
In most cases, upward price trend will continue for the
next 5-20 trading days
Using Day0 candle color, Day-1 candle color, and size of
gaps can better predict stock returns (Table 1-8)
In particular, stocks with Day0 white candle and
with the highest quintile of gap size yields 2.36%
market-adjusted returns
Other things equal, returns are higher when stocks
gapping up on volume higher than the 30-day average
volume, on lower than average volume, and below 10-Day
Moving Average
Data
CoversstocksincludedintheRussell3000betweenJanuary1,2006andDecember31,
2010
Average16.4stocksgappingupand13.8stocksgappingdowneachtradingday
Paper Type:
Working Papers
Date:
2013-11-03
Category:
Novel Strategy, Geographical Connections, Earnings Predictability
Title:
Geographic Diffusion of Information and Stock Re
Authors:
Jawad Addoum, Alok Kumar and Kelvin Law
Source:
SSRN Working Paper
Link:
Summary:
Stock returns can be predicted using past performance of other

firms in similar geographical regions. A long-short trading
strategy that exploits the diffusion of geographic information
earns an annual risk-adjusted return of 9%
Physical distance between corporate headquarters(HQ)
and centers of economic activities (EC) slow down
As an evidence, firms with above-median
geographic dispersion have monthly momentum
returns that are about 0.35% higher than firms
with below-median dispersion (Table 8)
Intuitively, earnings of other firms located in both HQ and
EC states contain value-relevant information
Define Citation-share: the number of times a specific U.S.
state is mentioned / the total number of times all U.S.
states are mentioned in annual 10-K filings
Define EC earning: citation-share weighted average
earnings of firms located in economically relevant states,
excluding HQ state
Define Forecasted EPS: fit values of quarterly EPS on
lagged EPS, lagged EC Earnings, lagged HQ Earnings, EC
Economic Activities Index, size, leverage and other
variables (Specification 3 of Table 3)
Sort stocks based on Expected Earnings Surprise
(forecasted EPS - analyst consensus)
Long (Short) position in firms with high (low) expected
earnings surprise
Geography-based measures predict returns
Monthly alpha is 75bps or an annual premium of 9%
(Table 1)
Performance is robust during various sample
periods
Robust to factors such as market, size, value, momentum,
short- and long-term reversal, and liquidity
Stronger predictability using EC-based measures than
HQ-based measures (Table 2, 3)
Such effect last up to eight quarters (Table 4)
Not driven by state-level business cycles or firm
characteristics
All regressions include controls for state-level
economic variables and firm fundamentals (Table
3)
EC measures also predicts operational performance
A one standard deviation increase in the earnings (cash
flows) of firms headquartered in EC states in the current
Data
quarter predicts a 0.156% (0.468%) increase in their

earnings (cash flow) (Table 3)
Meaningful magnitude as the average quarterly
earnings (cash flows) of 0.9% (1.7%) (Table 2)
Weaker results when using HQ-based measures (Table 2)
EC front-runs equity analysts
A one standard deviation increase in lagged
EC-Earnings corresponds to a 5.3% increase in
analysts consensus forecast error in the next
quarter (Table 6)
1994-2012 sample of annual 10-K filings from Electronic
Data Gathering, Analysis and Retrieval system
Stock accounting and price data are from Compustat/CRSP
Firms headquarter location is retrieved from the
CRSP-Compustat Merged (CCM) file
Paper Type:
Working Papers
Date:
2013-11-03
Category:
Novel Strategy, Asset Pricing, Jump Risk, Volatility Risk
Title:
Aggregate Jump and Volatility Risk in the Cross-Section of Stock

Returns
Authors:
Martijn Cremers, Michael Halling, David Weinbaum
Source:
SSRN
Link:
Summary:
Stocks with high sensitivities to jump and volatility risk have low
expected returns, because they hedge against the risk of
significant market declines. A two-standard deviation increase in
jump (volatility) factor loadings predicts a 3.5-5.1% (2.7-2.9%)
lower annual returns
Stocks with high volatility sensitivities hedge against the
risk of significant market declines, e.g., the recent
financial crisis
Hence stocks with positive loading on jump risk
would likewise be attractive and require lower
expected returns
A strategy that is market neutral, gamma neutral, but

vega positive is insulated from jump risk and only subject
to volatility risk
A strategy that is market neutral, vega neutral, but
gamma positive is only subject of jump risk
Both strategies can be implemented using investable
options
For each stock, the factor loadings are estimated using
Where MKTt is market return on day t, and Xt is the return

on either the jump or the volatility risk factor mimicking
portfolio
High jump and volatility loadings predict low expected returns
The value-weighted long-short portfolio earns a raw return
of -4.6% per year (t-statistic -4.37) and a risk-adjusted
return of -2.7% per year (t-stat -2.40) (Panel B Table 3)
I.e., jump and volatility risk both carry negative market
prices of risk
Significant at the 1% and 10% level, respectively
(Table 1)
Jump and volatility are distinct effects (Figure 1 and 2)
Returns on the two strategies are essentially
uncorrelated (0.09) (Panel B Table 1)
Similar findings when using Fama-MacBeth regressions
(Table 6)
Robust to size, downside beta, conditional
skewness and kurtosis, idiosyncratic volatility, and
idiosyncratic skewness
Data
January 1998 - December 2011 daily S&P500 futures
options data are from Chicago Mercantile Exchange
Stock return data are from Center for Research in Security
Prices
Paper
Type:
Working Papers
Date:
2013-10-03
Category:
Title:

Options Markets
Authors:
Source:
Link:
f
returns
diffusions
small (large) OIVG
OIVG momentum outperforms
A)
Data
month (Table 4)
(Table 4)
A.0.7)
Paper Type:
Working Papers
Date:
2013-10-03
Category:
Novel Strategy, Institutional investors, Informed Traders
Title:
Who Are Informed? The Evidence from Institutional Trades
Authors:
Yan Wang
Source:
http://northernfinance.org/2013/openconf/data/papers/114.pdf
Link:
Northern Finance Association
Summary:
Institutional trades initiated by managers that can anticipate

upcoming analyst rating changes strongly predict future stock
returns. A hedged portfolio generates risk-adjusted abnormal
return of ~3% per quarter
Informed investors(anticipators) foresee upcoming public
information (e.g., Analyst recommendation updates), and
swiftly adjust their portfolios before the news
By contrast, uninformed traders (followers) adjust their
portfolio after the disclosure of public news
Methodology to identify anticipators
Calculate the correlations between trades and
sequential analyst recommendation changes
Where Tradei,m,t is the percentage change in the holdings

of stock i in the portfolio of institution m during quarter t
Si,t-1, S i,t, S i,t+1 denotes change in the analyst
recommendation of stock i in past, current and coming
quarter. Note that S i,t+1 is only observable to informed
managers
Define the information correlation gap (ICG)
The higher the ICG, the more informed the manager is

23.5% (23.6%) of the managers are anticipators
(followers) solely for the present quarter. Only 7.6% of
investors are anticipators for four consecutive quarters
(Panel A, table 3)
Anticipators have smaller assets under management,
higher portfolio returns and higher portfolio turnovers ,
shorter investment horizon, large block holdings, high
industry portfolio concentrations (Table 1)
Anticipators can predict
They sell 0.20% (while followers buy 0.22%) of
their holdings one quarter prior to the negative
earnings news (Panel A, table 6)
Stocks purchased/sold most heavily by anticipators
around earnings announcements generate
1.14%/-0.89% three-day abnormal returns (Panel
A, table 7)
Each quarter, classify institutional investors into
anticipators and followers by ICG
Construct investment portfolios based on anticipators and
followers trades
At the end of each quarter, rank stocks by their
current-quarter changes in anticipators/followers
institutional holdings, and sort into five portfolios
Value-weight stocks
Construct a portfolio that is long in Q5 and short in Q1
ICG predict stock returns
Anticipators trades are highly predictive of the
one-quarter-ahead stock returns
Regression t-stat are significant for Fama-French
risk adjusted returns (Table 2)
Data
Hedging portfolio earns 3.9% in the quarter after

formation (Panel A table 5)
Similar effectiveness in some cases
E.g., when sort by portfolio turnover, similar t-stat
before and after Reg FD(Panel B, Table 9)
In some cases, much weaker after the Reg FD
E.g., in medium block holdings, the coefficient
dropped from significant 0.204 to an insignificant
0.016 (Panel B, Table 9)
By contrast, followers trades are not significant (Table 2)
More pronounced for stocks with higher information
asymmetry
Such as those of firms with high volatility
(coefficient 0.132, p-value<0.01) and young age
(coefficient 0.089, p-value<0.05) (Panel A table 4)
1994 Q1 - 2010 Q4 actively managed institutional holdings
data are from Thomson Reuters 13F fillings
Data on monthly consensus analyst recommendations are
from I/B/E/S
Stock return, share price, shares outstanding, and cash
dividends are from CRSP and accounting information is
from COMPUSTAT
Paper Type:
Working Papers
Date:
2013-10-03
Category:
Novel Strategy, Stock Dividends, Special Dividends
Title:
Predicting Corporate Distributions
Authors:
Hendrik Bessembinder and Feng Zhang
Source:
Helsinki Finance Seminar
Link:
http://gsf.aalto.fi/seminar_papers/Bessembinder-Distributions.Se
ptember.2013.pdf
Summary:
Stocks with high predicted probabilities of recurring corporate

distribution (e.g. stock splits, stock dividends, special dividends,
and dividends increases) earns significant abnormal returns
Corporate distribution events are predictable
The likelihood of occurrence spikes in the 12th

month after the prior event (Panel A of table 1 and
figure 2)
Reasons
Board meetings, which usually determines such
distributions, typically occur at regular calendar
dates, annually, quarterly etc
Firm characteristics such as profitability and free
cash flow tend to persist over time
Economic variables such as profitability, cash
balances, and share price appreciation help to
predict the occurrence of distribution events
Use the proportional hazard model of Cox (1972) to
capture the tendency for events to recur
where h0(t) is a baseline hazard rate that depends only

on the elapsed time since the prior corporate event
Xit is a vector of firm-specific explanatory variables: 5-day
announcement CARs, Log market capitalization, Cash
Market capitalization predicts dividend increases, ROA and
cash holding predicts special dividends, while the size of
the previous special dividend and of the prior dividend
increase are negatively associated with the probability of a
follow-on event (Panel B of table 3)
Ten year estimation window is used for the out of sample

test
Identify all stocks with a corporate distribution event
during the prior 12, 24, or 36 months
Sort stocks into ten groups based on probability of a
follow-on event in a month
Form portfolios which are long stocks falling into the
highest 1% and 5% estimated probability groups
Higher probability of recurring distribution, higher future returns
Stocks with highest 1%/5% probability of follow-on events
generate returns ranging from 1.1% to 2.6% per month
(Panel A of table 7)
5-day cumulative abnormal returns (CAR) around
announcement dates are 1.18%, 2.31%, 2.35%, and
3.24% for dividend increases, special dividends, stock
dividends, and stock splits, respectively (Panel A of table
2)
Fama-French-Carhart adjusted excess returns are
predominantly positive and significant
E.g., excess returns ranging from 50-65bps per
month for dividend increases (Panel B of table 6)
Results are robust over time (Table 8), across probability
payoffs (Table 9), are independent of the previously
documented abnormal returns in earning announcement
months (Table 10) and ex-dividend months (Table 11)
Data
January 1962 - December 2012 stock distribution events
are from CRSP
Including cash dividends, special dividends, stock
dividends, and stock splits
Cash dividend in US dollar, dividend is quarterly,
semi-annual, or annual, dividend is taxable, dividend
increase is greater than five percent
Previous quarterly cash dividend must be paid
within a window of 20-90 trading days prior
Paper Type:
Working Papers
Date:
2013-10-03
Category:
Novel Strategy, Portfolio Choice, Rank Effect
Title:
The Worst, the Best, Ignoring All the Rest: The Rank Effect and
Trading Behavior
Authors:
Samuel M. Hartzmark
Source:
http://www.usc.edu/schools/business/FBE/seminars/papers/F_9-613_HARTZMARK.pdf
Link:
USC FBE Finance Seminar
Summary:
Investors are much more likely to sell the extreme winning and
extreme losing positions in their portfolios. This leads to significant
price reversals of 40-160bps per month in such stocks
When faced with a large number of possibilities, individuals
typically do not pay equal attention to each, but spend
more time examining the most salient
In other words, investors pay more attention to the
extreme winners/losers in their portfolios
Investors are more likely to sell their best and worst
position, based on return from purchase price, i.e., rank
effect
All holdings reported in a month M are examined 10 trading
days into month M+3
All stocks that are ranked best and worst in at least
one fund are put into an equal weighted portfolio
Form two equal weighted portfolios: 1) long the worst
ranked stocks 2) long the best ranked stocks
Control for momentum (using UMD) and control for a short
term reversal (using ST_REV)
Rank effect leads to price reversals
Best ranked portfolio has a monthly alpha of 36bps
Worst ranked portfolio has a monthly alpha of 161bps
(Table 12)
Enhancing the loser portfolio profit by forecasting selling
pressure
Method1: weight stocks by the number of funds that
hold them
Alpha is 163bps after controlling for the short
term reversal factor(Table 13)
Such weighting scheme does not work for
best-ranked stocks
Method2: weights stocks by the stocks market cap
that is extreme ranked
term reversal factor (Table 13)
Significant coefficient in Fama-Macbeth regressions (Table
14)
Data
Even after controlling for earnings announcement

premium, high-volume return premium and dividend
month premium
Similar patterns for both individual investors and mutual
funds (Figure 2)
Robust to the disposition effect (the tendency to sell gains
more than losses) (Table 4)
Robust to tax considerations: the effect is present every
month and empirically investor exhibit the opposite of their
optimal intra year tax motivated trades (Table 15)
1980-2011 mutual fund data are from Thompson-Reuters
January 1991 - November 1996 retail investors from a large
discount brokerage
Paper Type:
Working Papers
Date:
2013-10-03
Category:
Novel Strategy, Behavioural Finance, Sentiment Analysis
Title:
Web Sentiment Analysis for Revealing Public Opinions, Trends

and Making Good Financial Decisions
Authors:
Cristian Bissanttini and Kostos Christodoulou
Source:
SSRN Working Paper
Link:
Summary:
A trading strategy based on Yahoo message board sentiment

outperform market index and yields up to 35.1% in the August
2012 - May 2013 period
Yahoo stock message boards are becoming a popular
source for investors
It reflects investors views and information
Discussants rate stocks by five scales (strong
buy, buy, hold, sell or strong sell), which
can be converted into three scales: (1=strong
buy or buy, 0 =hold, -1= strong sell or sell)
A sentiment day, denoted as t, is the set of
message posts collected from 4:00PM of the
previous day (t-1) to 4:00PM that day
However, such message boards also suffers from noises:

large amount of uninformed and unimportant information
To reduce noise, weight each authors prediction by their
credibility
Compare each authors stock rating at time t with the
subsequent daily stock return over the market at time t+1
Authors with higher prediction accuracy is given higher
weight (credibility score)
For each stock, the aggregate recommendation SENTk(t)
is the weighted average of the recommendations ui(t) for
all posters who create posts on stock k on day t:
Out of 30 DJIA stocks, 10 stocks have statistically

significant number of observations (Table 2)
SENT reverses next day
For all stocks, when regressing SENT (t-1) on SENT
(t), all the coefficients are negative (Table 3)
Build an equally weighted portfolio comprised of four
stocks: BAC, HPQ, INTC and MSFT
These stocks have the maximum number of
observations, therefore they are the most
statistically significant stocks
If sentiment is greater than Upper Limit, then BUY; if
sentiment is lower than Lower Limit then SELL
The algorithms to estimate these limits not
disclosed (footnote 1)
SENT can predict future excessive stock return
During August 2012 - May 2013, the 3-scale sentiment
model earned 35.1% and the 5-scale model earned 31.1%
(Table on page 6)
Abnormal returns above the market of +11% for
the 3-scale and +7% for the 5-scale strategies are
observed
Market return is 17.1%, portfolio beta is 1.41, so
the EMH expected return is 24.1%
The two proposed methods (3- and 5- scale index model)
both works
3-scale-index model perform better
Such strategy weighted stock correctly
Maximizes profit on BAC and HPQ and minimize
losses on INTC (Graph on page 7)
By comparison, without credibility score, simply
aggregating individual recommendation have no prediction
power (Table 5)
Data
August 2012 - May 2013 adjusted closing price are

downloaded from Yahoo! Finance
August 28, 2012 - May 16, 2013 messages are from
Yahoo! Finance Message Boards
55,217 self-reported as sentiment posts, from
5,967 distinct authors on the 30 Dow Jones Index
stocks (figure 1)
Paper
Type:
Working Papers
Date:
2013-09-07
Category
:
Novel strategy, time-series momentum
Title:
Improving Time-Series Momentum Strategies: The Role of Volatility

Estimators and Trading Signal
Authors:
Akindynos-Nikolaos Baltas, Robert Kosowski
Source:
ESEM conference paper
Link:
http://www.eea-esem.com/files/papers/EEA-ESEM/2013/1403/BK_SigVol_v5.
pdf
Summar
y:
An improved version of time-series measure can greatly enhance performance

by lowering turnover
Background
Time-series momentum strategies (TSMOM): takes long(short)
position in assets with a positive(negative) past 12-month return
A drawback of TSMOM is its high turnover
By comparison, cross-section momentum selects assets with relatively
higher (not necessarily positive) past performances
TSMOM provides impressive diversification to investors tool during the
2008 financial crisis, as in previous business cycle downturns
Define constant-volatility strategy (CVOL): construct portfolio such
that each asset has same level of volatility
Trend detection reduces transaction costs by 2/3
The traditional TSMOM only use the sign of the past returns
But intuitively, investors only want to take a position when there exists
a clear trend
The solution: fitting a linear trend on the past 12-month daily futures
price series using least-square
Define TREND: takes the value of +1/-1 when the t-stat is above 2 or
below -2
Comparable Sharpe ratio, but 2/3 less trading cost
Sharpe ratio before transaction costs is 1.04 and 0.99 for traditional
TSMOM and TREND based TSMOM (Table V )
Mean return and volatility are all comparable
But TREND can reduce turnover by 2/3 for most contracts, ranging
from 55-85% (Panel B of Figure 6 )
Source: the paper

Slightly better performance when using alternative volatility estimators
Traditional volatility estimators, (e.g, the standard deviation of daily
returns), provide relatively noisy estimates, hence worsening the
turnover
Of various range estimators (those based on daily low/high prices), YZ
estimator works best (page9-10)
It accounts for overnight jump of the price, and is an unbiased
volatility estimator (page 10, formula 23)
Similar Sharpe ratio of 0.6 for all volatility estimators in a
out-of-sample test (Table III)
However, YZ estimator lowers the annualized turnover by 1/5,
compared with the conventional STDEV estimator
Hence generating greater risk-adjusted returns after accounting
for transaction costs (Panel A of Table III )
Data
1974-2013 data for 75 futures contracts are from Tick Data
26 commodities, 23 equity indices, 7 currencies and 19
short-term, medium-term and long-term bonds
Equity indices spot prices from Datastream
Paper Type:
Working Papers
Date:
2013-09-07
Category:
Novel strategy, quality
Title:
Quality Minus Junk
Authors:
Clifford S. Asness, Andrea Frazzini, Lasse Heje Pedersen
Source:
SSRN Working Paper
Link:
Summary:
Quality earns significant, yet time-varying excess returns in the

U.S. as well as globally across 24 countries
Definitions
Intuitively, high-quality stocks as those that are profitable,
growing, safe and well-managed
Define a quality score by averaging stocks rank on four
components:
Profitability gross profits/assets, return on equity,
return on assets, cash flow/assets, gross margin
and fraction of earnings that is cash
Growth prior five-year growth rates for each of
the six profitability measures
Safety market beta, idiosyncratic volatility,
leverage, bankruptcy risk and volatility of return on
equity
Payout net equity issuance and net debt
issuance, and (high) total net payout/profits
Quality, and the profitability component in particular, is
persistent (Table II)
That is, quality stocks tend to remain quality stocks
High-quality stocks tend to have slightly higher
price-to-book, lower market betas and large market
capitalizations
Constructing quality-minus-junk (QMJ) portfolios
Sort stocks by quality into value-weighted deciles
Rebalance monthly
The monthly QMJ return is long the top 30% high-quality
stocks and short the bottom 30% junk stocks within the
universe of large stocks and small stocks
The global portfolio is the value-weighted composite of
country portfolios
Higher quality, higher risk-adjusted returns

For US, the monthly four-factor adjusted return is 0.97%
(Table IV)
For international stocks, the monthly four-factor adjusted
return is 0.93% (Table IV)
Similar patterns for gross returns
Increase almost monotonically from low quality to
high quality
Considerably time-varying performance
Consistently strong during market downturns, in
line with the flight to quality effect
Not adding value in bubble time: February 2000,
intervals preceding the 1987 crash, the 2008
financial crisis
Source: the paper
Low (high) current QMJ factor portfolio returns predict

high (low) future returns
Double sort quality and value (high book-to-market ratio) works
Data
For the long-term U.S. (recent global developed markets)

sample, the optimal quality/value weighting is 70%/30%
(60%/40%), producing a gross annualized Sharpe ratio of
about 0.7 (0.9)
A low price of quality predicts a high future return of QMJ
1951 - 2012 data for U.S. stocks are from of the CRSP
1986 - 2012 data for stocks in 24 developed markets are
from XpressFeed Global database
Paper Type:
Working Papers
Date:
2013-09-07
Category:
Novel strategy, investor sentiment
Title:
Investor Sentiment Aligned: A Powerful Predictor of Stock Returns
Authors:
Dashan Huang, Fuwei Jiang, Jun Tu, Guofu Zhou
Source:
SSRN working papers
Link:
Summary:
A new measure of investor sentiment based on six individual

measures has much greater predictive power than classic factors.
It increases the R-squares by 5+ times both in-sample and
out-of-sample
Background
The influential Baker and Wurgler (BW) sentiment index is
based on the principal component analysis of six individual
sentiment measures:
o Close-end fund discount rate (CEFD)
o Share turnover (TURN)
o Number of IPOs (NIPO)
o First-day returns of IPOs (RIPO)
o Dividend premium (PDND)
o Equity share in new issues (S)
The BW index may be flawed since these six measures
could have common noise component
Use partial least squares (PLS) to simultaneously estimate
ISt (investor sentiment) and IRt (common error
component of all the proxies)
The new aligned measure (ISPLS) is
High correlation between ISPLS and BW: correlation is 0.7

(Table 1)
ISPLS perform much better than BW(Table 2)

In Sample
R2
Out of Sample
R2
BW
0.30%
1.54%
ISPLS
0.11%
1.26%
Because of the large unpredictable component in monthly

market return, monthly R2 statistic near 0.5% signal
economically large predictability
The magnitude of the slope coefficient on ISPLS is 0.55
Suggesting that a one-standard deviation increase
in ISPLS is associated with a 0.55% decrease in
excess market return for the next month
Note that the average monthly return is only
0.31%, the return based on ISPLS varies by about
two times larger than the average equity risk
premium
Performs much better than other commonly used macroeconomic

variables
14 economic variables are the log dividend-price ratio
(DP), log dividend yield (DY), log earnings-price ratio (EP),
log dividend payout ratio (DE), etc
The in-sample R2s of those variables vary from 0.01% to
1.23% (only two of them exceed 1%), all below 1.54% of
the aligned investor sentiment
None of the 14 variables generate positive R2 over
1985:012010:12 (Panel B of Table 5)
Aligned investor sentiment captured by ISPLS substantially
improves the out-of-samplpredictability of BW index (Table
5)
ISPLS also improves forecasting power for the cross-section of
stock returns
Tested portfolios formed on industry, size, value, and
momentum, etc
E.g., for Technology stocks, BW index has in-sample R2 of
1.1%, while ISPLS has 2.21%
ISPLS significantly forecasts 9 (8; 9) out of 10 portfolios
sorted on size (book-to-market; momentum), while BW
Data
only significantly forecasts 9 (5; 5) corresponding

characteristics portfolios
Almost all the R2 of ISPLS are much larger the
corresponding R2 of BW
E.g., the R2 of ISPLS for large cap portfolio is
1.62%, while the corresponding R2 of BW is 0.26%
July 1965 - December 2010 BW index data are from

Jeffrey Wurglers website
Paper Type:
Working Papers
Date:
2013-08-02
Category:
Novel strategy, reversal around earning announcements
Title:
News-Driven Return Reversals: Liquidity Provision Ahead of

Earnings News
Authors:
Eric C. So and Sean Wang
Source:
UMN Empirical Conference paper
Link:
http://www.csom.umn.edu/accounting/empirical-conference-201
3/documents/EricSoPaper.pdf
Summary:
Profit of short-term reversal strategy can be enhanced by

six-folds when concentrating in earnings announcements. Such
pattern holds for stocks within SP500 as well
Intuition
In essence, return reversal strategy is to provide liquidity
to other investors who wants to buy/sell stocks
Providing liquidity immediately before earnings
announcements takes increased risks and hence requires
higher returns
So the short-term return before announcements can be a
proxy of cost of providing liquidity, which can be harvested
right after the announcements
Define pre-announcement return (PAR) : the cumulative
market-adjusted return during [t-4, t-2], where t is the
firms earnings announcement date
Calculate portfolio returns over [t-1, t+1], as well as over
[t+2, t+5] and [t+6, t+8]
Six times higher reversals over [t-1, t+1]

Sort stocks by PAR
The [t-1, t+1] 3-day market-adjusted hedged return is
1.44% and significant at the 1% level (Panel A, Table 3)
Low PAR stocks earn a significant 81 basis points
High PAR stocks lose an insignificant 63 basis
points
Six times higher profits than that over non-announcement
dates 0.24% (Panel B, Table 3)
No such effect after the [t-1, t+1] window
Become insignificant during [t+6, t+8] (Panel A of
Table 3 )
Similar magnitude for S&P500 stocks (Table 4)
Stronger reversals for higher volatility stocks
Define volatility using option implied volatilities
Double-sorting stocks observations by PAR and volatility
For high volatility stocks, the average reversal is 219 basis
points (Panel A, Table 7)
For low volatility stocks, the average reversal is 90 basis
points
Return reversals are highly correlated with VIX
The higher the VIX, the higher the reversal returns (Table
8)
Suggesting that when near-term volatility is high, liquidity
provision is more highly priced
Data
1996 - 2011 stock data are from CRSP, Compustat, and
OptionMetrics
Paper Type:
Working Papers
Date:
2013-08-02
Category:
Novel strategy, crash indicators
Title:
Stock Crashes Led by Accelerated Price Growth
Authors:
James Xiong
Source:
SSRN Working Paper
Link:
Summary:
Faster-than-exponential growth over the last 2-3 years predicts

stock price crashes
Methodology
Each month, measures past price returns in month [-6,0]
and month [-12,-6]
Source: the paper
Identifying accelerating stocks: (k t - kt-1) > 0) indicates

an accelerated growth rate, i.e., faster than exponential
growth
Identifying crashes using three monthly measures
(1) Skewness (SKEW): the third standardized
moment. Negative skewness indicates the
likelihood of large negative returns
(2) Excess conditional value-at-risk (ECVaR): the
expected tail loss, which is the expected VaR by
controlling for stock volatility
(3) Maximum drawdown (MDD): the cumulative
loss from the peak to the trough over a specified
period
All these indicators are based on six months of daily
returns
SKEW and ECVaR strongly correlated with an correlation of
0.78 (Table 1)
Limited correlation between MDD and other two metrics
(0.22 and 0.34, Table 1)
Higher return accelerations, lower returns
Regression method
Dependent variable is either SKEWi,t+1,
ECVaRi,t+1, or MDDi,t+1
Data
Independent variables (1) past 6 month return, (2)

standard deviation of stock is daily returns, (3) the
log of stock is market capitalization (4) detrended
average monthly share turnover
Faster-than-exponential growth rate (k t - kt-1)
predicts stock crashes
E.g., for SKEW, the (k t - kt-1) coefficients are
-0.12 with t-stat of -7.22 (Table 2B)
Portfolio method: monthly rank stocks into quintiles by (k
t - kt-1)
Controlling for either volatility or momentum
High accelerations stocks significantly
underperforms
Average return for high-acceleration quintile stocks
is 5.3% (vs 12.7% of low-acceleration stocks)
(Table 3, 4)
Average risk-adjust alpha is -2.7% (vs -5.0% of
low-acceleration stocks) (Table 3, 4)
Sharpe ratio for high-acceleration stocks is only
0.31, vs 0.62 of low-accelration stocks (Table 3, 4)
Robust to factors such as momentum, liquidity,
market cap, and book-to-market ratio
January 1960 through December 2011 stock daily returns
data are from CRSP
Include those in the top 80% market capitalizations and
priced above $2
Paper Type:
Working Papers
Date:
2013-08-02
Category:
Novel strategy, adjusting earnings by inflation
Title:
Accounting and the Macroeconomy: The Case of Aggregate

Price-Level Effects on Individual Stocks
Authors:
Yaniv Konchitchki
Source:
SSRN Working Paper
Link:
Summary:
Financial statements do not account for the impact of inflation on

the balance sheet items.
A strategy that makes inflation adjustment to nominal earnings

consistently yields abnormal returns of 10%+ per year, even
after controlling for accruals effect
Intuition
Financial statements do not account inflation effects that
vary across firms and over time
E.g., under U.S. GAAP, a land purchased for $100
sixty years ago and another for $100 one year ago,
the firm recognizes land at $200 in its financial
statements
Hence investors may not fully impound the implications of
inflation, leading to potential equity mispricing
Non-monetary holdings are usually held for several years
and thus accumulate inflationary effects over time
Monetary holdings are naturally hedged as the exposure to
monetary assets cancels the exposure to monetary
liabilities for the average firm
Definitions
Group financial statement holdings into two classes
Monetary (e.g. cash, liabilities) = monetary assets
- monetary liabilities = current assets - inventories
- total liabilities
Non-monetary (e.g. land) = PPE + Inventories +
Intangibles Total Liabilities Other Monetary
Define Inflation-adjusted earnings = Nominal earnings
adjusted by the change of each balance sheet item
(Inventory, PPE, Intangibles, Common Dividends,
Preferred Dividends, etc) using their respective lifecycles
(see Appendix at https://sites.google.com/site/ykonchit/)
For example, PPE is adjusted by PPE life cycle
Inventory is adjusted by the inventory turnover
ratio
Intangibles is adjusted by ratio of intangible /
the amortization of the related intangibles
Define InfEffect = (Inflation-adjusted earnings Nominal earnings) / (Total assets)
InfEffect is the periodic unrecognized inflation
effect on a firm
Define InfEffect_NetMonetary = -NetMonetaryHolding * t
where t is the annual inflation rate associated with
the fiscal year
Monetary Holdings equals to their nominal amounts
Define InfEffect_NonMonetary = InfEffect
InfEffect_NetMonetary
Sort stocks by InfEffect, InfEffect_NetMonetary, and
InfEffect_NonMonetary respectively
Data
The lowest InfEffect outperforms its highest counterpart by

10%+ per year on a risk-adjusted basis (Table 1)
Robust to momentum, net operating assets (NOA)
in addition to the three Fama-French factors (Table
2)
Consistent performance: positive returns in 26 of
28 years
Most such return comes from InfEffect_NonMonetary
The maximum risk-adjusted return is 13.49% with
a t-statistic of 5.66 (Table 3)
Consistent performance: positive returns in 28 of
28 years
Sorting stocks based on InfEffect_NetMonetary does not
yield significant returns (Table 3)
1984 to 2012 US stocks Nominal data are from CRSP and
Compustat from
Data on consumer price indices are from the FRED
Economic Research Data dataset of the Federal Reserve
Bank of St. Louis
Paper Type:
Working Papers
Date:
2013-08-02
Category:
Novel strategy, sin stocks, alcohol/defense/gambling/tobacco

industry
Title:
Can it be Good to be Bad? Evidence on the performance of US sin

stocks
Authors:
Anders Karln and Sebastian Poulsen
Source:
Ume School of Business and Economics Working Paper
Link:
http://umu.diva-portal.org/smash/get/diva2:634943/FULLTEXT01
Summary:
Sin stocks (stocks in alcohol/defense/gambling/tobacco

industries) on average beat the market by 5.8% annually, a
pattern that holds in past 50 years as well as in the most recent
five years. Tobacco industry has the highest abnormal return
Background
The influence of societal norms on investment decisions
has increased in the last decades
Socially responsible investing (SRI) mutual funds now

manage more than 11% of the total assets in the US in
2012
Some large institutional investors abstain from certain
sin industries such as alcohol/defense/gambling/tobacco
Define a SINDEX (Sinful Index) as value weighted indices
of all the stocks from these four sin industries
Sin stocks generate significant positive alphas
All industries have a positive mean return over the market
(Table 4, Figure 8)
The average annual excess return for SINDEX is
3.9 %
Tobacco Index (TINDEX) has the highest annual
excess return of 8.0% (Table 11)
Alcohol Index (AINDEX), Defense Index (DINDEX)
and Gambling Index (GINDEX) has an annual
excess return of 2.6%, 4.1% and 1.7% (Table 11)
SINDEX produces 5.7% annual alphas in Fama-French
3-factor regressions (Table 6)
Low beta: the market coefficient slopes between 0.6 and
0.7
Indicating SINDEX is less volatile than the market
Decent performance in recent years (Table 7)
2007 - 2012 annual 4-factor adjusted alpha is
8.8%
Consistent out-performance (Figure 7)
10-year rolling alpha ranges from a low of 0.2% to
a high of 0.9% with an average of 0.5%
Source: the paper
Data
Equally weighted SINDEX outperforms even more (Table

13)
Abnormal returns range from 10.0% to 13.0%
annually for CAPM, 3-factor model, and 4-factor
model and all significant at the 1% level
1973 - 2012 stocks data are from Datastream
The final sample includes 159 stocks, of which 76 were
still actively traded
Pape
r
Type
:
Working Papers
Date
:
2013-07-03
Cate
gory
:
Novel strategy, anomalies, institutional holding changes
Title
:
Institutional Investors and Stock Return Anomalies
Auth
ors:
Roger M. Edelen, zgr . nce, Gregory B. Kadlec
Sour
ce:
University of Alberta Working Pape
Link: http://www.business.ualberta.ca/en/Departments/FSA/~/media/business/Depart
ments/FSA/Documents/Frontiers%20in%20Finance/RogerEdelen.pdf
Sum
mar
y:
Institutional investors increase holdings of stocks in the short portfolios of many

anomalies before portfolio formation. Many popular anomaly strategies can be
enhanced by conditioning on institutional holding changes
Background
This paper studies the interaction of various anomalies and institutional
investor holding changes
Define alignment stocks as those long (short) anomaly stocks that have
shown an increase (decrease) in number of institutional
shareholders(#Inst) prior to portfolio formation
Define against stocks as those long (short) stocks that have shown
decreased (increased) #Inst prior to portfolio formation
Covers 12 anomalies, including accruals, profitability, investment,

financing, book-to-market, distress, and momentum (Table I)
Annual rebalance for each anomaly except momentum
Equal weight top and bottom tercile stocks
Most anomalies derive their abnormal returns primarily from the
short leg (overvalued stocks) of the portfolio (Table II)
Much higher #Inst change for short stocks
Group long/short stocks by changes of #Inst over calendar year t-1
Note that this is 6-months prior to the measurement of anomaly
returns which start in June 30 of year t
Note the 6-month gap between the observation of #Inst changes
and anomaly returns, with momentum the only exception
Yet the #Inst changes pattern persist through the gap and the
anomaly return interval (Figure 1)
In 9 out of 12 anomalies, short stocks have higher #Inst changes (Table III
Panel A), with MOM a strong exception
For short leg stocks, the average #Inst change is 37.7%, much
larger than that for long leg stocks (24.9%)
Anomaly returns mostly come from against stocks
Anomaly returns are concentrated in stocks where the defining
characteristic (e.g., low vs. high accruals) is accompanied by a change in
#Inst on the wrong side of the anomaly
Across the 12 anomalies, the average monthly alpha for stocks where
institutions trade with the anomaly is 26 bps (t-stat = 2.4), much lower
than the 87 bps (t-stat = 7.0) for against stocks (Table IV)
Source: the paper
Data
Institutional investors seem to buy the wrong stocks

For 9 out of the 12 anomalies, the pre-anomaly #Inst change is on
the wrong side of the anomaly (Table IV)
Robust to alternative measures: such as the change in the fraction of
shares held by institutional investors (%Inst), the change in the fraction of
shares held by mutual funds (%MF), etc(Table III, Panel B/C/D)
July 1981 - June 2012 institutional holdings is from ThomsonReuters
Institutional Holdings (13F)
Mutual fund holdings are from Thomson-Reuters Mutual Fund Holdings
database

Paper
Type:
Working Papers
Date:
2013-07-03
Category: Novel strategy, company guidance range, analyst estimate

Title:
Investor Overreaction to Analyst Reference Points
Authors:
Jean-Sebastien Michel
Source:
SSRN working paper
Link:
Summary
:
Analysts tend to keep their estimates within the company guidance range.
Those estimates that are exactly equal to endpoints of guidance range may
suggest analysts conservatism. Investors overreact to such forecasts, but
not other types of forecasts
Most companies tend to give a range of their expected earnings
Analysts tend to keep their estimates within the company issued
guidance (CIG) range. Any estimates outside of the range signals
analysts unusual confidence, and may risk their reputation
Investors seem to be overconfident that endpoints estimates are
conservative, and overreact to such estimates
Define Low RP (reference point): equals 1 when at least one analyst
forecast equals the low point of CIG, and 0 otherwise
Define High RP: equals 1 when at least one analyst forecast equals
the high point of CIG, and 0 otherwise
Define No RP (low): equals 1 when all analyst forecasts are less
than the low point of CIG , and 0 otherwise
Define No RP (High): equals 1 when all analyst forecasts are greater
than the high point of CIG, and 0 otherwise
Define forecast error: the percentage difference between the analyst
quarterly EPS forecast and realized quarterly EPS
1/3 of estimates are on the endpoints, with comparable forecast error
The percentage of forecasts exactly equal to the CIG Low (High) are
around 15% (20%) (Table 1)
The percentage of forecasts between the CIG Low and High hovers
around 50%. (Table 1)
When Analyst Forecast < CIG Low, the error is much higher at 19%,
compared with other cases where the error is -2% to 4% (Table 1, 2)
Strong reversal on announcement days for low RP stocks
For the Low RP stocks, days before the earnings announcements see
large negative abnormal return
T-stat is significant (Table 4)
Suggesting that investors react more strongly to analyst

forecasts in this case
Similar pattern for No RP (Low) and No RP (High) stocks (Table 4,
Figure2)
Source: the paper

The over-reaction theory is further supported by higher turnover
Low (high) RP stocks have share turnover of 2.67% (2.64%)
30% higher than the turnover of No RP stocks whose turnover is
2.09%. (Table 8 panel A)
Not driven by the magnitude of the forecast
When comparing the forecasts equal to CIG endpoints to those
that exceed CIG endpoints, the overreaction is even more
pronounced
Data
January 2000 to June 2011 EPS guidance are from First Call
Only retain range estimates
Data on analyst EPS forecasts are from the I/B/E/S
Stock returns, prices and shares outstanding are from
CRSP/Compustat
Paper
Type:
Working Papers
Date:
2013-06-02
Categor
y:
Novel strategy, stock duration, institutional holding period
Title:
Stock Duration and Misvaluation
Authors
:
Martijn Cremers, Ankur Pareek, Zacharias Sautner
Source: SFS conference paper

Link:
http://www.sfs.org/PaperforCavalcadewebsite2013/Stock%20Duration%20and
%20Misvaluation.pdf
Summa
ry:
Stocks with high presence of short-term investors are more likely to be

over-valuated. Within high M/B stocks, a portfolio that is long(short) high(low)
Stock Duration (a proxy of institution investor ownership) generates significant
alphas
Short-term investors are more prone to overconfidence which may
cause stock prices diverging from their fundamentals
Consequently, stocks with high presence of short-term investors may
display strong mean reversion
Stock Duration(SD) is defined as the weighted average length of time
that institutional investors have held a stock in their portfolios
SD measures indirectly measures short-term investor ownership
SD is not share turnover
Share turnover is (and SD is not) strongly affected by the recent
increase in high frequency trading (HFT), as HFT traders have
little overnight exposure
Institutional turnover is the changes in the quarterly holdings
over the past year
The correlation between institutional turnover and SD is -57%
Recent years see simultaneous increase of both SD and share turnover
Share annual turnover has increased from 72% in 1985 to 300%
in 2010
SD has been slightly increasing during the same period: 1.2
years in 1985 and 1.5 years in 2010
May be driven by the major recent shift towards indexing which
is inherently longer-term
Constructing quarterly portfolios
Portfolio1: sort by
SD
Generates an insignificant 4-factor

alpha (Table 6, panel A)
Portfolio2: double
sort by SD and
M/B
Generates significant 4-factor alpha of

4% (Table 6, panel B)
No value premium within highest SD
stocks
Value premium within shortest SD
stocks: the alpha spread between
highest/lowest M/B 8.2% per year
Portfolio3: triple
Negative 4-factor alpha of -5% for
sort on SD, M/B,

and past returns
stocks with high M/B, short SD and low

prior 6-month returns (Table 7, with
Panel D)
For stocks with low SD and low prior
6-month returns, high M/B stocks
underperform low M/B stocks by 7%
annually in 4-factor alpha terms
Source: the paper

Data
1985-2010 mutual fund holdings data are from the Thomson Financial
CDA/Spectrum database of SEC 13F filings
Stock return/accounting data is from CRSP/COMPUSTAT
Paper Type:
Working Papers
Date:
2013-06-02
Category:
Novel strategy, Google search volume
Title:
Quantifying Trading Behavior in Financial Markets Using Google
Trends
Authors:
Tobias Preis, Helen Susannah Moat and H. Eugene Stanley
Source:
SSRN Working Paper
Link:
Summary:
A Google Trends strategy, which buys (sells) DJIA index when

search volume for certain keywords decreases (increases), earns
significantly higher returns than a buy-and-hold strategy
Intuition
Investors may search for information online before they
buy or sell
Volume of certain search keywords may reflect aggregate
investor sentiment
E.g. Stocks, Dow Jones
Google Trends provides aggregated search volume of
different search terms over time
Such tools may help quantify investor sentiment and build
profitable trading strategies
Methodology
Select search keywords: select 98 keywords by calculating
frequency of each word in Financial Times articles from
2004/8 to 2011/6, normalized by number of Google hits
for each search term
Step1: each week, compute search ratio over the previous
three weeks using Google Trends
Search ratio = Search volume of a specific term,
e.g. debt / total Google search volume
Step2: for each keyword, calculate search volume change
Search volume change = this weeks search ratio
- search ratio over the previous three weeks
Step3: sell (buy) DJIA on the first day of the next week if
the weekly search volume change is positive (negative),
hold for one week
Ignore transaction fees. The maximum transactions per
year is 104
Significantly higher returns
Benchmark1 (Buy and hold): buy DJIA index at the
beginning and selling it at the end of the period
Benchmark2 (Dow Jones weekly momentum strategy):
use weekly DJIA closing price changes as the basis of buy
and sell decisions
Google Trends strategy based on the search term debt
The Google Trends strategy would have increased
the value of a portfolio by 326% from 2004 to 2011
By comparison, the DowJones index only grows

16%
Data
Google Trends strategy based on 98 search terms

On average, Google Trends strategies beat
benchmark1 (benchmark2) strategy which yield
16% (33%) profits (Figure 3A)
Increases (decreases) in the price of the DJIA were
preceded by a decrease (increase) in search
volume
The return generated by the 98 search terms is
correlated with its financial relevance (based on
frequency of each search term in the online edition
of Financial Times)
The best-performing search term is debt
Both long and short legs work
Returns from both sides are significantly higher
than benchmarks(Figure 4A and 4B)
1/5/2004 to 2/22/2011 search data are from Google
Trends (http://www.google.com/trends)
Retrieve data on the number of hits for search terms in
the online edition of the Financial Times on 6/7/2011 and
the numbers of Google hits for these terms on 6/8/2011
Paper Type:
Working Papers
Date:
2013-06-02
Category:
Novel strategy, S&P500 marketing timing, RSI, VIX
Title:
Profit By Combining RSI And VIX
Authors:
SystemTrader
Source:
SystemTrader blog
Link:
http://systemtradersuccess.com/vix-rsi/
Summary:
A simple S&P500 market timing strategy based on RSI and VIX

generate solid performance
Intuition
It is desirable to buy pullbacks in an uptrend market
This study uses the VIX index to gauge when the market is
experiencing a pullback
Simple strategy
The S&P500 index must be above its 200-day moving
average to buy
Buy when RSI(2) of the VIX is above 90
Exit when RSI(2) of the VIX falls below 30
Where RSI(2) = 100 100 /(1+Average Gain in past 2
days / Average Loss in past 2 days)
Solid performance for most of the time
Did well except during the U.S. debt crisis in late summer
of 2011
Buy threshold values of 80 and above produces solid
performance
Paper Type:
Working Papers
Date:
2013-06-02
Category:
Novel strategy, distress predict, Moody KMV measure
Title:
The Global Relation Between Financial Distress and Equity

Returns
Authors:
Pengjie Gao, Christopher A. Parsons, and Jianfeng Shen
Source:
Notre Dame working paper
Link:
http://www3.nd.edu/~pgao/papers/Default_March2013.pdf
Summary:
Higher default probabilities strongly predict lower equity returns,

a pattern that is especially strong among small firms in North
America and Europe
Background
The Expected Default Frequencies(EDF) measure is an
estimate of the probability of default for a given firm,
based initially on Mertons model of credit risk
Moodys produces EDF database that covers firms in over
50 countries
This study covers Europe, North America, Japan,

Asia-Pacific excluding Japan, Other America (excluding the
U.S. and Canada), Greater Middle East, and Africa
Episodes where EDF values rise sharply: (1) the Southeast
Asian financial crisis and the Russian default during 1997
and 1998; (2) the burst and aftermath of the dot-com
bubble beginning in the year 2000; and (3) the most
recent global financial crisis starting in late 2008 (Figure
1)
Constructing country-neutral portfolios
At the end every month t, group stocks into ten equally
sized groups within each country, based on their EDF
values
Every month, aggregate all firms within a given EDF decile
across all countries
Long(short) stocks the 10th (90th) EDF percentiles
Strong pattern among small stocks
Defined as those below the median size cutoff in their
respective countries
For month t+2 (t is the portfolio formation month), the
monthly cap-weighted risk-adjusted alpha spread is 53
basis points
Long lasting effect: For 3-, 6-, and 12-month holding
periods, value weighted four-factor alphas are 47/40/34
basis points per month (Table 3)
Monotonic pattern: for small cap stocks, returns goes
down as default risk goes up (per graph below)
No such pattern in large cap stocks (Table 3, Panel A)
Source: the paper
Data
1992-2010 default risk data are from Moody-KMVs

Expected Default Frequency (EDF)
Cover 36,000 firms in 39 countries, total 3.4 million
firm-month observations from
Stock data are from the CRSP/Compustat North America
merged database for U.S. stocks, Compustat North
America for Canadian stocks, and Compustat Global for
the remaining countries
Paper Type:
Working Papers
Date:
2013-06-02
Category:
Novel strategy, earning surprises, earnings announcement day

returns
Title:
Consistent Earnings Surprises
Authors:
Byoung-Hyoun Hwang and Dong Lou
Source:
London School of Economics Working Paper
Link:
http://personal.lse.ac.uk/loud/Analysts.pdf
Summary:
Bullish (bearish) analysts tend to report downward(upward)

biased forecasts, because they do not want to be contradicted by
coming earning announcements. Stock recommendations
positively predict announcement period returns. A long-short
portfolio earns monthly abnormal returns of 1.6%
Intuition
Analysts are evaluated by their forecast accuracy
Bullish (bearish) analysts are more likely to report
downward (upward) biased earnings estimates, as they do
not want to be contradicted by negative firm-specific news
Hence firms with more optimistic (pessimistic) average
recommendations may experience more positive
(negative) surprises and announcement day returns
Define consensus forecast: the average annual EPS
forecast across all forecasts issued in 3 months prior to
the earnings announcement
Define SUE: (actual EPS analysts consensus forecast
) / lagged stock price
Buy-rated stocks are more likely to have narrow beats

Within Buy stocks, 28% more stocks have Narrow Beat
than Narrow Miss
Within Hold/Sell stocks, only 19% more stocks have
Narrow Beat than Narrow Miss (Table5, Panel B)
Significant portfolios returns
Assign each recommendation a score: 5 (strong
buy), 4 (buy), 3 (hold), 2 (under-perform) and 1
(sell)
Each day long (short) stocks in the top (bottom)
recommendation tercile that are announcing
earnings in 3 trading days
Hold stocks for 7 trading days
Hold Treasury bill if no more than 10 stocks on
either the long or short side (happened on less
than 5% of the trading days)
Such portfolio generates monthly DGTW-adjusted return of
1.57% (t = 2.5) (Table 7)
The monthly Carhart four-factor alpha is 1.56% with t =
2.3 (Table 7)
Similar findings in regression: recommendation levels and
subsequent earnings-announcement-day returns are
positively correlated with coefficient of 0.245 (t = 3.76)
(Table 7)
Worked in the two groups of most optimistic/pessimistic
recommendation stocks(Table 4)
Worked in recent (post-2003) periods (Table 9)
Data
1993 2012 analyst stock recommendations and forecasts
are from IBES
Financial-statement and financial-market data are from
COMPUSTAT and the Center for Research in Security Prices
(CRSP), respectively
Paper Type:
Working Papers
Date:
2013-04-30
Category:
Novel strategy, sector rotation
Title:
Equity Sector Rotation via Credit Relative Value
Authors:
Dave Klein
Source:
NAAIM Wagner Award paper
Link:
http://www.naaim.org/wp-content/uploads/2013/00N_Equity_Se
ctor_Rotation-via__Credit-Relative_Value_David-Klein.pdf
Summary:
A sector rotation strategy, which selects sector ETFs based on

their fair value relative to a High Yield Bond index, consistently
generates higher return than S&P 500 index with lower risk
If credit risk rises (falls) among a suitably-chosen basket
of companies, then equity values will drop (rise) too
Define the fair value of a sector ETF as
Where HYB is the option-adjusted spreads for Bank of

America/Merrill Lynchs US High Yield Bond index
A and B are co-efficients in regressions that covers the prior
26 weeks
Define disconnect as how far (in %) each ETF is away
from fair value
Constructing the sector ETF portfolios

Each week, invest in an equal-weighted basket of the N
top-ranked ETFs out of total of 9 sector ETFs
Rebalance weekly
Superior risk-adjusted returns
Each basket strategy outperforms
Profit increases returns as N decreases (Exhibit 2)
Source: the paper
Maximum drawdown for all the strategies is comparable to

the SP500 index
Ranks sectors fairly well: excluded ETFs show lower return
than those included in the portfolio (Table 5)
Better performance when switching between sector ETFs and
Treasuries
The tactical asset allocation (TAAN) strategy
Step1: choose the N top-ranked ETFs and divide
assets into N equal shares
Step2: For each chosen ETFs, invest in ETF if the
fair value is greater than market value, otherwise
invest in 3-month Treasury bills
Better returns and lower drawdown
Though it lags the Basket6 strategy during bull
markets (Exhibit 4)
Consistent performance: profitable in every year of during
the sample period (Table 8
Data
Lower trading frequency: trade only when ETF is in/out of

portfolio
The number of transactions drops by 64% (To 2.4
per week from 6.8 per week) (Table 7)
1999/7 - 2012/12 prices of 9 sector ETFs are from Yahoo
Finance
3-month Treasury yields and option-adjusted spreads for
Bank of America/Merrill Lynchs US High Yield B index
(HY/B) are from St.Louis Feds FRED Economic database
Paper
Type:
Working Papers
Date:
2013-04-30
Catego
ry:
Novel strategy, disposition effect, short interest
Title:
Biased Shorts: Stock Market Implications of Short Sellers Disposition Effect
Author
Bastian von Beschwitz, Massimo Massa
s:
Source
:
Link:
http://icf.som.yale.edu/sites/default/files/2013%20Behavioral%20Conference/B
iased%20Shorts%20Bastian.pdf
Summ
ary:
Short sellers are subject to the disposition effect, similar to average investors. A
related strategy generates up to 26% annual alpha
Average investors demonstrate the disposition effect: they tend to hold
onto losing stocks to a greater extent than they hold onto their winning
stocks
Short sellers demonstrate similar pattern: they too tend to hold on to
their losing stocks
Define Short Sale Capital Gains Overhang I (SCGO I): the capital gains
overhang using the reference points
Where S is share of stocks that were shorted in different periods, P is the

price for each short selling horizon(1 day ago, in the last 3 days, in the
last 7 days, in the last 30 days and longer)
Define Short Sale Capital Gains Overhang II (SCGO II): the capital gains
overhang using the reference point computed from short seller horizon
For all investors in the market, define reference price
So Long Capital Gains Overhang (LCGO) = (Rt - Pt) / Rt

On average, each week 3.72% (median 1.55%) of shares outstanding
are on loan, with an average holding period of 5-8 weeks (Table 1)
Average SCGO I is positive with 0.97%, average LCGO is 0.87% (Table
1)
Higher SCGO, less shares covered by short-sellers
Regressing closing (i.e., shares returned / shared on loan) on SCGO,
plus risk variables such as stock turnover in the past year and past
returns(Table 2)
A one standard deviation (10.86%) increase in SCGO raises the closing
of the short position by 0.6% percentage points, or approximately 5%
relative to its median (Table 2)
SCGO negatively predicts future stock returns
Constructing portfolio: long stocks in the lowest SCGO quartile and short
those in the highest SCGO quartile
Weekly 3-factor alpha is 20 - 30 basis points (11.5% to 18% annually)
When excluding January (when trades might be influenced by tax
considerations), the alpha is 14.5% to 26% per year
Not surprisingly, it did not work only in the case of very negative past
returns (Table 6)
Robust to disposition effect of other investors
Regress stock returns on SCGO and the capital gains for the market
overall (LCGO)
One standard deviation of SCGO decreases the return by 3.3% per year,
when controlling for LCGO
One standard deviation increase in LCGO increases the return 7% per
year, when controlling for SCGO
Data
2004 - 2010 US stocks weekly short interest data are from Data Explorer
US stock price and accounting data are from CRSP/Compustat
Paper Type:
Working Papers
Date:
2013-04-30
Category:
Novel strategy, industry lead-lag, cross border industry prices
Title:
Cross-Border Links and the Global Flow of Industry News
Authors:
Ben Ranish
Source:
Link:
http://www.people.fas.harvard.edu/~branish/papers/IndustryNews.pdf
Summary:
Cross border industry news is only gradually diffused to stocks in other

countries. A related strategy generates an annual return of 8%. Such
profit however is declining in recent years
Intuitions
Industry news is typically relevant in several countries
However, cross border industry news is only gradually
incorporated into stock prices in other countries
This study covers 47 industries in up to 55 countries over a
period of 25 years
Significant profit for global industry momentum portfolio
Step1: buy industry portfolios in each country, weighted

by the amount by which the industry has recently
outperformed in foreign markets
Step2: similarly, short industries which underperformed
in foreign markets
The annual return is 7% (63bps per month) (Table 9)
Similar effect in smaller markets
Equal weight (as opposed to value weighte) each market
yields raw returns averaging 8% versus 7% per month
(Table 9)
Effect last for 1-2 months
The first few trading days accounts for roughly half of
the total response
Robust to local industry momentum
Profits remain a significant 4.5% per year (Table 9)
Stronger effect in relatively homogeneous industries, such as
computer software, steel, and various mining industries
No such effect in some local service industries, such as
entertainment and health care
Source: the paper

Profit halved in the past years
Since 2003, the global momentum has yielded returns of only
about 2.5% per year, after controlling for local industry
momentum and Fama French factors
Data
1986-2010 US stock data are from CRSP/Compustat
SIC codes from Compustat are used to sort the stocks into the
Fama French industry portfolios
Currency exchange rates from Global Financial Database
Paper Type:
Working Papers
Date:
2013-04-30
Category:
Novel strategy, stock price leaders/followers, Granger causality
Title:
Cross-Firm Information Flows and the Predictability of Stock

Returns
Authors:
Anna Scherbina, Bernd Schlusch
Source:
GWU working paper
Link:
http://business.gwu.edu/finance/pdf/Paper-Apr-12.pdf
Summary:
Stock price leaders can be defined using their ability to

Granger-cause follower stocks prices. A lead-lag strategy
generates significant annual return of 5%, even after controlling
for firm- and industry-level variables
Intuition
Information can flow in unexpected directions from stock
to stock
Firms at the center of an issue (information leaders) can
lead the returns of stocks that are larger, in different
industry
A follower on average has 199 leaders, of which slightly
more than half are positive leaders (Table 1)
Only 14% leaders belong to the same industry as their
followers (Table 1)
No consistent leadership: The likelihood that a leader stays
a leader after one year is 3.83%
In many cases, leaders are small and belong to different
industries
Defining leaders
Step1: for each pair of stocks i and j, regress monthly
returns of stock i on the lag of its own return, the lag of
stock js return, and the lag of market return
Define stock j as leader of stock i if the absolute value

of the t-statistic on stock js lagged return exceeds
2.00
Step2: run such regressions for each month and for all
stock pairs, so as to identify a set of leaders for each stock
Lower leader signals, lower follower returns in the subsequent
month
Constructing portfolio: for each stock, form portfolios

based on the aggregate leader signals
Signal = regression coefficient * leader
current-month return
The 4-factor alpha is 0.39% per month when value
weighted (Table 2)
Similar 4-factor alpha of 0.33% per month during
1990-2011 (Table 4, panel F)
Similar findings when leaders are out of industry or
smaller(Table 4, panel G, H)
Short-lived leadership: the return is close to 0 when wait
up to 13 days before forming portfolios (Table 4, panel G,
H)
Only works reliably for positive leaders (Table 4, panel I, J
)
Similar findings when using weekly returns: 0.20%
monthly 4-factor alpha(Table 6)
Robustness
Stronger effect when a signal originates from smaller
leaders
Given the stronger effect when equal-weighting
leader signals than value-weighting
Robust to industry membership: both an intra-industry
strategy (sorting followers on their leaders within
industries) and an inter-industry strategy (sorting
followers on leaders from outside industries) works
Stocks leadership is positively related to the intensity of
news developments at the firm level
Since news are associated with more followers
(Table 7)
So this Granger analysis confirms the importance of
news
Data
1963 - 2011 US stock data is from CRSP/Compustat
2003-2010 news data are from the Thomson-Reuters
News Analytics dataset
Paper Type:
Working Papers
Date:
2013-03-31
Category:
Novel strategy, company conference calls, analysts
Title:
Playing Favorites: How Firms Prevent the Revelation of Bad News
Authors:
Lauren Cohen, Dong Lou, Christopher Malloy
Source:
Harvard Business School Working Paper
Link:
http://www.people.hbs.edu/lcohen/pdffiles/malcolou.pdf
Summary:
Firms that call on more bullish analysts during earnings

conference calls tend to underperform. A long-short portfolio
exploiting this casting behavior earns 5-factor abnormal returns
of 95 bps per month during 2003-2011
Intuition
Some firms strategically choreograph their earnings
conference calls
E.g., calling on analysts who are most bullish to ask
questions
The purpose is to cast conference calls to get
more positive analyst coverage
Such manipulation impacts stock returns
Since essentially this is to hide/delay negative
information, which eventually leaks out in the
future
Some firms have stronger incentives to cast the calls
(Table III)
E.g., those with higher discretionary accruals, those
barely meeting or exceeding earnings expectations,
and those with more stock price volatility
Firms with fewer analyst coverage and less
institutional ownership (Table I)
On average 2.7 unique analysts (out of an average of 13.5
analysts covering a stock) are called on during a typical
quarterly earnings call
Define RecIn-RecOut as the average recommendation level
by in analysts (i.e., those analysts a firm choose to call
on) versus those of the out analysts (i.e., those analysts
a firm does not call on, but who cover the firm)
Overall the stocks covered in this study are larger, have
lower book-to-market ratios (i.e., more growth-like),
and have higher institutional ownership (Table I)
Firms tend to call on bullish analysts
Median recommendation of participating analysts (vs those
analysts not in the call) is Buy (vs Hold)
Similar results when using panel/logit regressions
(Table II)
Such analysts tend to ask less difficult questions (Table X)
They ask shorter questions, which are followed by
shorter firm response
Higher contemporaneous returns, but lower future returns
Data
Much higher returns around the call when favorable

analysts are called on
A one standard-deviation increase of RecIn-RecOut
predicts a 36% increase in the contemporaneous
CARs (Table IV)
Much lower future earnings surprises and CARs (Table V)
54% lower CARs at the next announcement (Table
V, Columns 4-6)
A long-short portfolio earns 83 bps (Table VI)
During the 5 days around next earnings
announcement, long (short) the stocks with prior
RecIn<RecOut (RecIn>RecOut)
4-factor adjusted alpha is 83 bps (t=3)
Mainly driven by the Short portfolios relative
underperformance
Casting firms are more likely to restate their earnings
A one standard-deviation move in (RecIn-RecOut)
predicts a 10% increase in future restatements
(Table VII)
2003 - 2011 earnings conference call transcript data are
from Thomson Reuters StreetEvents data feed
Stock data are from CRSP/Compustat. Firm restatements
are from the Audit Analytics database
Analysts past forecasts and recommendations are from
IBES
Paper Type:
Working Papers
Date:
2013-03-31
Category:
Novel strategy, company conference calls, analysts
Title:
Playing Favorites: How Firms Prevent the Revelation of Bad News
Authors:
Lauren Cohen, Dong Lou, Christopher Malloy
Source:
Harvard Business School Working Paper
Link:
http://www.people.hbs.edu/lcohen/pdffiles/malcolou.pdf
Summary:
Firms that call on more bullish analysts during earnings

conference calls tend to underperform. A long-short portfolio
exploiting this casting behavior earns 5-factor abnormal returns
of 95 bps per month during 2003-2011
Intuition
Some firms strategically choreograph their earnings
conference calls
E.g., calling on analysts who are most bullish to ask
questions
The purpose is to cast conference calls to get
more positive analyst coverage
Such manipulation impacts stock returns
Since essentially this is to hide/delay negative
information, which eventually leaks out in the
future
Some firms have stronger incentives to cast the calls
(Table III)
E.g., those with higher discretionary accruals, those
barely meeting or exceeding earnings expectations,
and those with more stock price volatility
Firms with fewer analyst coverage and less
institutional ownership (Table I)
On average 2.7 unique analysts (out of an average of 13.5
analysts covering a stock) are called on during a typical
quarterly earnings call
Define RecIn-RecOut as the average recommendation level
by in analysts (i.e., those analysts a firm choose to call
on) versus those of the out analysts (i.e., those analysts
a firm does not call on, but who cover the firm)
Overall the stocks covered in this study are larger, have
lower book-to-market ratios (i.e., more growth-like),
and have higher institutional ownership (Table I)
Firms tend to call on bullish analysts
Median recommendation of participating analysts (vs those
analysts not in the call) is Buy (vs Hold)
Similar results when using panel/logit regressions
(Table II)
Such analysts tend to ask less difficult questions (Table X)
They ask shorter questions, which are followed by
shorter firm response
Higher contemporaneous returns, but lower future returns
Much higher returns around the call when favorable
analysts are called on
A one standard-deviation increase of RecIn-RecOut
predicts a 36% increase in the contemporaneous
CARs (Table IV)
Much lower future earnings surprises and CARs (Table V)
54% lower CARs at the next announcement (Table
V, Columns 4-6)
A long-short portfolio earns 83 bps (Table VI)
Data
During the 5 days around next earnings

announcement, long (short) the stocks with prior
RecIn<RecOut (RecIn>RecOut)
4-factor adjusted alpha is 83 bps (t=3)
Mainly driven by the Short portfolios relative
underperformance
Casting firms are more likely to restate their earnings
A one standard-deviation move in (RecIn-RecOut)
predicts a 10% increase in future restatements
(Table VII)
2003 - 2011 earnings conference call transcript data are
from Thomson Reuters StreetEvents data feed
Stock data are from CRSP/Compustat. Firm restatements
are from the Audit Analytics database
Analysts past forecasts and recommendations are from
IBES
Paper Type:
Working Papers
Date:
2013-02-28
Category:
Novel strategy, political beta, industry rotation
Title:
Political Sentiment and Predictable Returns
Authors:
Jawad M. Addoum, Alok Kumar
Source:
University of Miami working paper
Link:
http://bus.miami.edu/docs/UMBFC-2012/sba-ecommerce-50a101
8711854/PolPredict4_(3).pdf
Summary:
In US, policies of Democratic and Republican parties are usually

favorable to different industries. A trading strategy based on
political beta yields an annualized risk-adjusted return of 6%
Intuitions
In US, democratic and Republican party policies usually
have a different impact on different industries
Republican polices are more likely to be favorable
to Tobacco, Pharmaceuticals, and Finance-related
industries(Table 1)
Democratic polices are more likely to be favorable

to Health-care and Construction industries (Table
1)
Such political sensitive industries/stocks account for
17-27% of the total market capitalization
Before and after elections, investors identify industries
that may benefit from the policies of winning parties, such
demand shifts may have a strong impact on stock returns
Define political beta
Step1: each month for each industry, regress industrys
monthly returns on a Presidential Party indicator and
election year indicator
Where the Presidential Party indicator (RepubDummy)

variable is 1 (0) when the Presidential Party was
Republican (Democratic)
The term-period indicators are set to 1 during each
August - July period of a four-year Presidential term
Note that this methodology is similar to using the
UBS/Gallup Optimism Survey, which surveys the
optimism levels of Republicans and Democrats(Table
9)
Step2: define industries with large positive (negative)
coefficient as Republican (Democrat) industries
Step3: if the presidential party for the current month is
Republican (Democrat), long top 5 Republican (Democrat)
industries, and short top 5 Democrat (Republican)
industries
Portfolios are value-weighted using industry market
capitalization
Significant profits from industry strategy
Long portfolio earns an average
Works in 54 out of 73 years (in the graph below, dark
line=long portfolio, light line=short portfolio, dark dotted
line = market index, light dotted line = risk free)
Portfolio returns increase monotonically with political betas

(Table 2)
Sharpe ratio changes monotonically with political betas
Similar pattern when sorting stocks (instead of industries) (Table
3)
Long-Short portfolio earns an annualized risk-adjusted
return of 3.9%
Mostly comes from 1981 to 2011 period, where annual
return is 6.6%
Similar pattern for Sharpe ratio (Panel B, Table 3)
Similar pattern when using characteristic-adjusted returns
Stronger pattern when the challenger party won
Especially during transition from the Democratic to the
Republican Party (Table 4 Panel A)
The average monthly returns for the incumbent and
challenger victories are 0.22% and 0.78%, respectively
Stronger during high attention periods (Table 10)
I.e., the months surrounding the elections, and
years one and four of the Presidential term
Data
Stock data are from the Center for Research on Security
Prices (CRSP)
Paper Type:
Working Papers
Date:
2013-02-28
Category:
Title:
Trade Linkage and Cross-country Stock Return Predictability
Authors:
Tae-Hoon Lim
Source:
Link:
http://taehoonlim.com/Tae-Hoon_Lim_JobMarketPaper_Jan2013.
pdf
Summary:
A strategy of long (short) industry whose trade-linked industries

had high(low) returns yields an annualized return of 12% in US
and international markets. Such strategy is free of small-cap bias
Background
To identify customer-supplier relationship, earlier studies
used firms major customer disclosure information from
Compustat
This study, however, uses a new data source (GTAP),
which is relatively free of small stock problems
GTAP is widely used in international trade
literature but never in finance literature
GTAP provides data on cost spent on imported/exported
goods by industries around the world
E.g. quantities of iron and steel products imported
from Japan to Korea, and amounts of this iron and
steel consumed by Korean industries
As such, GTAP describes customer/supplier relationships
among industries across countries
Each month for each country/industry, calculate
customer returns as
where
- Vijd (proportion of cost spent by industry j in
country d on imported good i to cost spent on
imported good i by all industries in country d)
and then by
- Wic,d (proportion of exported good i to country d

from country c to all of exported good i from
country c)
Significant returns
Long-short portfolio yields monthly excess returns of
1.09% when sorted on customer industry returns, and
1.06% when sorted on supplier industry returns (Table 1)
Hence this strategy doesnt depend on short
positions
Similar findings in regressions: coefficients on lagged
customer industry returns are significant
Distinct from industry momentum: magnitude of
regression coefficients is much greater than the coefficient
on momentum (0.182 vs 0.098 in panel B, Table 2)
Consistent performance, including in recent periods (graph
below is based on customer portfolios)
Source: the paper

Data

Only include countries in the Morgan Stanley
Capital Index (MSCI) World Index or MSCI
Emerging Markets Index
For international countries, use of disaggregated

commodities and services by disaggregated industries
from the GTAP
For US, use the Benchmark Input-Output Surveys of the
Bureau of Economic Analysis (BEA)
Pape
r
Type
:
Working Papers
Date: 2013-02-28
Cate
gory:
Title: Trade Linkage and Cross-country Stock Return Predictability
Auth
ors:
Tae-Hoon Lim
Sour
ce:
Link:
http://taehoonlim.com/Tae-Hoon_Lim_JobMarketPaper_Jan2013.pdf
Sum
mary
:
A strategy of long (short) industry whose trade-linked industries had high(low)

returns yields an annualized return of 12% in US and international markets. Such
strategy is free of small-cap bias
Background
To identify customer-supplier relationship, earlier studies used firms
major customer disclosure information from Compustat
This study, however, uses a new data source (GTAP), which is relatively
free of small stock problems
GTAP is widely used in international trade literature but never in
finance literature
GTAP provides data on cost spent on imported/exported goods by
industries around the world
E.g. quantities of iron and steel products imported from Japan to
Korea, and amounts of this iron and steel consumed by Korean
industries
As such, GTAP describes customer/supplier relationships among industries
across countries
Each month for each country/industry, calculate customer returns as
where
- Vijd (proportion of cost spent by industry j in country d on imported
good i to cost spent on imported good i by all industries in country
d)
and then by
- Wic,d (proportion of exported good i to country d from country c
to all of exported good i from country c)
Significant returns
Long-short portfolio yields monthly excess returns of 1.09% when sorted
on customer industry returns, and 1.06% when sorted on supplier industry
returns (Table 1)
Hence this strategy doesnt depend on short positions
Similar findings in regressions: coefficients on lagged customer industry
returns are significant
Distinct from industry momentum: magnitude of regression coefficients is
much greater than the coefficient on momentum (0.182 vs 0.098 in panel
B, Table 2)
Consistent performance, including in recent periods (graph below is based
on customer portfolios)
Source: the paper

Data

Only include countries in the Morgan Stanley Capital Index (MSCI)
World Index or MSCI Emerging Markets Index
For international countries, use of disaggregated commodities and services
by disaggregated industries from the GTAP
For US, use the Benchmark Input-Output Surveys of the Bureau of
Economic Analysis (BEA)
Paper Type:
Working Papers
Date:
2013-02-28
Category:
Novel strategy, (dis)continuous Beta, high frequency data,

downside beta
Title:
Continuous Beta, Discontinuous Beta, and the Cross-Section of

Authors:
Sophia Zhengzi Li
Source:
Duke working paper
Link:
http://econ.duke.edu/uploads/media_items/jmp-sophiazhengzili.
original.pdf
Summary:
Stock market indices can move continuously or discontinuously

(jump). Using a second-by-second price database, this study
shows that only stocks discontinuous beta is priced but not
continuous beta. A strategy that goes long(short) stocks in the
highest(lowest) discontinuous beta decile yields 17% per annum
Intuition
Investors care more about large market movements, and
less about small market movements
If an stock co-varies strongly with market discontinuities,
investors may demand higher return, since such stock
tends to suffer badly when the market goes down sharply
Methodology of calculating betas
Standard beta: each month end, regress stock excess
returns on daily market index returns for previous 12
month
Discontinuous and Continuous beta: for each month,
aggregate the past 12 months high-frequency data
(sampled at every 75-minute interval between 9:45 am

and 4:00 pm) regressions
Where
and
are the continuous and the
discontinuous parts of the market return.

and
are the Discontinuous and Continuous beta
Discontinuous betas have larger magnitudes than the
continuous betas (Table 1, panel A)
These three betas are different: e.g., positive correlation
between illiquidity and discontinuous betas, but negative
relationship between illiquidity and other two betas (Table
2)
Highest return predictability for discontinuous beta (Table 1,
panel A-D)
Standard beta
0.95%
Continuous beta
1.04%
Discontinuous
beta
1.47%
Discontinuous beta has the highest predictability after

controlling for various risk factors, followed by standard
beta and then continuous beta (Per Table 4, Table 6)
Jump risk premium is 3% per annum after
controlling for all other variables (Table 9)
Robust to various sampling frequencies: the baseline
sampling frequency is 75 minutes, but similar patterns
when using 5 to 180 minutes
Robust to portfolio holding period from 1 to 12 months
Discontinuous betas subsumes idiosyncratic volatility (IVOL)
IVOL weakly positively predict future returns (Table 8,
note the universe is SP500 here, as opposed to all stocks
in earlier studies)
When add discontinuous beta, the regression significance
is all but gone (Table 8)
Data
1993-2010 second-by-second price records for S&P500
stocks are from TAQ database
Total of 985 distinct stocks and 4,535 trading days
Daily and monthly stock returns are from for Research in
Securities Prices (CRSP) database

Paper Type:
Working Papers
Date:
2013-02-28
Category:
Novel strategy, insider trading, analyst revi
Title:
Insider Trading and Analyst Forecast Revisions: Global Evidence
Authors:
Wen Jin, Joshua Livnat, and Yuan Zhang
Source:
SSRN Working Paper
Link:
Summary:
Stocks with analysts revision confirming prior insider trading

yields significant return spreads, with a return spread of 8.6% in
the three-day period surrounding the revision. Such interaction
works best for insider sales in US, and for insider purchases in
Definitions
INSIDER: set to 1 if there is any insider trading activity in
the designated window, and 0 otherwise
Insider PURCHASE (SALE): set to 1 if the aggregate
time-weighted trading is a net purchase (sale), and 0
otherwise
In US, there are 833 purchases and 1439 sells on average
each month
In international market, there are 1478 net purchase
position and 904 net sale position each month(Table 5)
Suggesting a weaker emphasis on stock-based
compensation outside of the US
Insider trading predicts stock returns
From January 1996 to October 2011, long(short) insider
buy(sell) earns 0.22% in the 30-day window after the
calendar month end (Table 1)
Most of the hedge return coming from long portfolio:
suggesting that insider purchases are more informative
In international market, the returns spread is 0.77%, with
more return comes from short portfolio
Market reacts immediately to analyst revisions
Sort the analyst forecast revisions into 10 deciles
In US, the three-day hedged return is 7.6% (Table 2,
Panel A)
In international markets, the hedged return is much lower
at 2.5% (Table 6 Panel A )
Insiders trading and analyst revisions are supplement to each
other
Data
In the US market, when analysts confirm the insider

trading signal, the hedged return around the three-day
period surrounding the revision is 8.6%, with the lowest
(highest) decile of revisions earns -5.2% (3.4%)
When analysts conflict with prior insider trading, the
hedged return is 7.1% (20% lower than confirming
scenario)
When analysts agree with insiders, the market
responds more strongly (coefficient 25% higher) to
their forecast revisions (Panel B, Table 7)
1996-2012 US data are from the Thomson Reuters insider
trading database
Analyst forecast data are from IBES
2006-2012 international insider trading data are from 2iQ
Research, which covers European and Asia-Pacific
countries
Paper
Type:
Working Papers
Date:
2013-01-31
Catego
ry:
Novel strategy, industry rotation, large cap stocks with extreme returns
Title:
Trading On Coinciden
Author
s:
Alex Chinco
Source
:
Link:
https://bepp.wharton.upenn.edu/bepp/assets/File/AE-S13-Chinco.pdf
Summ
ary:
Investors pay more attention to the ten large cap stocks with the highest/lowest
returns, and consequently buy/sell other stocks in the same industry. A trading
strategy that buys/sells industries of past winner/losers generates 11% excess
return annually
Intuition
It is impossible for any investors to digest the vast amount of
information available
So investors may pay far more attention to stocks whose returns are
highest/lowest
Investors then choose to buy/sell stocks in the same industries as those
winner/losers, driving their returns up/down
E.g., Apple and Dell realized top ten returns from October to
December 2005, while Ford, GM, and Toyota are among the ten
stocks with the lowest returns
Consequently, by January of 2006 investors buy computer
hardware stocks and sell auto stocks
Such pattern is called coincidence co-movement
Step1: Set the parameters - suppose investors care about top/bottom 10
stocks (within S&P500 universe) with extreme returns over the last 3
months, look for at least 2 stocks from the same industry, and hold
portfolio for 1 month
Step2: If at least 2 stocks from same industry were in the group of
top/bottom 10 stocks, then in next month long/short an equally
weighted portfolio of all stocks in such industry except for the stocks with
highest returns
E.g., in Jan 2006 this strategy would be long all computer
hardware stocks except for Apple and Dell, and short all
automotive stocks except for Ford, GM, and Toyota
When no such industry to buy/sell, then buy/sell risk-free assets
Significant profits
A long/short strategy yields a 10.91% per year excess return
Annualized Sharpe ratio is 0.59, almost double that of the market index
0.32
Data
When regressioning strategy return on classic risk factors (size, value,

momentum), the strategy yields an abnormal return of 10.56% per year
(Table 2)
Not driven by momentum: the correlation with momentum profit is only
0.24 (Table 2)
Works best for fresh coincidence industries:
For fresh coincidences industries (those that had 2 extreme
stocks in the previous month, but not the month before), the
alpha is 1.86% per month
For stale coincidences, its just 0.32% (Table 7)
Not sensitive to ranking window length: similar findings for 3-12 months
(Table 3)
Holding window length matters: returns decreasing from 1 to 12 months
holding period, only 4.68% annual abnormal return for 12 month holding
period
No such effect when define the 10 top/bottom stocks among all stocks
As opposed to limiting the top/bottom stocks within the S&P 500
Since there are many small firms that traders are unlikely to
notice
1965-2011 stock data are from CRSP
Exclude the bottom 30% of stocks and those stocks with less than $1 per
share
Define industry groups using the 49 industry classification
Paper Type:
Working Papers
Date:
2013-01-31
Category:
Novel strategy, quality measure, large-cap stocks
Title:
The Quality Dimension of Value Investing
Authors:
Robert Novy-Marx
Source:
Rochester working papers
Link:
http://rnm.simon.rochester.edu/research/QDoVI.pdf
Summary:
Combining quality and value factors yields significantly higher

returns than value factor alone. Adding quality also enhances
performance of momentum
Quality is defined as gross-profits / total assets
Value is defined as book-to-market
Quality is negatively correlated with value

That is, high quality stocks trade at premium
prices. So quality strategies tilt towards growth
stocks
Quality strategy is as profitable as value
Sort the 500 largest non-financial stocks by quality
Rebalance annually at the end of June
Long/short the top/bottom 30% (150 stocks) with
the highest/lowest signals
Quality generates significant returns (Table 1)
The long/short strategy earns excess returns of 28
basis points per month, with 1/3 volatility of the
market (9.6%)
Sharpe ratio slightly higher than the market (0.35
vs 0.33)
The long-only portfolio outperformed the market by
21 basis points per month, with a tracking error of
5.6% and an information ratio of 0.44
Quality strategy is as profit as value strategy
As value strategies yield 0.31 percent per month,
but with higher risk (12.2%), yielding a slightly
lower Sharpe ratio (0.31) (Table 1)
Low turnover: the quality strategy takes four years to turn
over
Combining value and quality works best
Step1: sort 500 largest non-financial firms into 10 deciles
by quality
Step2: within each decile, long the 15 stocks with the
highest value, and short the 15 with the lowest value
The long/short strategy generated excess returns of 46
basis points per month (table 2)
60% higher than the simple quality strategy
Volatility is only 8.1%, and the Sharpe ratio is 0.68
The long-only side outperformed the market by 31 basis
points per month with a tracking error of only 5.1%,
yielding an information ratio of 0.73 (Table 2, panel A)
Similar findings when combining each stocks quality and
value rankings (Table 3)
Decent performance in recent years
Source: the paper

Adding quality and value also enhance momentum
The long/short combined strategy earned excess returns
of 73 basis points per month, with volatility of 13.2%,
yielding a Sharpe ratio of 0.66 (versus 0.33 of market
index) (Table 4, panel C)
The long-only portfolio generates the profit of 44 basis
points per month, and information ratio of 0.93 (Table 4,
panel C)
Hedging market exposures greatly lowers drawdown
during 2009 momentum crash (Figure 4)
Momentum strategy lost 68.8%, and
value/momentum strategy lost 61.9%
Yet when hedging the market exposure and running
the strategy at market volatility, the combined
quality/value/momentum strategy fell only 38.1%
Data
1963 to 2011 stock data are from Compustat
Paper Type:
Working Papers
Date:
2013-01-31
Category:

analysts revisions
Title:
Authors:
Source:
SSRN Working Paper
Link:
Summary:

revisions
revision
month
Hold for one month
returns
Data

CRSP
Paper
Type:
Working Papers
Date:
2012-12-31

Title:
Authors:
Gary Antonacci
Source:
SSRN Working Paper
Link:
Summary
:
turnover

relative momentum
costs
asset
Equity pair
MSCI U.S.
MSCI EAFE/MSCI
ACWI

vs 15.86%) (Table 1)
0.45) (Table 1, 2)
Credit pair
High Yield Bonds

The Barclays
Capital U.S.
Intermediate
Credit Bond Index

assets (0.97 vs 0.51)
Dual momentum is
Real estate pair
Morningstar
mortgage REITs
Morningstar
equity based
REITs

Economic stress
pair
The Barclays
Capital U.S.
Dual momentum
Treasury 20+ year

bond index
Gold

(Table 9)
Data
indices.
bill Index
Paper Type:
Working Papers
Date:
2012-12-31
Category:
Novel strategy, trend, moving average
Title:
Trend Factor: A New Determinant of Cross-Section Stock Returns
Authors:
Yufeng Han and Guofu Zhou
Source:
SSRN Working Paper
Link:
Summary:
A novel factor based on moving average regressions yields a

risk-adjusted alpha of 3% per month. Such factor is persistent in
recent years and is robust to known risk factors including

momentum
Intuition
Stock price have strong trends in some periods, likely
caused by persistent and fundamental changes
E.g., asset expansion/contraction tends to be
followed by periods of abnormally low/high returns
Different from momentum
Momentum is not entirely about price trends: for
example, a firms past return can be very high due
to sudden price spike driven by acquisitions news
Trend signal, on the other hand, captures the
predictability and pricing of genuine price trends
Calculating monthly trend signals
Step1: stock price trends (PA) = moving averages (MA)
/ the closing price
Step2: estimate coefficients of PA by regressioning
monthly stock returns on lagged PA signals
where PAjt-1,Li is the PA at the end of month t - 1 on stock j with

lag Li (3-, 5-, 10-, 20-days)
Step3: use i,t to calculate the expected stock return at
month t
Each month, sort stocks into five quintiles by the expected
returns
Equal-weight stocks and rebalance every month
Long (short) the quintile with the highest (lowest)
forecasted expected return
Superior performance
Portfolio returns increase monotonically with expected
returns (Table 9)
Lowest quintile yields -0.07% per month
Highest quintile yields 3.03% per month
Large return gaps between the lowest and the
second quintile (0.93%), and the highest and the
fourth quintile (1.49%)
High-Low portfolio earns 3.09% per month
Doubling those of size and book-to-market factors,
and tripling that of the momentum factor
Similar patterns for risk-adjusted returns (Table 2)
Fama-French three-factor alphas increase

monotonically from the lowest (-1.29%) to the
highest (1.52%) quintile
High-Low portfolio has an alpha of 2.81%
Works much better within higher risk stocks (Table 5)
Measuring risk using size, idiosyncratic volatility,
share turnover, income volatility, credit rating,
analyst coverage, and firm age
Profitability monotonically increases when risk
increases. E.g., the High-Low portfolio has a
Fama-French alpha of 1.17% (5.21%) when
idiosyncratic volatility is at the lowest (highest)
Robust performance
Robust to moving average window length
Longer lagged moving averages (50-day, 100-day
and 200-day) yields slightly better performance
than 20-day(2.87% vs. 2.81%) (Panel A of Table
3)
Value-weighted portfolios yield half alpha of those for
equal-weighted portfolios (Panel B of Table 3)
Works in subperiods (Table 10)
Works in 853 months out of total 1007 months
Source: the paper

Robust to various control variables: size, book-to-market
ratio, last month return, last month price, and liquidity
(Table 4)
Not correlated with momentum factor
The correlation is -0.14 (Table 9)
Trend (momentum) factor has a return 3% (1%)
and Sharpe ratio of 0.64 (0.14). (Table 9)
Controlling for Fama-French three factors and
momentum, High-Low spread portfolio still yields
an alpha of 2.78% per month (Table 6)
Data
1926/1-2010/12 stock price and accounting data are from
CRSP/COMPUSTAT
Paper Type:
Working Papers
Date:
2012-12-31
Category:
Novel strategy, Google searches, Factiva news artic
Title:
The Impact of Information Supply and Demand on Stock Returns
Authors:
Yanbo Wang
Source:
SSRN Working Paper
Link:
Summary:
Stocks with increasing information supply (number of news

articles) and demand (number of Google searches) generate
significantly higher future returns
Definitions
Information supply: the monthly number of news articles
in Factiva about a company or its stock ticker
Information demand: the monthly number of Google
searches about a company or its stock ticker
Supply/demand is increasing or decreasing when its value
is above or below the 12-month average, respectively
Using stock ticker counts, the proportion of stocks with
increasing information supply
and
demand in a given
month is on average 23.4% (Table 1)
Long stocks with increase in both supply and demand, and
short all other stocks
Monthly rebalance, equally weight stocks
The annual abnormal return (adjusting for market, size,
book-to-market and momentum) is between 16% - 22%,
the Sharpe ratio is between 0.85 and 0.9 (Table 4)
By contrast, a Sharpe ratio is 0.049 for the S&P500
during the same period
Consistent returns: from 2005 - 2011, when using stock
ticker, the portfolio is profitable in 77 out of 84 months
Source: the paper

Much lower risk: the return standard deviation is 1.70%,
compared with the S&P 500 return standard deviation of
5.02%
Works best in small cap: the annual gross return is
23%-34% for the bottom 20% small stocks, vs 7%-12%
for rest of the stocks (Table 5)
Most return in the first month: though the effect persists
for 12 months after portfolio formation (Table 7)
Not caused by corporate event (e.g., earning
announcements, alliances or mergers) (Table 8)
Robustness: not driven by reversal, price momentum,
trading volume, liquidity, institutional ownership, analyst
coverage, news coverage, size, book-to-market ratio,
profitability, operating efficiency and industry
Discussions
The turnover may be very high, and it is costly to trade
small cap stocks
Needs to see more discussions on time lag of Google data
availability
Data
2004 and 2011 stock data is from Compastat/CRSP,
analyst coverage data is from IBES
For Information Supply: The count of news articles are
from Factiva, which can be searched by stock name or
stock ticker
For Information Demand: the Google Search Volume is

from Google Trends, which provides the time series of
search volume of the queried keywords
Total 3,133 (3,378) stocks in the sample when search by
ticker (firm name)
Paper Type:
Working Papers
Date:
2012-12-02
Category:
Novel strategy, R&D spill-over effect, industry selection
Title:
R&D Spillover and Predictable Returns
Authors:
Yi Jiang, Yiming Qian, and Tong Yao
Source:
SSRN Working Paper
Link:
Summary:
A small group of firms substantial R&D increases have positive

spillover effects on the performance of other firms in the industry,
particularly those firms with little R&D increase and with less
investor attention
Intuition and Definition
Intuition: investors under-estimate the benefits of R&D
spending to the investing firms as well as to other firms in
the same industry
Define firms as R&D Leaders
Such Leaders must rank among the top decile of
the R&D growth rates; and their industry must rank
among the top quintile across industries
Define Peers as those in the same industry but do not
have substantial R&D increases
From 1975 - 2008, the average R&D growth rate is
163% for the former and 13% for the latter
Define Non-event firms as those in other industries
(those with little R&D increase)
From 1975-2008, total 143,867 firm-year
observations, 1,610 are R&D Leaders, 28,336 are
Peers, and 113,921 are non-event firm-year
observations
Leaders and peers are mostly from R&D intensive
industries: medical equipment, computers,
pharmaceutical, etc.
R&D peers tend to be small firms, growth firms, past

return losers (Table 3)
Both Leaders and Peers see significantly alpha and earning
surprises
Equal-weight portfolio and monthly rebalance
R&D leaders has a monthly four-factor alpha of 0.79%
Peers has a monthly alpha of 0.48% (Table 3 )
Robust to known risk factors
Similar findings in regressions that control for firms
own R&D increase, past industry returns, size,
book-to-market ratio, and firms own past returns
(Table 4)
Leaders and Peers experience significant positive
announcement returns and earnings surprises
Confirmed in regressions with earnings surprise or
earnings announcement return as the dependent
variable (Table 6)
R&D Leaders experience an average abnormal
return of 0.53% around each of the four quarterly
earnings announcements (a total of 2.12% for the
year)
Peers experience an abnormal return of 0.22%
around each quarterly earnings announcement (a
total of 0.88% for the year)
Leaders and Peers also see positive abnormal operating
performance
Measured in terms of sales growth rate, gross profit
margin, and gross ROA
Both Leaders and Peers experience substantially better
operating performance during the subsequent three years,
relative to firms in industries without an R&D increase
event
Robust to various firm characteristics and in particular, a
firms own R&D increase (Table 5)
For peers, lower investor attention predict higher returns
Measures of investors attention using 1) institutional
investors joint holdings of the R&D Leaders and the Peer;
2) the joint holdings by actively managed equity mutual
funds; 3) joint coverage of R&D Leaders and the Peer by
brokerage-firm analysts
Same operating performance by Peers receiving low and
high investor attention (Panels A, B, C of Table 9)
Low investor attention predict higher stock returns
When attention is measured as common mutual
fund holdings, Peers with low attention experience
a monthly alpha of 0.73% while those with low
attention is just 0.23% (Table 7)
Data
1975 2008 stock data are from CRSP/Compustat
Paper
Type:
Working Papers
Date:
2012-12-02
Categor
y:
Novel strategy, mutual fund holdings, graph theory
Title:
The Network of Mutual Fund Holdings: Stock Centrality and Future Returns
Authors
:
Phillip S. Wool
Source: UCLA working paper

Link:
http://personal.anderson.ucla.edu/phillip.wool.2012/documents/phillip_wool_h
oldings_networks.pdf
Summa
ry:
A centrality measure can quantify the importance of a stock in institutional

investors portfolio holding network. Stocks moving toward the center of the
network outperform those drifting toward the periphery by 4.1% annually.
Such centrality measure is supplemental to the breadth of ownership"
measure
Intuition
The breadth of ownership measure (i.e., the fraction of mutual funds with
long positions in the stock) identifies popular stocks, but not those
important stocks (those that show up in just a few portfolios, but always
alongside other highly popular stocks)
In graph theory, a nodes importance can be quantified using centrality.
Similarly in the network of institutional portfolios, centrality captures the
relative importance of stocks
A large decrease in a stocks centrality means of such stock is out of favor,
and is likely to see lower future returns
Methodology
Step1: define a connection between a pair of fund/stock aij = 1 if fund j
holds shares of stock i; 0 if not
Then
measures the number of mutual fund
portfolios that hold both stocks i and j
Step2: calculate the holdings network centrality score ci, which
measures the importance of a stock
A normalized version of centrality score (Formula 7) adjusts for market

size bias
A stock can be important because it connects with many other stocks,
or it connects with other few extremely important stocks
Centrality has limited correlation with other ownership measures and
demonstrates momentum
Centrali ty score is consistent (Table IX)
When a stock enters the sample, it is most likely to appear at
low centrality
Stocks on the fringe of the holdings network at time t are slightly
more likely to drop from the sample at time t+ 1 than companies
with high-status (Panel B)
Momentum in score changes: Stocks with big moves in centrality
(positive or negative) are more likely to experience another large
change in the next period
Limited correlation: only modest positive correlations among Centrality
and Breadth (Panel B of Table XI)
Lowest centrality firms have the smallest size, but stocks in second
decile are among the top quintile size (Table V)
Large decrease in centrality predicts lower stock returns (Tables VI and VII)
The bottom decile portfolio (stocks experiencing the greatest fall in
centrality) yields significant 5-factor alpha of -3.3% per annum
Alpha for decile 2-10 are close to 0
Long-short strategy yields annualized alpha of 4%, with most alpha
from the short side
Levels of centrality score has no predictive power (Table IV)
Similar findings in regression (Table XII)
Controls for size, value, price momentum, turnover
Centrality and Breadth is not dominated by each other
Stocks with the sharpest score drop will return -1.2% per quarter
Data
March 1980 - December 2009 data on mutual fund portfolio holdings
are from Thomson Reuters CDA/Spectrum dataset
Remove index funds by removing funds with names containing such as
Index, INDEX, index, Indx, Idx, Ix, etc.
Stock data are from the Center for Research in Security Prices (CRSP)
Daily and Monthly Stock Files
Paper Type:
Working Papers
Date:
2012-10-28
Category:
Novel strategy, information leadership, corporate news

announcements
Title:
Information Leaders
Authors:
Kewei Hou, Anna Scherbina, Yi Tang, and Stefan Wilhelm
Source:
Arizona State Working Paper
Link:
http://wpcarey.asu.edu/finance/news-events/upload/information
_leaders_Sept_21.pdf
Summary:
Stocks whose prices lead other stocks in the same industry can
be identified using granger causality regression. A related
generates a four-factor alpha of 10% per year, and is robust to
industry momentum, last months industry return, and last
months return of the largest stocks in the industry
Intuition
Investors collectively may digest information for some
stocks (leaders) faster than others
Example 1: an outcome of a class action lawsuit against a
small tobacco company is likely to affect valuations of
other larger tobacco firms
Example 2: a small company may first suffered customer
boycotts due to child labor issues in third-world countries,
and may lead returns of these the companies employing
similar practices
So the source of information leadership need not to be
market size, analyst following or institutional ownership
Identify information leaders using Granger-cause industry returns
Step1: obtain the time series of daily value-weighted
industry returns from Kenneth Frenchs data library
Step2: for each stock in any industry, run Granger
causality test by regressing industry returns on (1) its own
return lags and (2) the stock return lags
Step3: a firm return Granger causes (iArizona State

Working Paper.e., leads) the industry return if the Wald
test rejects the hypothesis that the regression coefficients
on the lagged stock returns, b1 through b5, are jointly
equal to zero at the 5% significance level
Leaders constitute 14.17% of the sample (Table 2), and
changes frequently
Current leaders not likely to be leaders again after

3 months (figure 1)
Leaders tend to be slightly larger, have a lower last
months return, have more news stories written about
them in the month in which they are designated as leaders
High leader return (LR), higher industry returns
Sort industries into 10 portfolios each month by the
equal-weighted leader returns, and then calculate equaland value-weighted stock returns for the next month
Industry returns monotonically increase with LR
From 58 bps for lowest LR decile to 120 bps for
highest LR decile when value-weighting stocks
(Table 3)
The risk adjusted alpha is 61 bps when
value-weighting stocks
Robustness
Last months LR is correlated with last-months
value-weighted industry return, value-weighted return on
the biggest 30% of stocks in the industry
The predictive power of LR remains after controlling for
industry momentum, last months industry return, and last
months return of the largest 30% of stocks in the industry
(Table 4)
The four-factor long-short quintile abnormal return
is 44 (41, 44) bps controlling for industry
momentum, (last months industry return,
industry-level large stock return last month)
Similar findings when controlling these variables in
Fama-MacBeth cross-sectional regressions (Table 5)
beta, illiquidity, Idiosyncratic skewness, turnover
and momentum
The coefficient on the last months equal-weighted
leader return ranges from 0.0296 to 0.0684 across
all regression specifications
Industry momentum and last months industry
return subsume about half of the predictive power
of the leader return though the coefficient is still
significant 0.0296
Data
1963/7 to 2010/12 stock return data are from
CRSP/Computstat dataset
Quarterly earnings announcement dates are from the
Quarterly Compustat dataset
News announcement data are from the Thomson Reuters
News Analytics dataset starting only from January 2003
Industry classifications are from Kenneth Frenchs web site
Paper
Type:
Working Papers
Date:
2012-10-28
Categor
y:
Novel strategy, insider trading, insider silence, short interest
Title:
The Sound of Silence: What Do We Know When Insiders Do Not Trade
Author
s:
George P. Gao and Qingzhong Ma
Source: Cornell University Working Paper

Link:
http://forum.johnson.cornell.edu/workshop/ACCOUNTING/TheSoundOfSilence_
GaoMa_20121015.pdf
Summa
ry:
Insider silence (periods when corporate insiders do not trade), coupled with
high short interest, predicts significant negative future returns, which are even
lower than when insiders net sell. Such pattern lasts for at least 10 months
Insider silence is the period when insiders do not trade
Define Net insider demand (NID) as the net shares purchased/sold by
insiders
A firm is net buying if NID > 0, net selling if NID < 0, and
silence if no insider trading activity occurs
Insider silence is very common: percentage of insider silence is 74%
(50%, 33%, 20%) when NID is measured over the past 1 (3, 6, 12)
months (Panel A of Table 1)
Insider silence can be informative
Corporate insiders are not allowed to buy or sell their companys
stocks during the period before the announcement of major
corporate events, such as acquisition
As an illustration, the proportion of merger targets whose
insiders net buy their own company shares is 8%-10% during
the time period at least six months before the announcement
month, and then decreases to only about 3% in the

announcement month (Table 2 and Figure 2)
NID correlated with short interest
Percentage of firms with net insider selling increases when short
interest piles up (Panel B of Figure 1)
Insider silence predicts negative future returns
Every month, form three portfolios (silence, buy, and sell) based
on their insider trading activities over the past six months
Calculate each portfolios buy-and-hold abnormal returns (BHAR) over
the subsequent holding period of 1, 3, 6, 12, and 24 months
Silence portfolio has a 12-month BHAR of -2.5%, significant at the 1%
level
No return reversal: for up to two years after portfolio formation (Panel
A)
Slow decay: significant at 0.97% (0.65%) for the first (sixth) month
Mostly information reflected around earnings announcements: In the
first (third) month after portfolio formation, the 5-day abnormal return
accounts for 47% (94%) of the same-month alpha (Table 6 and Figure
6)
Similar findings in Fama-MacBeth regressions (Table 9)
Controlling for short interest, firm size, B/M ratio, and return
momentum etc
Coefficients on insider silence remain significant in all regression
models, and hold for two sub-periods (Table 9): pre- and post2002/10 (SarbanesOxley Act)
NID effect strongest when short interest highest
Double sort firms first by short interest (into 5 quintiles) and then over
the past six months (silence, buy, and sell)
Within the high short interest quintile, the silence portfolio
underperforms most
The 12- (24-) month BHARs of silence portfolios are highly
significant -7.5% (-11.19%)
The sell portfolio predicts insignificant -1.48% (Panel B)
Source: the paper

Longer silence period, lower future returns: when insiders are silent for
1 (12) months, the one-year BHAR is -0.99% (-10.72%) (Table 4)
Within the bottom or low short interest quintile, no positive BHARs in
the silence portfolios
Data
1992/1-2010/12 insider trading data are from Thomson Reuters
Monthly short interest data are from the exchanges (1992/1 to
2002/12), and Standard and Poors Compustat (2003/1-2010/12)
Stock data are from CRSP/Compustat merged database
Paper Type:
Working Papers
Date:
2012-10-28
Category:
Novel strategy, debt growth, asset growt
Title:
Debt growth anomaly: Financing Asset Growth
Authors:
Michael J. Brennan, Holger Kraft
Source:
SSRN Working Paper
Link:
Summary:
The asset-growth anomaly (high asset growth predicts lower

return) are mainly due to the negative returns realized by those
firms that either issue or retire large amounts of debt. In other
words, for stocks with high asset growth rate, firms that issue or
retire more debt have lower stock returns
Prior studies show that higher asset growth, lower predict
future stock returns
Raising capital (eg., issues of stock or debt), lead
to lower future returns
Returning capital (e.g., share repurchases or debt
retirements) lead to higher future stock returns
Intuition of debt growth anomaly: debt financing is one
way to manipulate EPS
Raising debt can raise reported earnings per share
when the cost of debt is less than earnings-price
ratio
Such manipulation is especially key when managers
are under pressure to perform given poor past
performance, of over-optimistic analyst
expectations, or of declining profitability
Debt is defined as the book value of all long and short
term debt excluding accounts payable
Define Total Debt Growth(TDG) as change of
debt/book value of assets
Define month 0 as the December of year y, the year in
which Total Asset Growth (TAG) is measured
Each July (so month 7) sort stocks by TAG into 10 decile
portfolios
Deciles 7, 8 and 9 are high growth deciles with
growth rates of around 12%, 18%, and 32%
respectively
Decile 10 contains hyper growth rms in which the
average growth rates range from 75% to 303%
Hold portfolio until the end of month 18
Firms are allocated to 4 debt issuance portfolios (DI), a no
change in debt portfolio (Dzero), and 4 debt retirement
portfolios (DR)
High TAG, lower returns
For the equal-weighted portfolios, the excess returns is

-0.6% per month in months [7-18] (panel A, table 1)
For equal-weighted portfolios, the return is about half of
equal-weighted
Such significant negative abnormal returns persist in
months [19-30]
Not driven by firms that merge (panel C, table 1)
High debt activity, lower returns
More issuance
, lower returns
The average difference between the returns on the
DI4 and DI1 quartiles across TAG deciles is 3.5%
per annum for the VW portfolios (Table 3)
Moderate retirement
predict higher returns
Significant positive returns in low/moderate debt
retirement quartiles DR1-DR3
More debt retirement not a better signal: in
virtually every TAG decile, the abnormal returns for
DR4 are below those for DR1
Double sort by TAG and then TDG
That is, subdivided each of 10 TAG portfolio into 9
portfolios based on TDG: DR1-DR4 (debt retirers), Dzero
(no change in debt), and DI1-DI4 (debt issuers)
It is striking that DR4 in TAG10 actually retires an
amount of debt equal to 42% of its assets while
more than doubling its total assets
Little correlation between TAG and TDG except for the
highest TAG portfolio(TAG10) (Table 2, Panel A)
Significant debt retirements only in for TAG1 and TAG10
(Panel B , table 2)
In TAG10, higher debt activities (issuance and retiring), lower
returns
Among debt issuers, the abnormal returns are decreasing
in debt issuance, reaching -1% per month for DI4
Among debt retirers, the abnormal returns are also
decreasing reaching minus 80 basis points per month for
DR4
By contrast, the returns on the lower debt issuance
quartiles (and Dzero) of these TAG deciles are small and
insignicant
Data
1968 -2010 stock data are from Compustat-CRSP data set
Restrict our analysis to firms with scal year ending in
December
Analyst data are from IBES data on analyst earnings
forecasts for 1975 to 2010

Paper Type:
Working Papers
Date:
2012-10-28
Category:
Novel strategy, foreign business proxy, multinational firms
Title:
Gradual Information Diffusion in the Stock Market: Evidence from

U.S. Multinational Firms
Authors:
Xing Huang
Source:
SSRN Working Paper
Link:
Summary:
Information for firms with foreign operations may be reflected in

stock prices slowly. A trading strategy based on firms foreign
operations of multinational firms generates an annual alpha of
10%
Intuition
Sales from foreign market is important: U.S. multinational
firms have on average 48.94% sales from foreign
operations (Table 1, Panel B)
Foreign operations information may be diffused gradually
and thus will be only slowly incorporated into stock prices
Instead, the performance of foreign operations may be
better reflected in the stock market of foreign countries
Hence a measure of foreign operations using
foreign stock market returns may predict of stock
returns
Measuring foreign operations using foreign stock market returns
Proxy foreign operations using sales-weighted average of
corresponding industry returns in operating foreign
countries
where BusProxy is the foreign business proxy (FBP)

for firm i in industry j during period t
is the fraction of sales from foreign country c
is industry js return in country c during period t
The intuition: the real performance of foreign operations

can be better reflected in the stock market of foreign
countries
For example, if a U.S. automobile firm has 30% (20%,
50%) sales from U.S. (German, Canadian) operations,
then its foreign business proxy is 20%Automobile
industry return in Germany + 50%Automobile industry
return in Canada
Lag 6-month gap between fiscal year end and
portfolio formation time
On average 965 multinational firms for one month, about
12% (17%) of CRSP universe in terms of total number of
firms (market capitalization) (Table I)
FBP predicts stock returns
Constructing portfolios: each month, sort multinational
firms on the FBP into five quintile groups
Run time-series regressions of the excess returns on
market excess return, the Fama-French three factors and
momentum
Higher FBP, higher alpha: alpha increases monotonically
as FBP goes up, -46 (36) bps for lowest (highest) quintile
Carhart four-factor alpha is 82 bps (t=2.5) for a
value-weighted one (Table II) (Figure 3 (a))
Works in most years: failed in only three out of 20 years,
and return is above 10% about half of the years(Figure 4)
No return reversal: not until 36 months after the formation
date (Figure 5)
Data
Similar findings in Fama-MacBeth regressions (Table IV)

Note that it is important to control for U.S. industry
momentum and global industry momentum,
because they can potentially lead to the correlation
between foreign business proxy and the stock
return in the following month
FBP predicts, but not the domestic business proxy
after controlling for global industry momentum
(Column (2)-(4), Table IV)
Foreign operations information is incorporated relatively
faster if the language is English or the geographic distance
is closer (Table VII)
Asia information delayed more than information
about operations in Europe and English-speaking
countries
No size bias: similar predictability for small firms relative
to medium and large firms
1990 to 2009 firms geographic segment financial
information is from Compustat Geographic Segment File
Global industry monthly returns are computed from

Datastream Global Equity Sector Indices
Stock returns and accounting data are from
Compustat/CRSP
Analyst coverage data is from the Institutional Brokers
Estimates System (IBES)
Paper Type:
Working Papers
Date:
2012-09-30
Category:
Novel strategy, timing momentum profits
Title:
Comomentum - Inferring Arbitrage Capital from Return

Correlations
Authors:
Dong Lou and Christopher Polk
Source:
LSE working paper
Link:
http://personal.lse.ac.uk/loud/Comomentum_20120831.pdf
Summary:
When many investors are chasing momentum strategy, the

momentum profit is likely to suffer. Comomentum can measure
such crowd-ness by measuring the return correlation among
typical winner/loser stocks. Momentum profits are higher (lower)
during periods of low (high) comomentum. Similar findings in
international markets and also in value strategy. A stock level
comomentum strongly and positively forecasts stock returns
Intuition
When lots of capital is deployed in momentum strategy,
winner (loser) stocks may be over bought (sold) and may
reverse
Because many investors are buying/selling same stocks,
the correlation of winner/loser stocks may be high
Co-momentum is a proxy for the amount of capital
deployed in momentum strategy
A high comomentum suggests that momentum is
crowded and may more likely to be an overreaction
Measuring comomentum
In essence it is the return correlation among typical
winner/loser stocks
Step1: at the end of each month, sort all stocks into
deciles by previous 12-month return (skipping the most
recent month)
Step2: in winner and losers group, compute the 52 weekly

pairwise return correlations in past year for all stocks in
each decile. Such correlation is comomentum
Comomentum varies over time
E.g., the average loser stock has an correlation as
low as 0.053 and as high as 0.284 (Table I Panel A)
Interestingly, comomentum is not moving up over the
years
Though more arbitrageurs are trading the
momentum strategy
This may be due to that markets are more liquid,
so that each dollar of trading has a smaller price
impact
High comomentum forecasts lower momentum returns
For the 20% of the period with high comomentum,
momentum strategy yields 10.4% lower returns over the
first year, relative to its performance during the 20%
period with low comomentum (Table IV Panel A)
Momentum continues to lose 14.4% (relative to the
low comomentum periods) in the second year after
formation
Robust to Fama-French three-factors: the return
differential then becomes 9.5% and 9.4% in years one
and two, respectively
Holds for the three years after portfolio formation (Figure
2)
Similar findings in regression: comomentum is negatively
correlated (-0.183) with future 1-year momentum profit
(Table III Panel B)
Evidence of institutional investors herding: these results
are only present for stocks with high institutional
ownership (Table VI )
Similar pattern in international markets
Worked in every one of the 19 largest non-US stock
markets
When only investing in countries with relatively low
comomentum, the profit is a significant 12% per year (6%
if hedged to global market, size, value and momentum)
By comparison, countries with high comomentum yields
only 1/4 of profits and is insignificant
A stock-level comomentum(SC) strongly forecasts stock returns
Define SC: for each stock, calculate the partial correlation
between its weekly returns and the minus returns of the
bottom momentum decile
High SC indicates higher likelihood of being chased
by momentum investors
Data
These stocks should perform well subsequently

and, if aggregate comomentum is high, eventually
reverse
When sorting stocks by SC, the abnormal performance
linked to stock comomentum lasts for six months (Panel B
of Table IX)
Robust to momentum: in regression, SC significantly
predicts stock returns, after controling for momentum,
size, log book-to-market ratio, idiosyncratic volatility, and
turnover (turnover) (Table IX)
1964 to 2010 US stock data are from CRSP
Monthly returns of actively-managed equity mutual funds
and long-short equity hedge funds from the CRSP
survivorship-bias free mutual fund database and the
Lipper TASS database
Paper Type:
Working Papers
Date:
2012-09-30
Category:
Novel strategy, option volatitliy
Title:
Improving Portfolio Selection Using Option-Implied Volatility and

Skewne
Authors:
Victor DeMiguel, Yuliya Plyakha, Raman Uppal, Grigory Vilkov
Source:
London University working paper
Link:
http://faculty.london.edu/avmiguel/DPUV-2012-06-11.pdf
Summary:
In large cap universe (stocks in S&P500), novel option-implied

volatility and skewness measures can substantially improve
Sharpe ratio, after prohibiting shortsales and accounting for
transactions costs
Methodologies
Use out-of-the-money implied volatilities for calls and puts
with a maturity of 30+ days
Take implied volatilities for calls with deltas smaller or
equal to 0.5, and implied volatilities for puts with deltas
bigger than -0.5
Volatility is defined as the model-free implied volatility
(MFIV)
It represents a nonparametric estimate of the

risk-neutral expected return volatility
MFIV can better predict the realized volatility than
the Black-Scholes volatility
Skewness measure 1: model-free implied skewness
(MFIS)
It represents a nonparametric estimate of the
risk-neutral stock-return skewness
Skewness measure 2: spread between the Black-Scholes
implied volatility for pairs of calls and puts (CPVS)
Historical volatility risk premium adjustment (HVRP) is the
ratio of average monthly implied and realized volatilities.
I.e, MFIV/(realized volatility)
Risk-premium-corrected implied volatility (RIV) = MFIV /
HVRP
Variance risk premium = implied variances - realized
variances
Implied-realized volatility spread (IRVS) = the
Black-Scholes implied volatility - the realized
stock-return volatility for the past month
RIV is 10 times better at predicting volatilities
For predicting the monthly realized volatility using daily
returns
The mean prediction error (ME) is 0:0047 for the RIV
By comparison, the ME is 10 times higher at
0:0185 when using historical volatility
The root mean squared error (RMSE) for the RV is 0.1274
Smaller than the RMSE of 0.1671 for historical daily
volatility
MFIV, MFIS and CPVS predict returns
Constructing the portfolios
Sort stocks by one of the volatility measures above
Form a long-short portfolio daily based on the
characteristic value at the end of a day
Hold each portfolio for one day, one week, or two
weeks
Use equal-weighted portfolio (1/N) as benchmark
Use the parametric-portfolio methodology, where the
stocks weight is a linear function of its benchmark weight
and the value of characteristics
For 2-week holding period, MFIS earns the highest return
of 17.98% p.a. (Table 1)
Higher Sharpe ratios than benchmark
The Sharpe ratio for the benchmark 1/N portfolio is
0.5903
For the portfolio using IRVS it is 0.9232, for MFIS it
is 1.0092, and for the CPVS it is 1.4291
Robust to usual risk factors

E.g., The Sharpe ratio for the parametric portfolio
with CPVS it is 0.9390 (Panel A, table 8)
Much higher than the 0.5903 Sharpe ratio for the
1/N portfolio
Robust to transactions costs
Assuming trading cost the SP500 stocks is about 10 basis
points
The make-even transactions cost (which makes the
portfolio return equal to that of the benchmark) for MFIS
is 1.46% in 2-week rebalancing (Table 7)
The benchmark portfolios is the 1/N portfolio, no
shortsale, minimum-variance portfolio
In 2-week rebalancing, the make-even transactions cost
for MFIS is 30 basis points
Data
1996-2010 options data are from IvyDB (OptionMetrics)
Note that only 143 stocks has implied volatilities
available for the entire time series
But the result is similar when using all the stocks
that are part of the S&P500 index on that day and
which have no missing data on that day
Stock data are from CRSP/Compustat
Paper Type:
Working Papers
Date:
2012-08-26
Category:
Novel strategy, volatility of option-implied volatility
Title:
Unknown Unknowns: Vol-of-Vol and the Cross Section of Stock

Returns
Authors:
Guido Baltussen, Sjoerd Van Bekkum and Bart Van Der Grient
Source:
EFA 2012 conference paper
Link:
http://www.efa2012.org/papers/s2g1.pdf
Summary:
The volatility of option-implied volatility (vol-of-vol, or VoV) can

predict stock returns. High VoV stocks underperform low VoV
stocks by 10% per year. Such pattern persists for more than 18
months
Intuition
VoV captures the variation in investors expectations about

return volatility
VoV representing second-order beliefs about stock
returns, i.e., unknown unknowns.
Compared with VoV, options implied volatilities (IV)
measures the risk-neutral expectation of a stocks future
volatility
It gauges the perceived risks to investors regarding
expected stock returns
I.e., such risks are known unknowns
Definition of VoV
VoV is the standardized volatility of daily option implied
volatility over the past month
For each stock each day, calculate the VoV for stock i on
day t as follows
Where
implied volatility -formula- is calculated as
the average implied volatility of the ATM call option and
ATM put option
High VoV stocks have higher beta, higher idiosyncratic
volatility, higher past month maximum returns, and a
more positively skewed and leptokurtic return distribution
(Table 1)
Higher VoV, lower future returns
Sorts stocks by VoV into value-weighted quintile portfolios
Low VoV stocks earn 0.59% per month, high VoV stocks
earn -0.26%
The hedged return is -0.85% per month (Panel (a)
of Table 3)
I.e., about 10% per year
Consistent performance through the years (figure 4)
Source: the paper

Hold up to 18 months: excess returns and alphas
continue to accumulate (at a slowly decreasing rate) for
up to than 18 months (figure 3)
60% hit ratio: the VoV effect is present in around 60
percent of the months (figure 4)
Robust to 20+ known risk factors
When adjusted for size, book-to-market, and
momentum, the hedged long-short portfolio earn the
four-factor alpha of -0.69% a month
Double sort VoV and 20 other known risk factors (table
4, panel a to f)
Canonical
characteristics
Size, beta, book-to-market,

momentum and short-term reversal
Return distribution
characteristics
Idiosyncratic volatility, past months

maximum return, skewness, and
kurtosis;
Liquidity
characteristics
Stock turnover, Amihuds stock

liquidity
Option-based
characteristics
Changes in call and put implied

volatilities, implied-minus-realized
volatility spread, call-minus-put
implied volatilities
Data
E.g., kurtosis focuses on fat tails in the return distribution,

therefore seems related to VoV. Yet per panel b, it is not
subsumed by VoV
Similar findings in regressions (table 5)
1996 - 2009 option data are from OptionMetrics database
Such data include daily implied volatilities, closing bid and
ask prices, option strikes and maturities, options volume
and open interest
Paper Type:
Working Papers
Date:
2012-08-26
Category:
Novel strategy, leverage, relative leverage
Title:
The Relative Leverage Premium
Authors:
Filippo Ippolito, Roberto Steri, Claudio Tebaldi
Source:
Link:
http://www.efa2012.org/papers/f2g1.pdf
Summary:
Some firms temporarily deviate from their optimal leverage. The

relative leverage, defined as the difference between observed
and ideal (target) leverage, can significantly predict future stock
returns
Intuitions
Firms can temporarily deviate from their optimal leverage,
and be over- or under-leveraged
Those firms that deviate significantly bears a different risk
exposure, and should then be priced differently
One can not make such distinction using realized
(observed) debt ratios
Definitions
Market debt ratio (MDR) = (short-term debt + long-term
debt) / (short-term debt + long-term debt + market
capitalization)
Book-valued debt ratios (BDR) = (short-term debt +
long-term debt) / (short-term debt + long-term debt +
book value of equity)
Employing a partial-adjustment model, target leverage is
defined as :
where MDRi;t1 is lagged MDR

Xi;t1 is vector of known firm characteristics, include:
Profitability (=EBIT / assets), Market Value over Assets,
Depreciation (= DEP / assets), Size, Tangibility (Property,
plant, and equipment (PPENT) / assets (AT)), R&D
expenses, etc
Using a dynamic panel data model, is estimated to be
23.8% (Table II)
For each stock each month, the relative leverage (RL) is
RL = observed leverage - target leverage
When RL is positive (negative), a firm is
overleveraged(under-leveraged)
Size is negatively related to the absolute value of RL with
a mean correlation of -0.121
Book-to-market equity is positively related to RL (Table
III)
MDR do not predict returns
In regression, MDR only predicts during the period
1980-1994, but not other periods (Panels A, B, and C of
Table XIII in Appendix A)
RL is strongly related to future stock returns
In all four sub-periods, high RL firms consistently earn
average returns of about 2% per month
Low RL earn average returns of about 1% per month
A deviation of 10% between observed and target leverage

corresponds to a premium (discount) of about 0.5% per
month for over-(under-) leveraged firms
Similar returns from under- and over-leveraged firms
Confirmed in regressions
Regress stock returns on size, book-to-market equity,
momentum and RL
RL has an average coefficient of 3.5 during 1965-2009, 20
standard errors from zero
The coefficient of RL is strong in each of the three
subperiods 1965-1979, 1980-1994, and 1995-2009
(Appendix A, Table XI)
Data
1965-2009 data for US stocks are from the Compustat
Industrial Annual database
Paper Type:
Working Papers
Date:
2012-07-29
Category:
Novel strategy, real earnings management
Title:
Firms Real Earnings Management and Subsequent Crashes in

Stock Price
Authors:
Bill Francis, Iftekhar Hasan and Lingxiang Li
Source:
Link:
http://aaahq.org/AM2012/display.cfm?Filename=SubID%5F2867
%2Epdf&MIMEType=application%2Fpdf
Summary:
Management purposely deviates business operations to meet

earnings consensus. Such real earnings management (RM) is
positively associated with the likelihood of future stock price
crashes. Such effect is three times stronger after SOX 2002 than
before. By contrast accruals management (AM) is much weaker
after SOX
Real earnings management (RM) is the deliberate
deviation of the firms business operations from the norm
by managers to achieve certain earnings targets
Such RM should impose economic cost on a firm, because
it changes firms operations from the normal (optimal)
business practice
The predicting power of RM becomes even three times
stronger after SOX 2002
By contrast, the accrual effect drops by half after
SOX
On average 19.5% (23.1%) of firm-year observations has
at least one crash (jump) during the fiscal year (Table 2)
Defining three types of RMs:
Type1 (RM_DISX): the manipulation of discretional
expenses (selling, general and administrative (SG&A) +
research and development expense (R&D) + advertising
expense )
Type2 (RM_PROD): production cost = ( cost of goods sold
(COGS) + change in inventory )
Type3 (RM_CFO): A lower than normal cash flow from
operations (CFO)
Note RM_CFO is in itself ambiguous. E.g., both
discretional expenses cutting and overproduction
can be used to boost earnings, but at the same
time these two activities will respectively increase
and decrease CFO
The final RM measure is the sum of the absolute value of
RM in prior three years (RM_3_SUM, Formula 7)
Note it is unsigned because 1) RM activities may
reverse in time and 2) RM can be used to decrease
earnings as well as increase earnings
All RM measures are adjusted by various factors

that can predict the normal level. E.g., lagged total
assets, lagged total assets, market value (MV),
Tobins Q (Q), internal funds (INT), and change in
sales (e.g., see Formula 1)
Higher RM, higher likelihood of stock price crashes
Based on regression
Crash equals to 1 if weekly return rises above 3.09

standard deviations from its fiscal-year mean
Control variables include: size of the firm (size),
capital structure (leverage), growth opportunities
(MTB), firm performance (ROA)
Without control variables, all three types of RM measures
are positively related to crash risk
Controlling variables above as well as AM, discretional
expenses management (DISX_SUM) and production
manipulation (PROD_SUM) are positive and strongly
significant with p-values smaller than 0.001(Table 4)
But sale manipulation (CFO_SUM) is no longer significant
The magnitude and variance of RM is larger than AM
(accruals management) (Table 2)
Consistent with the evidence that RM is more
widely used than AM
Combining all three RM measures works best
RM_3_SUM has the strongest impact on crash likelihood
(Panel B of Table 5)
Since management are likely to use all three RM
methods
One standard deviation change of RM_3_SUM will lead to
an increase of crash likelihood by 1.13%
Given the overall crash likelihood is only around 19%,
such an increase is about 6% of the average crash
likelihood (1.13% divided by 19.52%)
The standard deviation of the highest-RM group is 30%
larger than that of the lowest-RM group (Panel C of Table
5)
RM cant predict price positive jumps (Table 9)
Even stronger effect among Suspect Firms
Suspect firms are those with 1) reported earnings just
above zero (0<ROA<0.01) and 2) reported earnings just
above last years earnings (0<ROA<0.01)
Such firms are shown to be more likely to manage
earnings upward using real activities
For RM_suspect firms that use both expense-related and

production-related methods, the marginal impact on crash
is 4.74% (Panel B of Table 8), suggesting a 25% higher
likelihood
By constrast, Accrual_Suspect firms do not display a
higher likelihood of crashes
RM effect much stronger after Sarbanes Oxley
Using RM_3_SUM, before SOX, one standard deviation is
associated with only 0.75% increase in crash likelihood
After SOX, it is associated with 2.13%
By contrast, the accrual-based management on crashes
drops by nearly half after SOX (Table 10)
Data
1994-2009 weekly return data is from CRSP and annual
financial data is from Compustat
Paper Type:
Working Papers
Date:
2012-07-29
Category:
Novel strategy, emerging market, affiliates of multinational

corporations
Title:
Emerging Market Outperformance: Public-traded Affiliates of

Multinational Corporations
Authors:
K.J. Martijn Cremers
Source:
SSRN working pape
Link:
Summary:
The emerging market affiliates of large multinational corporations

enjoy good stock performance and lower volatility over the last
14 years, outperforming their parents, the local markets and the
developed markets
Background
Emerging markets saw large returns and high volatility
during 1998- 2011
E.g., Asian markets see annual return of 19.0%
with annualized volatility of 26.1%
This paper finds that a sub-group of emerging market
stocks (i.e., affiliates) generate better performance
without greater down-side volatility
Intuition: such affiliates enjoy the fast growth in local

markets, and the better corporate governance and
resources of the parent companies
The study covers 92 affiliates stocks
About equally distributed in Asia, Eastern Europe,
Middle East, and Latin America
Median ownership of the parent is 56%
Parent companies are mostly in U.K. (15), the U.S. (13),
France (10) and Germany (10)
Most of such parent corporations are headquartered
and mostly also listed in developed markets
Higher returns with lower volatilities
Annual return of 27.4% compared with 13.3% of their
parents
The annualized volatility is 24.6%, lower than that of local
country indices (29.7%) (Table 2)
Remarkably better performance during the recent financial
crisis
Source: the paper
Data
Same pattern when study the performance by regions:

EMEA, EM-Asia and Latin America (Table 3)
Not driven by P/B changes: The growth rates of P/B of
affiliates and their countries are quite similar (Figure 6)
Not driven by industry bias: The performance of the
emerging market industry indices falls far short of these
affiliates
$1 investment in the portfolio of EMEA affiliates
would grow to $19.8 from January 1999 to June
2011, far better than its industry matched portfolio
This study covers 92 affiliates for the period of 1998- 2011
24 in Asia, 15 in Eastern Europe, 22 in the Middle
East, and 22 in Latin America
Parents companies are mostly listed in developed markets
such as U.K., the U.S., France and Germany
Paper Type:
Working Papers
Date:
2012-07-29
Category:
Novel strategy, analyst revisions, analyst optimism
Title:
Are Analysts Really Too Optimistic?
Authors:
Jean-Sbastien Michel and J. Ari Pandes
Source:
Link:
http://aaahq.org/AM2012/display.cfm?Filename=SubID_557%2Epdf&
MIMEType=application%2Fpdf
Summary:
A new measure of analyst ability, firm-level relative analyst earnings

forecasts (ARAF), can predict future stock returns. A strategy based
on ARAF earns risk-adjusted return of 11% per year. This effect is
more pronounced among smaller, more illiquid and more uncertain
stocks
Background
Stocks with high analysts revisions (adjusted for average
estimate error) may signal analysts ability and confidence in
the stock
Note that such confidence is not analysts (unfounded)
optimism, and it should be based on analysts private
information and effective analysis
Constructing average relative analyst forecast (ARAF)

Step1: for each analyst, each stock, and each month, define
relative analyst forecast (RAF) as
Where Fi,j,t is analyst js forecast for firm i and for the

forecast date t; () is the average forecast of all analysts
for the period t to t-k for the same firm, and () is the
standard deviation of these forecasts
In other words, RAF is the (analysts forecast prior
3-months average forecast of all analysts) / (standard
deviation of these forecasts )
Step2: for each stock, get the aggregate RAF (ARAF) by
averaging RAF across all analysts
So ARAF controls for any company or time-specific
factors that affect forecasts and therefore eliminates
the general biases attributed to consensus forecasts or
recommendations
Average ARAF varies substantially by quintile (Table 3)
Constructing the ARAF portfolio
Each month, sort stocks into quintiles by ARAF
Rebalance monthly and calculate equal-weighted return for
each portfolio
The (unreported) value-weighted returns is qualitatively
similar, though with lower economic significance
Higher ARAF, higher returns
High-ARAF firms significantly outperform low-ARAF firms by
0.92% (1.45% vs. 0.53%) per month (annualized spread
11.04%) (Table 5)
The risk-adjusted hedged portfolio monthly return is 0.97%
and highly statistically significant at the 1% level (annualized
spread 11.64%) (Table 5)
Returns monotonically increase with ARAF measure
Robust to risk factors and Reg-FD
Double sort stocks by ARAF and size (P/B, momentum,
liquidity) into 5x5 portfolios
ARAF works better in smaller, riskier (measured by
book-to-market) and less liquid segments
But still demonstrate strong abilities among firms that are
larger, less risky and more liquid (Table 6, 7)
Sort by size
In small cap quintile,

22.68% annually
In large cap quintile,

2.76% annually
Sort by illiquidity
In illiquid quintile,
18.36% annually
In most liquid
quintile, 3.00%
annually
Sort by volatility
In high volatility
quintile, 24.00%
annually
In low volatility
quintile, 4.44%)
annually
Regression confirms the findings (Table 8)

momentum, analyst EPS forecast dispersion,
prior-month return to capture the reversal, S&P
long-term debt rating, and forecast error
Weaker but still effective post-Reg FD (Table 9)
Divide the sample into pre-Reg FD (1984-2000) and
post-Reg FD (2001-2010)
On a factor-adjusted basis, the annualized hedged
return is 14.40% pre-Reg FD and 7.56% post-Reg FD
Higher ARAF, better accounting performance and higher forecast
accuracy
Better operating performance in terms of ROA, CROA (cash
flow on assets), and ROE
Strong and positive relationship: high ARAF portfolios
significantly outperform low ARAF portfolios
operationally by $0.95 to $1.32 per $100 of assets and
$3.53 per $100 of equity in mean (Table 4)
Forecast error (FCE) decreases with ARAF (Table 4)
More pronounced for high uncertainty firms: they see a
five-times larger mean difference in FCE between high
and low ARAF firms (0.88 versus 0.17), comparing to
low uncertainty firms (Table 4)
Data
January 1984 to December 2011 stock data is from CRSP
Analyst EPS forecasts data (for the one-year fiscal period) is
from Thomson Reuters I/B/E/S unadjusted detail history file
Actual EPS is from the I/B/E/S unadjusted detail actuals file,
while other accounting data from Compustat
Paper Type:
Working Papers
Date:
2012-07-29
Category:
Novel strategy, institutional ownership
Title:
Institutional Ownership and Return Predictability Across

Economically Unrelated Stocks
Authors:
George P. Gao, Pamela C. Moulton and David T. Ng
Source:
Cornell University Working Paper
Link:
http://www.hotelschool.cornell.edu/research/facultybios/researchpapers/documents/Predictability_20120703.pdf
Summary:
Common behaviors of institutional investors may induce return

predictability between the stocks of otherwise economically
unrelated firms. The industry-neutral long-short portfolio based on
the predicted returns earns a four-factor abnormal return of 68
bps per month (with a t-stat over 6). The profits are reversed
within four weeks
Intuition
Institutional investors share some common practices
E.g., limits on how much can be invested in a single
stock. So managers sell a stock with high recent
abnormal returns
E.g., re-evaluate stocks after earnings
announcement
Such behaviors may induce return predictability between
the stocks of otherwise economically unrelated firms
The key idea of this paper is to use returns of unrelated
stock to predict the return of target stock
Methodology
Identify Significant common institutional investors
Common investor is those who holds positions in
two stocks as of the end of the prior quarter
Significant common investor is an investor who,
for each stock in the pair, holds more than the
median institutional holder does
Identify pairs of unrelated stocks
Unrelated Stocks are pairs of two firms from
different Fama-French 30 industries, and the Bureau
of Economic Analysis (BEA) benchmark input-output
data show zero dollar value between their industries
A stock whose return is to predict (Target Stock)
is matched with multiple economically unrelated
stocks (Unrelated Stocks)
A pair of stocks with high (low) significant
institutional ownership are those whose significant
institutional owners have above-median
(below-median) positions
On average, institutions hold over 40% of a firms
outstanding stock and a firm has 93 institutional investors
(Table 1)
215 unrelated-stock pairs for each target stock,

with 206 (188) have common (significant common)
27 (10) common (significant common) institutional
investors per stock pair
Step1: Identify all economically unrelated stocks for each
stock (target stock) using the methodology above
Step2: For each quarter in the last five years, calculate the
cumulative abnormal return (CAR) for the unrelated stock
since its previous announcement and the point in time
equivalent to the week of interest, the unrelated stocks
average CAR over its post-earnings announcement weeks,
and CAR for the target stock over the subsequent week
(Figure 2)
Step3: Regress the target stocks future week CAR on the
average CAR of the unrelated stock over the previous
weeks since the unrelated stocks earnings announcement
Step4: Predict the target stocks next weeks CAR using the
regression coefficients
Step5: Average across all the unrelated-stock predictions
for each stock to get the average predicted return for the
next week
Step6: Sort stocks into industry-neutral quintile portfolios
based on their average predicted returns
Long-short industry-neutral strategy: go long
(short) the quintile portfolio with the highest
(lowest) predicted CAR, i.e. long Q5 and short Q1
Strong weekly return predictability
Value-weighted weekly Fama-French-Carhart 4-factor
alpha is 19 bps with a t-stat of 5.8 (6.1) (Panel A of Table
3)
Returns are monotonically increasing from Q1 to Q5
For example, value-weighted FFC4 alpha is -11.6
(7.2) for Q1 (Q5)
Data
Works for up to four weeks (Figure 4)

Works in most of the five-year sub-periods (Panel B of
Table 3)
Annualized return and Sharpe ratio are positive in
all but four years (1975, 1993, 2000, and 2001)
and remains positive during the financial crisis in
2007-2009 (Figure 3)
Exclusively driven by pairs of stocks that are held by the
same institutional investors
Portfolios formed based on predicted returns from
stocks with (without) significant common
institutional investors show long-short portfolio
alpha of 20.1 (6.3) bps with a t-stat of 5.7 (1.9)
(Table 4)
Not driven by weekly reversal, momentum, size, value,
lead-lag effects, or non-synchronous trading (Table 7, 8)
October 1974 to December 2010 data for US stocks are
from CRSP
Earnings announcement and accounting data from
Compustat, analyst forecast data from I/B/E/S, 13F
institutional holdings data from Thomson Reuters,
institutional trading data from Ancerno, and information on
customer-supplier industry links from the Bureau of
Economic Analysis (BEA) Benchmark Input-Output Surveys
Paper
Type:
Working Papers
Date:
2012-07-29
Categ
ory:
Novel strategy, institutional ownership
Title:
Institutional Ownership and Return Predictability Across Economically Unrelated

Stocks
Autho
rs:
George P. Gao, Pamela C. Moulton and David T. Ng
Sourc
e:
Cornell University Working Paper
Link:
http://www.hotelschool.cornell.edu/research/facultybios/research-papers/docum
ents/Predictability_20120703.pdf
Sum
Common behaviors of institutional investors may induce return predictability
mary: between the stocks of otherwise economically unrelated firms. The
industry-neutral long-short portfolio based on the predicted returns earns a
four-factor abnormal return of 68 bps per month (with a t-stat over 6). The
profits are reversed within four weeks
Intuition
Institutional investors share some common practices
E.g., limits on how much can be invested in a single stock. So
managers sell a stock with high recent abnormal returns
E.g., re-evaluate stocks after earnings announcement
Such behaviors may induce return predictability between the stocks of
otherwise economically unrelated firms
The key idea of this paper is to use returns of unrelated stock to predict
the return of target stock
Methodology
Identify Significant common institutional investors
Common investor is those who holds positions in two stocks as of
the end of the prior quarter
Significant common investor is an investor who, for each stock in
the pair, holds more than the median institutional holder does
Identify pairs of unrelated stocks
Unrelated Stocks are pairs of two firms from different
Fama-French 30 industries, and the Bureau of Economic Analysis
(BEA) benchmark input-output data show zero dollar value
between their industries
A stock whose return is to predict (Target Stock) is matched with

multiple economically unrelated stocks (Unrelated Stocks)
A pair of stocks with high (low) significant institutional ownership
are those whose significant institutional owners have
above-median (below-median) positions
On average, institutions hold over 40% of a firms outstanding stock and a
firm has 93 institutional investors (Table 1)
215 unrelated-stock pairs for each target stock, with 206 (188)
have common (significant common) institutional investors
27 (10) common (significant common) institutional investors per
stock pair
Step1: Identify all economically unrelated stocks for each stock (target
stock) using the methodology above
Step2: For each quarter in the last five years, calculate the cumulative
abnormal return (CAR) for the unrelated stock since its previous
announcement and the point in time equivalent to the week of interest,
the unrelated stocks average CAR over its post-earnings announcement
weeks, and CAR for the target stock over the subsequent week (Figure 2)
Step3: Regress the target stocks future week CAR on the average CAR of
the unrelated stock over the previous weeks since the unrelated stocks
earnings announcement
Step4: Predict the target stocks next weeks CAR using the regression
coefficients
Step5: Average across all the unrelated-stock predictions for each stock to
get the average predicted return for the next week
Step6: Sort stocks into industry-neutral quintile portfolios based on their
average predicted returns
Long-short industry-neutral strategy: go long (short) the quintile
portfolio with the highest (lowest) predicted CAR, i.e. long Q5 and
short Q1
Strong weekly return predictability
Value-weighted weekly Fama-French-Carhart 4-factor alpha is 19 bps with
a t-stat of 5.8 (6.1) (Panel A of Table 3)
Returns are monotonically increasing from Q1 to Q5
For example, value-weighted FFC4 alpha is -11.6 (7.2) for Q1 (Q5)
Data
Works for up to four weeks (Figure 4)

Works in most of the five-year sub-periods (Panel B of Table 3)
Annualized return and Sharpe ratio are positive in all but four years
(1975, 1993, 2000, and 2001) and remains positive during the
financial crisis in 2007-2009 (Figure 3)
Exclusively driven by pairs of stocks that are held by the same
Portfolios formed based on predicted returns from stocks with
(without) significant common institutional investors show
long-short portfolio alpha of 20.1 (6.3) bps with a t-stat of 5.7
(1.9) (Table 4)
Not driven by weekly reversal, momentum, size, value, lead-lag effects,
or non-synchronous trading (Table 7, 8)
October 1974 to December 2010 data for US stocks are from CRSP
Earnings announcement and accounting data from Compustat, analyst
forecast data from I/B/E/S, 13F institutional holdings data from Thomson
Reuters, institutional trading data from Ancerno, and information on
customer-supplier industry links from the Bureau of Economic Analysis
(BEA) Benchmark Input-Output Surveys
Paper
Working Papers
Type:
Date:
2012-07-29
Category
:
Title:
Authors:
Source:
Link:
12.pdf
Summary
:

Background
Recent study
(t-stat =1.5)
=0.79) per month
each year
high (top 30%)

rebalance monthly
strategy
Source: the paper

Data
Datastream
Paper Type:
Working Papers
Date:
2012-07-29
Category:
Novel strategy, VIX futures basis
Title:
The VIX Futures Basis: Evidence and Trading Strategies
Authors:
David P. Simon and Jim Campasano
Source:
SSRN Working Paper
Link:
Summary:
VIX futures basis predicts VIX returns from 2006 through 2011.
The strategy is to short (long) VIX futures when the basis is in
contango (backwardation), meanwhile hedging the market
exposure with mini-S&P 500 futures positions. This strategy is
highly profitable and robust to transaction costs
Intuition
VIX futures is getting more popular as insurance against
tail risk, thanks to its strong negative correlation with
equity returns
This study focuses on the front two VIX futures contracts
due to trading cost concern
Liquidity falls and quoted bid-ask spreads rise
substantially beyond the front two futures contracts
The basis tend to be in contango (backwardation) when
volatility is low (high)
When VIX is lower than 20% (40-50%), the front
VIX futures are in contango 78% (46%) of the time
Implementing the strategy
Sell (buy) the nearest VIX futures when in contango
(backwardation)
Daily roll (defined as the price of the front VIX futures

contract that has more than ten business days until
settlement VIX ) / (number of business days until the
front VIX futures contract settles) greater than 0.10 (less
than -0.10) points and hold for five trading days
The future should be within at least 10 trading days to
maturity
Hedging by long (short) positions in E-mini S&P 500
futures
As a 1% increase (decrease) in E-mini S&P 500
futures corresponds to a 0.59% decrease
(increase) in VIX futures with ten trading days to
maturity
Assuming round-trip brokerage costs of $3 per futures
contract, full bid-ask spread for VIX futures and $12.50 for
E-mini-S&P 500 futures
Contango (backwardation) can predict VIX future return
A one percentage point contango (backwardation) predicts
a 0.79% decrease (increase) in VIX futures level over the
next month (Table 3)
Short (long) trades average net profits $539 ($908) per
contract (Table 4)
Source: the paper
Data
Short trades works better when spot VIX is above 21

(Sortino ratio 1.15 vs. 0.62) (Table 5)
Long trades works better when spot VIX is below 34
(Sortino ratio 0.99 vs. 0.68) (Table 5)
Alternative exit strategy: closes trades when the rationale
for initiating no longer holds (instead of holding for five
trading days) improves the Sortino ratio for both short
(1.08 from 0.75) and long (0.69 from 0.53) VIX futures
trades
January 2006 through the end of December 2011 VIX
futures data are from CQG
The VIX (spot index values) and the front rollover adjusted
mini-S&P 500 futures prices are from Pi Trading
Paper Type:
Working Papers
Date:
2012-06-25
Category:
Novel strategy, exchange-traded notes (ETNs), asset allocation
Title:
Volatility Exchange-Traded Notes: Curse or Cure?
Authors:
Carol Alexander and Dimitris Korovilas
Source:
SSRN Working Paper
Link:
Summary:
VIX futures ETNs, which exploit roll yields and term structure
convexity, can provide excess returns and diversification benefits
to classic asset classes
Background:
VIX ETNs have decent market cap: ~30 ETNs available
with a market cap of $3 billion
Large trading volume: Trading volume on some ETNs can
reach $5 billion per day
$875 million was traded per day on average during
2012/01-2012/02 on just two of these ETNs (VXX,
the Barclays iPath 1-month constant maturity
tracker and TVIX, its supra-speculative, twice
leveraged extension)
The first generation ETNs are not good investments
They are VIX futures trackers such as VXX and VXZ
VXX and VXZ have a Sharpe ratio of -0.77 and

-0.16, respectively, due to term structure convexity
(Figure 5 and Table 5)
The second generation ETNs have good risk-adjusted
returns (Figure 5 and Table 5)
They are roll-yield arbitrage ETNs such as XVIX and
XVZ
They exploit the term structure convexity by selling
(buying) short (long)-term VIX futures
XVIX and XVZ has Sharpe ratio of 1.21 and 0.74
respectively
ETN portfolios may provide excess return and
diversification in a world where the traditional asset
classes are more correlated
Re-construct VIX futures ETNs daily value
Because such ETNs began to trade in 2009
Step1: construct indices for the S&P investable,
constant-maturity VIX futures for 2004/3-2012/3
Using the daily close price for (1) all VIX futures
contracts; (2) 30-day (VIX) and 93-day (VXV) S&P
500 implied volatility indices calculated by CBOE;
(3) S&P constant maturity VIX futures indices; (4)
1-month (VXX) and 5-month (VXZ)
constant-maturity VIX futures tracker ETNs; (5)
XVIX and XVZ
Two sets of synthetic constant-maturity time series
Set1: a non-investable futures price time
series which illustrates the general level of
VIX futures, and the contango and
backwardation features of their term
structure
Set2: the S&P indices of investable VIX
futures returns
Step2: With the above S&P indices of investable constant
maturity VIX futures, replicate the VIX futures ETNs daily
indicative value
Individual VIX ETNs provide excess returns and diversification
Assuming annual service fee of 0.85% and 0.95%, for
XVIX and XVZ respectively
XVIX and XVZ have a Sharpe ratio of 1.21 and 0.74,
respectively (Figure 5 and Table 5)
Complementing each other: XVIX performs best when the
market is in contango (when the XVZ returns are low or
negative); XVZ performs well in backwardation (when the
XVIX loses money)
ETNs portfolios have even higher Sharpe ratios
Data
Portfolio1 (Static CVIX): allocates 75% capital to XVIX and

25% to XVZ
Because historically the ratio of contango to
backwardation is 75% to 25%
Portfolio2 (Dynamic CVZ): holds XVIX when the VIX term
structure is in contango and XVZ in backwardation
CVIX and CVZ have higher Sharpe ratios (1.21 and 1.32,
respectively) than any individual ETNs
CVIX has a total return of 254% (similar to the
XVIX) and the CVZ has a total return of 871%
(much better than the XVZ)
Provides diversification in standard asset allocation (Table
6)
Higher Sharpe ratio: CVIX and CVZ outperform US
equities, commodities and bonds in terms of
Sharpe ratio
Negative correlation: CVIX and CVZ have a
significant negative correlation with the S&P 500
equity index and a small negative correlation with
the commodity index
March 26, 2004 to March 31, 2012 daily close data are
from Bloomberg
Paper Type:
Working Papers
Date:
2012-06-25
Category:
Novel strategy, mutual fund flows, fire sales
Title:
Front-running of mutual fund fire-sales
Authors:
Teodor Dyakov and Marno Verbeek
Source:
European Financial Management meeting paper
Link:
http://efmaefm.org/0EFMSYMPOSIUM/Germany2012/papers/005.pdf
Summary:
Some mutual funds experience large outflows and have to sell their
holdings in short period of time. Stocks held by such funds generates
a five-factor alpha of 50 bps per month
Intuition
Some mutual funds experience large asset outflows and
have to sell their holdings in short period of time
o Such sales put selling pressure on stocks held by the fund
Fund flows are predictable to a certain extent

o This study correctly forecast 48% (30%) of the funds with
extreme inflows (outflows)
A substantial number of funds had significant outflows and
fire-sales
o The number of fire-sales has grown from 457 in 1990 to
1321 in 2010
o Funds with the most outflows has at least 2.5% per month
outflow and can be as high as -3.27%
o Such funds on average holds 73 stocks which implies a
reasonable degree of diversification
Calculate the selling pressure by forecasting extreme in/outflows
Step1: estimate probability of extreme in/outflows using
logistic regressions
Where flow (j, k) is fund flows, and r(j, k) are past

returns, TNA is past total net assets (because funds with
extreme flows are not big in size) (Formula 2, 3)
Step2: forecast fund with extreme flows
I.e., those funds with extreme high estimated
probability of in/outflows
Funds with extreme forecast flows are not big in size
and hold more stocks in their portfolios (Table 3)
Out-of-sample test shows the model correctly forecast
48% (30%) of the funds with extreme inflows
(outflows), with a standard deviation of 10% (8%)
Step3: identify fire-sale stocks by examining these funds
holdings
For each stock held by these funds, calculate Expected
pressure (EP) = (the total holdings of all funds with
expected high inflows) - (the total holdings of all funds
with expected high outflows)
Assuming a two month reporting delay
The stocks with the lowest EP are those with the
highest probability of being commonly sold by funds in
distress
At the beginning of each month, sort stocks by EP
Stocks in the lowest decile are called Expected
Fire-sales (EFS)
The EFS portfolio has 252 stocks on average
Equal-weighted all stocks in that portfolio, and rebalance
every month
Adjust returns of EFS stocks by the market, SMB, HML,

Momentum and the liquidity factor
Mostly small-mid cap: most EFS stocks are below NYSE cap
mean, but 85% of them above the third NYSE size quintile
(Table 4)
Not driven by liquidity: EFS stocks have a very low loading on
liquidity (table 5)
Small-cap EFS stocks underperform
Among all EFS stocks, the alpha is close to 0
But EFS works in small EFS stocks: for those with
market cap below market median, the alpha is -50 bps
per month (panel B, table 5)
Reversals in large EFS stocks: the alpha is 86 bps per
month (panel A, Table 5)
The Rolling 120 Month Alphas. Source: the paper

Less effective after year 2000
Shorter duration: the duration of the anticipated
selling pressure has decreased from about 1-month in
the 1990s to about 2-week in the most recent decade
(Figure 1)
I.e., in a daily holding strategy, EFS works for about a
month in the 1990s, yet last for only two weeks after
year 2000 (Figure 2)
Data
Strong reversal of large stocks after year 2000

From year 2000, large EFS stocks (those with market
cap above market median is 1.67% in holding month
(panel C, table 6)
Although the number of such large EFS stocks is just
58 per month
1990 - 2010 mutual fund data are from CRSP Mutual Fund
Database
Quarterly/semi-annual holdings of mutual funds are from
Thomson Financial/CDA database; Monthly and daily CRSP
stock returns are from CRSP
Accounting data are from Compustat and analyst forecast
data are from I/B/E/S

Type:
Date:
2012-05-21
Categ
ory:
Novel strategy, security lending, short interest
Title:
Exploring Alpha from the Securities Lending Market
Auth
ors:
Vivian Ning, Li Ma, Kirk Wang, Temi Oyeniyi
Sourc
e:
Capital IQ working paper
Link:
https://www.capitaliq.com/media/131415-SP%20Capital%20IQ%20Quant%20Re
search%20-%20Alpha%20in%20the%20Securities%20Lending%20Market_Marc
h_new.pdf
Sum
Stock lending factors can predict stocks returns during July 2006 October 2011
mary: among Russell 3000 companies
Background
As of 2011 in Russell3000 stocks, shares on loan accounts for 6% of stock
shares outstanding
At its peak in 2007, the ratio is close to 10%

This study uses DataExplorer securities lending database
Lending factors predict stock returns
Group lending factors into 5 categories
Catego
ry
Definition
Rationale
Deman
d
The quantity on
loan
High demand
reflects investors
pessimism
Supply
The quantity of
shares available
to be borrowed
Limited supply can

be an indication
that a security is
difficult to borrow,
which leads to a
tighter constraint
on short-selling
Utilizati
on
Demand / supply
Reflect the short

investors
sentiment
Cost
Borrowing cost
High cost to
borrow may be
due to limited
supply (low
institutional
ownership) or high
demand
Special
Factors
DataExplorer
measure of a
securitys
sentiment
DX indicators are
derived from
securities lending
data and stock
price information
Factors in Utilization category show the strongest performance

Weekly return spread of 1.00% for all Russell 3000 stocks, and 1.22% for
stocks with the top/bottom 4% (Table 1)
16 out of the 19 factors have annualized return spreads of 16%+ between
July 2006 - October 2011 among Russell 3000 companies
Most factors are statistically significant at the 5% level
Stronger results in the top and bottom 4% of factor scores
Combination of the 5 categories works best
In the tailed universe (stocks with top/bottom 4% measure), a simple

equal-weighted five-factor strategy yields an annualized return spread of
41% (information ratio 1.91) (Table3)
Where the return spread is 30.89% for in-sample period, 52.26%
for out-of-sample period
Strong small-cap bias in the short-side (Table 5)

Short side (Q5) has much lower median market cap ($453mn)
Long side (Q1) has much higher median market cap ($4,117mn)
Limited turnover
Turnover is 4.1% for Q5 (Table 5)
Suggesting that transactions costs should not significantly impact the
factor return spreads
Works in other international developed markets (Table 7)
Such as United Kingdom, France, Italy, Sweden, and Switzerland in
Europe; Japan, Australia, Hong Kong, and Singapore in Asia; and U.S and
Canada in North America
Similar multi-factor strategies yields significant return spreads
The annualized return spreads are 38.8%, 36.3%, and 37% in
Canada, Europe and Asia respectively
Data
July 2006 - October 2011 securities lending data (including daily shares
borrowed, inventory of available, Shares on loan, and stock borrowing
costs) are from Data Explorers
Paper Type:
Working Papers
Date:
2012-05-21
Category:
Novel strategy, liquidity, investor attention
Title:
Liquidity Shocks and Stock Market Reactions
Authors:
Turan G. Bali, Lin Peng, Yannan Shen, and Yi Tang
Source:
SSRN Working Paper
Link:
Summary:
A strategy that is long (short) stocks with negative (positive)

illiquidity changes generates a risk-adjusted monthly return of
1%. Such predictability holds for up to a year
Background and Intuition
It is well known that less liquid stocks have higher
returns given their higher risks
Liquidity changes over time and experiences shocks
(Table 1)
Investors under-react to firm level illiquidity shocks, and
the degree of under-reaction is stronger for stocks with
less investor attention
o Stronger under-reaction for small stocks, and
stocks with low trading volume, low analyst
coverage, and low institutional holdings
Definitions
Iliquidity (ILLIQ) = (absolute daily stock return) / (daily
dollar trading volume)
ILLIQ is positively correlated with volatility
Illiquidity shock (ILLIQU) = ( ILLIQ - past 12-month
average ILLIQ) / volatility of ILLIQ
In other words, ILLIQU measures the change of
ILLIQ
Higher ILLIQU, lower future stock returns
Sorting stocks by ILLIQU for each month
Monotonicity between return and ILLIQU
Returns spread (High-Low ILLIQ-shock) is -1.23%
per month with a t-stat of -5.86 (Table 2)
Risk-adjusted alpha spread is -1.42% per month
with a t-stat of -6.67
Both high and low deciles contributed: low ILLIQU stocks
outperform, high ILLIQU stocks underperform
Similar findings in Fama- MacBeth regressions (Table 5)
Data
Control variables are size, book-to-market ratio,

market beta, co-skewness, momentum, short-term
reversal, idiosyncratic volatility, etc
The average slope coefficients on ILLIQU are
negative, ranging from -0.16 and -0.29, and highly
significant with t-stat of -5.52 to -12.88
Robust to known factors
Double sorting on ILLIQU and known factors
confirm the robustness
Quintile 5-1 Fama-French 3-factor alphas range
from significant -0.70% to -1.40% per month
(Table 3)
Robust to other liquidity-based variables
Control variables include illiquidity, liquidity beta,
standard deviation of ILLIQ of monthly turnover,
etc
Monthly Fama-French 3-factor alphas are in the
range of (-1.11% to -1.18%) and highly significant
with t-stat ranging from -6.59 to -7.60 (Table 6)
Works for up to 1 year (Figure 4)
Robust to alternative measures of liquidity shock, different
weighting schemes (value-weighted, price-weighted, and
liquidity-weighted), different subsample, expansionary and
recessionary and recent financial crisis periods
Stronger effect for small stocks and stocks with low
trading volume, low analyst coverage, and low institutional
holdings
July 1963 - December 2010 stocks data are from CRSP
Accounting variables are from the Merged
CRSP/Computstat database
Analysts earnings forecasts come from the I/B/E/S
dataset
Spreads are calculated using Trade and Quotes (TAQ)
tick-by-tick transactions data from 1993 - 2010
The institutional ownership data are from Thompson 13F
filings from 1980 - 2010
Paper
Type:
Working Papers
Date:
2012-05-21
Catego
Novel strategy, moving average strategy, SMA
ry:
Title:
Theoretical basis and a practical example of trend following
Author
s:
ukasz Wojtw
Source: 2012 NAAIM award paper

Link:
http://www.naaim.org/wp-content/uploads/2012/05/theoretical_basis__practic
al_example_of_trend_following_Lukasz_Wojtow.pdf
Summa
ry:
A strategy based on Min-Max (an indicator of security price trending)

outperform classic SMA strategies and can beat SP500 index by a wide margin
from 1991 - 2010
Background
A simple moving average (SMA) strategy goes long(short) at the next
days open if todays close is above(below) the simple moving average
To show that real security prices demonstrate certain level of trending,
this study test the strategy using real data, as well as some random
data series such as 1) Data simulating a fair coin toss 2) Biased coin
toss 3) Scrambled real data
Calculation of Max-Min
Decide the length of the indicator, for example 260 days
Step1: count how many days ago was the maximum price level, this will
be maximum index
Step2: count how many days ago was the minimum price level, this will
be minimum index
Step3: calculate difference of (minimum index maximum index)
If the result is positive(negative), the trend is up(down)
Graphically, one can draw a straight line from the maximum to the
minimum index
The slope of the line indicates the direction of the main trend as
shown below
Opening a long position if trend is up, and going short if the trend is
down
Min-Max outperforms the classic SMA strategy by 10%
Profit factor is the profit generated by profitable trades divided by the
losses generated by losing trades
Per table 1, Min-Max generates 10% higher profit factor from
1991-2010
Higher returns than index: during 1991-2010, Min-Max strategy

generates 659% profit, whereas SP500 285%
Low draw-down: the maximum strategys drawdown was 49 %, S&P
500s maximum drawdown was 57%
This strategy was profitable on most securities covered (15 out of 20)
Such as stocks (Apple, Ford, GE, etc), currencies (EurUsd, etc),
indices, (DJIA, etc), commodities (Coffee, silver, etc)
Paper
Type:
Working Papers
Date:
2012-05-21
Categ
ory:
Novel strategy, moving average strategy, SMA
Title:
Theoretical basis and a practical example of trend following
Autho
rs:
ukasz Wojtw
Sourc
e:
2012 NAAIM award paper
Link:
http://www.naaim.org/wp-content/uploads/2012/05/theoretical_basis__practical
_example_of_trend_following_Lukasz_Wojtow.pdf
Summ
ary:
A strategy based on Min-Max (an indicator of security price trending)

outperform classic SMA strategies and can beat SP500 index by a wide margin
from 1991 - 2010
Background
A simple moving average (SMA) strategy goes long(short) at the next
days open if todays close is above(below) the simple moving average
To show that real security prices demonstrate certain level of trending,
this study test the strategy using real data, as well as some random data
series such as 1) Data simulating a fair coin toss 2) Biased coin toss 3)
Scrambled real data
Calculation of Max-Min
Decide the length of the indicator, for example 260 days
Step1: count how many days ago was the maximum price level, this will
be maximum index
Step2: count how many days ago was the minimum price level, this will
be minimum index
Step3: calculate difference of (minimum index maximum index)
If the result is positive(negative), the trend is up(down)
Graphically, one can draw a straight line from the maximum to the
minimum index
The slope of the line indicates the direction of the main trend as
shown below
Opening a long position if trend is up, and going short if the trend is down
Min-Max outperforms the classic SMA strategy by 10%

Profit factor is the profit generated by profitable trades divided by the
losses generated by losing trades
Per table 1, Min-Max generates 10% higher profit factor from 1991-2010
Higher returns than index: during 1991-2010, Min-Max strategy

generates 659% profit, whereas SP500 285%
Low draw-down: the maximum strategys drawdown was 49 %, S&P
500s maximum drawdown was 57%
This strategy was profitable on most securities covered (15 out of 20)
Such as stocks (Apple, Ford, GE, etc), currencies (EurUsd, etc),
indices, (DJIA, etc), commodities (Coffee, silver, etc)
aper Type:
Working Papers
Date:
2012-04-22
Category:
Novel strategy, momentum, risk parity
Title:
Managing the Risk of Momentum
Authors:
Pedro Barroso and Pedro Santa-Clara
Source:
SSRN working paper
Link:
http://ssrn.com/abstract/2041429
Summary:
Scaling long/short momentum portfolio by the inverse of

momentum portfolio return volatility can avoid momentum crash,
and greatly improve momentum long-term performance
Intuition: momentum portfolio crashes is linked to momentum
return volatility
Momentum crashes, though few in member, greatly hurt
performances
In 1932, momentum returned a -91.59% in two
months. In 2009 momentum returned -73.42%
over three months
Take decades to recover investment: took 31 years
after the 1932 crash
Crashes likely happen in high momentum return
volatility periods
Momentum portfolio volatility is highly persistent
Momentum return risk is measured as the realized
variance of daily returns
From 1963:07 to 2011:12, the R-squares of
auto-regression of realized variance of momentum
is 57.82% (table 2 )
Hence more than half of the risk of momentum is
predictable
Momentum volatility is not stock market volatility
Stock market volatility accounts for only 23% of
momentum portfolio volatility
Intuitively, it would make sense to allocate more(less)
assets to long/short momentum portfolios when its risk is
low (high)
In some sense, this approach is to equally allocate risk to
long and short portfolios
Define momentum in traditional fashion
Measure momentum as the 11-month lagged
returns, skipping one month
but weighting long/short portfolio by the inverse of
return volatility
Step1: Calculate daily momentum portfolio returns
volatilities for the past 6 months
Where
is the square of daily momentum returns
Step2: Weight long/short portfolios by the inverse of such

return variance
Consequently, the risk managed momentum return is
Where the left-hand side is the risk-managed momentum

return,
is the variance per the formula above,
is a constant target level of volatility (set to be 12%)
The monthly scale factor (which determines the portfolio
leverage) has an average of 0.90 and a range of 0.13 to
2.00, with extreme values during 1933, 2000-02 and
2008-2009 (figure 7)
Rebalanced monthly
Superior performance to classic momentum strategy
Classic
momentum
Risk-party
momentum
Average (%) annual

return
14.46
16.5
STD (%)
27.53
16.95
Sharpe Ratio
0.53
0.97
Max monthly
drawdown(%)
-78.96
-28.4
Max monthly
drawdown(%)
-96.69
-45.2
Virtually all out-performance comes from avoiding crash
Results are similar when using alternative ways of

measuring realized return volatility
Managing time-varying realized variances is better than managing
time-varying betas
Because specific risk is more persistent and predictable
than the systematic
Yet most of the momentum risk is specific: systematic
component is only 23% of total risk on average
Hedging with time-varying betas fails as it focuses on the
smaller and less predicatable part of risk
Discussions/Concerns
Leverage cant be assumed to be unlimited and costless in
reality. The authors think that As a zero-investment
and self-financing strategy we can scale it without
constraints.
Momentum has notoriously high turnovers, need to see
more discussions regarding portfolio turnovers
Data
July 1963 to December 2011 daily stock data is from CRSP
Paper
Type:
Working Papers
Date:
2012-04-22
Catego
ry:
Novel strategy, legislators and constituent industries, industry returns
Title:
Legislating Stock Prices
Author
s:
Lauren Cohen, Karl Diether and Christopher Malloy
Source: Rothschild Caesarea Center 9th Annual Academic Conference

Link:
https://portal.idc.ac.il/en/main/research/CaesareaCenter/about/Academic%20c
onference%202012/PID-135.pdf
Summa
ry:
Legislation may have significant impact on returns of related industries. A

strategy that long (short) an industry after the passage of positive (negative)
legislations yield significant risk adjusted returns
Intuition
Companies revenues and earning may be greatly impacted by
legislatures
In US, legislators (Senators) tend to protect and promote the interest of
industries (firms) in their home state
Focus on industries rather than firms: because legislators rarely specify
individual firms
Investors do not understand the impact of legislatures (Panels B, C of
Table III)
No run-up effect: in terms of firm returns in the 6- (or 12-)
month period prior to the bills passage
No announcement effect: zero abnormal returns in the month
that the bill is passed
Step1: assign each bill to one (or more) of the 49 industries by parsing
and analyzing the full bill text
Step2: identify relevant Senators: these whose home state are the
headquarter of at least one firm the industry in question
Step3: identify important industries as those that rank in the top 3 for
each state in terms of size (sales and market cap)
Step4: identify interested Senators as those who have important
industries that are relevant to a legislation
Step5: define Interest-Based Signing Measure(IBSM): if the ratio of
positive votes by interested Senators is greater than that for
uninterested Senators, then this is a positive bill for the industry in
question
Form a Long portfolio that buys the firms in each industry assigned to
a bill where the IBSM is positive, and likewise for a Short portfolio
Weight stocks by market capitalization, monthly rebalance
Large abnormal returns
A long-short portfolio earns abnormal returns of over 0.9% per month

following the passage of positive legislation, or 11% per year (Panel A of
Table III )
Similar patterns in terms of excess returns, CAPM alphas,
3-factor alphas, or 4-factor alphas
Most returns from the short side
Abnormal returns to the short portfolio are 0.7-0.8% per month
(Table III)
Suggesting that bills opposed by interested Senators but
ultimately passes is a bad sign for relevant industries
Similar findings in regressions: the impact of Bad Bill on future
industry-level returns is -0.8% per month (t=2.86) (Column 1, Table IV)
Robust to different measures of industry momentum, industry-level
measures of size, book-to-market, investment, and R&D expenditures,
capital expenditures (CAPEX), and book equity
Robust to sub-periods: the effect is stronger over time. In the more
recent period, the magnitudes of the return effects are 15-20% larger
Stronger effect for Concentrated Interests
The intuition is that focusing on Senators that have concentrated
interests in a particular industry should amplify the effects
When focusing on interested Senators who are impacted by the most
important industry (No. 1 ranked industry by size) in the bill, the
long-short portfolio returns rise to 1.30% per month (t=2.78) (Panel B,
table VI)
When focus on the most important industry who are headquartered in
interested legislators states, the long-short portfolio has returns of
1.8% per month (t=1.89)
Though this reduces the sample size greatly
Data
1989 to 2008 complete legislative record of all Senators and all
Representatives on all bills from the 101st through 110th Congresses
are from the Library of Congress Thomas database
Paper Type:
Working Papers
Date:
2012-04-22
Category:
Novel strategy, Text-based Network Industry Classifications

(TNIC), GICS
Title:
Categorization Bias in the Stock Market
Authors:
Philipp Kruger, Augustin Landier, and David Thesmar
Source:
SSRN Working Paper
Link:
Summary Conventional
Summary:
Conventional industry classification can be improved. Those

stocks whose official industry peers out-performed
(under-performed) fundamental peers earn large negative
(positive) returns over the next month. A long-short strategy
yields a monthly abnormal return of 1.5
7%
Intuition: conventional industry classification may be problematic
The conventional industry classification may mislead
investors
E.g., unders SIC classficiation, both Rock-Tenn
(which does paperboard food packaging) and
Schweitzer-Mauduit (which produces cigarette
paper) are in paper and allied products" industry
So both will likely be impacted by a news shock for
paper and allied products"
Yet such news shock is less relevant to
Schweitzer-Mauduit, whose earnings depends
largely on cigarette sales that impact Tabacco
industry
Consequently Schweitzer-Mauduit tend to first
over-react to their official industry shocks and
subsequently revert
This study shows that such divergence between official
industry classification and fundamental industry
classification may lead to return reversals in 2-3 weeks
Identifying fundamental peers using a Text-based Network
Industry Classifications (TNIC)
For every possible pair of firms, compute product
similarity by parsing business description" section of
their 10K forms
Firms that use similar words to describe their
products are likely to operate in the same product
market
Such firms are called fundamental peers
For each firm, calculate returns of its official" peers
(defined by standard SIC classification), and those of its
fundamental" peers
Define firms official industry return = equally weighted
average of the returns of all firms belonging to the same
SIC2 (two digit SIC) category
Define firms fundamental industry return = the equally
weighted return of a portfolio consisting of all
fundamental" peers
At the beginning of each week t, sort firms according to

the industry return differential (official industry return fundamental industry return) in past 6 weeks
So for firms in the first (fifth) quintile, Q1(Q5),
fundamental industry return strongly exceeds
(underperform) that of its official industry
Categorization bias yields significant abnormal returns
Reversal starts in the first week: the first week four-factor
alpha spread is 37 bps (annualized return 19%) and is
highly significant (t-stat=5.66)
Persistence in 1 month
Q5 revert fully within a weeks time
Q1 take much longer to revert completely: from 28
bps in the first to about 16 bps in the sixth week
Portfolio analysis at the monthly level yields identical
conclusion (Table A.I)
Stronger effect in mid- and small-caps
Significant alpha for long-short portfolios consisting
in small (154 bps with t=4.25) and mid cap firms
(119 bps with t=2.39)
No significant alpha for large cap firms (Table IV)
Regression confirm results from the above portfolio
analysis (Table VII)
Using Global Industry Classication Standard (GICS) or
SIC3 level yield similar results
Stronger effect for Closer followers
Double sort stocks based on (1) the official-fundamental
divergence and, (2) how close the return of a stock has
been to official industry return
A long-short strategy for closer followers yields a
monthly abnormal return of 1.57 % (18% annually) with a
t-stat of 4.1 (Table V)
Data
Text-based Network Industry Classifications (TNIC)
information are from
http://www.rhsmith.umd.edu/industrydata/index.html
Historical SIC code is from Compustat (SICH)
1997 and 2009 stock return data are from CRSP
Paper Type:
Working Papers
Date:
2012-04-22
Category:
Novel strategy, uncertainty, implied volatility
Title:
Uncertainty and Stock Returns
Authors:
Guido Baltussen, Sjoerd Van Bekkum, and Bart Van Der Grient
Source:
SSRN Working Paper
Link:
Summary:
Volatility-of-volatility (vol-of-vol) is a feasible measure of

uncertainty. A portfolio that is long (short) lowest (highest) 20%
uncertainty stocks yields an annualized return of 9%. Such
pattern is stronger for larger stocks and persists for more than 12
months
Intuition
Options-implied volatilities (IV) are primarily driven by
expected stock price volatility
Higher IV indicates higher risks perceived by
investors about future stock returns
A good proxy for expected uncertainty is the time variation
of such perception
Such variation reflects the extent to which
investors dont know what they dont know, or
unknown unknowns
Define volatility-of-volatility (vol-of-vol): vol-of-vol =
(standard deviation of IV) / (average IV over the past
month using daily data)
Where IV = average IV of the at-the-money (ATM)
call option and ATM put option, measuring the risk
perceived by investors about future price movements
of a stock
High vol-of-vol stocks have larger market cap, higher
beta, and lower momentum (Table 1, 3)
Extreme levels of vol-of-vol tend to persist: 33% (32%) of
the stocks in the lowest (highest) vol-of-vol quintile stay in
that quintile during the next period
Construct vol-of-vol portfolios
At the end of each month, sort all stocks into quintiles by
a one-day lagged vol-of-vol
Buy(sell) stocks with highest (lowest) quintile vol-of-vol
Value-weight stocks and holding for one month
Higher vol-of-vol, lower future returns
High-Low value-weighting portfolios earns a significant
(t=-2.5) monthly return of -0.77%
Of which -0.21% (0.56%) is from High (Low)
portfolio
Fama-French-Carhart alpha (4F alpha) is -0.62% per
month with t-stat of -2.14 (Panel (a) of Table 2)
Data
Portfolio returns decrease monotonically from quintile 1

(Low) to quintile 5 (High) (Figure 2)
Robust to known risk factors, per portfolio double sorts
and firm-year regressions
Vol-of-vol effect is not explained by size, beta,
book-to-market, momentum, short-term reversal,
idiosyncratic volatility, maximum return, skewness,
kurtosis, leverage, short sale constraints or
liquidity-, option-, uncertainty-related variables
(Table 4, 5)
Stronger effect for the largest stocks
Evident in large cap stocks, but absent among the
firms in the two smallest size quintiles (Panel (a) of
Table 4)
Vol-of-vol effect holds across different sub-periods (Figure
3)
Return persistent beyond 12 month after portfolio
formation (Table 7 and Figure 4) for longer holding periods
(3, 6, 9, 12, or 24 months after portfolio formation)
January 1996 until October 2009 option data (daily implied
volatilities, closing bid and ask prices, option strikes and
tenors, and information on options volume and open
interest) are from OptionMetrics
Stock returns, stock characteristics, and market
capitalization data are from CRSP
Paper Type:
Working Papers
Date:
2012-04-22
Category:
Novel strategy, number of trades, short-sale constraints,

high-frequency trading data for low-frequency strategy
Title:
The Number of Trades and Stock Returns
Authors:
Yi Tang and An Yan
Source:
Fordham University Working Paper
Link:
http://faculty.baruch.cuny.edu/jwang/seminarpapers/numtrd-0323-2012.pdf
Summary:
A high-frequency trading data, number of weekly trades, can

forecast stock returns. A long-short portfolio yields 15.18%
annualized return after adjusting for Carhart-four-factors. Such

pattern holds after adjust for dollar trading volume
Intuition
When fewer investors trade a stock, it may be that the
stock faces more binding short-sale constraints
More investors are sitting on the sidelines and wait
for stock price to fall to reasonable levels
For each stock, define adjusted number of
trades(NUMTRDU) = (weekly number of
trades(NUMTRD) - past 26-week average NUMTRD ) /
(standard deviation of past 26-week NUMTRD)
NUMTRDU has low correlation with the NUMTRD
(correlation coefficient 0.05), and with the volatility
of NUMTRD (correlation coefficient 0.02)
But highly correlated with the adjusted share
turnover (TURNU) (correlation coefficient 80.34%)
and the adjusted dollar trading volume (VOLDU)
(correlation coefficient 79.43%)
Significant alpha
When regressing on lagged NUMTRDU, the cross-sectional
correlation coefficients of two weeks ahead stock return
(RET) and characteristic-adjusted return (RET_ADJ) are
1.72% and 1.31%, respectively (Panel B of Table 1)
Skip week t + 1 to alleviate the concern of
microstructure effects, such as bid-ask bounce and
non-synchronous trading
The average raw return spread is 0.344% per week
(17.89% annualized) (Panel A of Table 2)
The Carharts four factor adjusted returns is 0.29% weekly
(15.18% annualized )
RET monotonically decrease with NUMTRDU: the average
weekly raw return (RET) increases monotonically from
-0.003% per week to 0.341% per week
Robustness
Robust to dollar trading volume (VOLDU)
Double sort stocks by VOLDU and NUMTRDU, the
positive relation between NUMTRDU and RET
remains intact (Table 3)
Although the return spread is <5%, half of
those of other controlling variables
In firm-level cross-sectional regressions that
include VOLDU, the coefficient of NUMTRDU are still
significant (table 4)
Further suggesting that NUMTRDU not
subsumed by VOLDU
Robust to liquidity: if driven by liquidity, then a large
number of non-informational buyer-initiated
Data
(seller-initiated) trades should lead to a price increase

(decrease) (Panel A of Table 5)
Similar findings when using monthly window rather than
the weekly (Panel A of Table 8)
Robust to common return predictors
Such as size, book-to-market, momentum,
illiquidity, analyst dispersion, trading turnover, and
dollar trading volume, etc
Similar pattern in the two subsamples of the
buyer-initiated and the seller-initiated trades
January 1993 - December 2008 stock return and volume
data at the daily and monthly frequencies, and the
financial statement information are from the
CRSP/Compustat
The number of trades and the trade-order imbalance
variables are computed using the tick-by-tick data from
the Trade and Quotes (TAQ) database
Data on analysts earnings forecasts are from the
Institutional Brokers Estimate System (I/B/E/S) database
Paper Type:
Working Papers
Date:
2012-03-30
Category:
Novel strategy, macroeconomic exposures, geographic exposure
Title:
Macro to Micro: Country exposures, firm fundamentals and stock
Authors:
Ningzhong Li, Scott Richardson, and Irem Tuna
Source:
SSRN Working Paper
Link:
Summary:
Combining a companys country sales exposure and such

countries economic forecasts can predict stock returns
Intuition and definition
Many companies nowadays generate sales from foreign
countries, so economies in these foreign countries will
have an impact on the firms earning and stock returns
Geographic exposure is measured through sales
(sourced from annual reports for firms with positive
sales)
This study forecast stock return using foreign countries

economy predictors
I.e., composite leading indicator (CLI) published by
OECD for its member countries and six
non-member countries: (Brazil, China, India,
Indonesia, Russia and South Africa.)
Define SHOCK as a firms by-country sales-weighted economic
forecasts
Where by region %sales is from firms annual reports

Assume each companys operations in a continent are
proportional to the GDPs across these countries
Economic forecasts by region are based on the moving
average of monthly change of country CLIs
SHOCK forecasts returns of small- and also mid-caps.

The value weighted 6-month return is 8.6% (smallest
quintile) to 3.5% (largest quintile) (table 5, 6)
SHOCK do not significantly predict returns for
largest 20% stocks
Robust to known risk factors: momentum, size, beta,
earnings-to-price, and book-to-price
Robust to transaction costs: assuming 30 (100) basis
points institutional round trip costs on the largest
(smallest) stocks
Robust to different weighting schemes: such as equal- and
risk-weighting (table 5)
SHOCK tends to underperform when small firms or value
firms outperform, and outperform when the overall equity
market is doing well
SHOCK also predicts operating performance and analyst forecast
revisions
One standard deviation in relative country performance
corresponds to an additional 40 basis points of ROA (table
1)
One standard deviation change in the shock is associated
with an additional 0.12% increase in analyst earnings
forecasts (table 4)
Data
1998-2010 stock data are from Compustat for US firms

and FactSet for non-US firms
Monthly CLI data are from OECD website
Paper Type:
Working Papers
Date:
2012-03-30
Category:
Novel strategy, moving average, market timing
Title:
Market Timing with Moving Averages
Authors:
Paskalis Glabadanidis
Source:
SSRN Working Paper
Link:
Summary:
A simple moving average(MA) strategy can boost risk-adjusted

returns of various value-weighted factor portfolios (e.g., those
sorted by market size, book-to-market, cash-flow-to-price, etc).
It yields significant alphas of 10-15% per year after transaction
costs
Constructing factor decile portfolios
Step 1: Sort stocks into value-weighted decile portfolios
by firm characteristics such as,
Market value, book-to-market, cash-flow-to-price,
earnings-to-price, dividend-price, short-term and
long-term price reversal, medium-term
momentum, and industry classification
Step 2: At the end of each month and for each portfolio,
calculate the 24-month Moving Average (MA) as the
average of the last 24 monthly prices (Formula (1))
Trading rule: Buy (or continue to hold) a portfolio next
month when its monthly closing price is above the moving
average price. Otherwise invest the money into the
risk-free asset (the 30-day U.S. Treasury bill)
Transaction cost: a trading cost of 50bps of portfolio value
when entering and exiting stocks (Formula (3))
Superior risk-adjusted returns vs. buy-and-hold
For each of the underlying portfolio, define MAP =
moving average (MA) strategy return - buy-and-hold
(BH) strategy return
MA strategy dominates the underlying BH portfolio
strategy (Table 1)
o With substantially higher average annualized

returns, lower standard deviations, and hence
higher Sharpe Ratios
o These results hold for almost all portfolio across
all sorting variables
o As an illustration, below is the MAP and Sharpe
Ratio for two factors: Earning-to-price and
Cashflow-to-market
Robustness
Robust for two subperiods (1960/1-1986/12 and 1987/12011/12) (Table 3)
Robust when lagging month by 6, 12, 36, 48 and 60
months (Table 4)
The pattern persists with up to 36 months, and
degrades at 48 and 60 months
The annual MAP returns with a moving average
window of 6 (12, 36) months is 8%-21%
(5%-15%, 1%-9%)
Given infrequent trading, the break-even transaction costs
can be as large as 3-9% per trade (Table 5)
Abnormal returns for most deciles survive after controlling
for investor sentiment, default, liquidity risks, recessions
and up/down markets
Like BH, MA High-minus-Low alpha are significantly positive
across most sorting variables
As measured per CAPM, Fama-French 3-Factor, and
Fama-French-Carhart 4-Factor models (Table 2)
High-minus-Low CAPM alphas ranges from 4.01% for
Earning-price sorted portfolios to 9.98% for Medium-term
momentum sorted portfolios
Data
Industry-sorted portfolios have CAPM alphas ranging

between 3.06% for the NoDur industry to 10.06% for the
HiTec industry
Fama-French-Carhart 4-Factor alphas are lower than CAPM
and Fama-French alphas, but are all significant
Stock data of January 1960 to December 2011 is from Ken
French Data Library
Paper
Type:
Working Papers
Date:
2012-03-30
Categor
y:
Novel strategy, analysts forecast error, short-term trading during earning

announcements
Title:
The short term prediction of analysts forecast error
Authors
:
Kris Boudt, Peter de Goeij, James Thewissen, and Geert Van Campenhou
Source:
SSRN Working Paper
Link:
Summa
ry:
A trading strategy around earnings announcements that longs (shorts) stocks

with the most pessimistic (optimistic) consensus forecast generates an annual
risk-adjusted return of 16.56% during 1998-2010
Background
In essence, earnings surprises is the result of analysts forecast error
Define analysts forecast error = (analysts consensus forecast
actual earnings) / closing price on the day before the forecast date
A positive (negative) forecast error thus points to an optimistic
(pessimistic) consensus
Such forecast errors can lead to strong stock price reactions on earning
announcement days
This study proposes robust estimation techniques to forecast such
prediction errors, especially for those outliers
While the traditional OLS yields a poor out-of-sample prediction
performance
Such technique focuses on stocks with the most extreme
predicted forecast errors
Variables Used to Predict Analysts Forecast Error
Categor
y
Reason
Forecast variables
Analysts
forecast
variable
s
There exists positive

autocorrelation in
analysts forecast error
over time
Prior forecast error,

include positive and
negative ones
Analysts become more

optimistic in more
uncertain information
environment
Earnings forecasts
dispersion
Higher analyst coverage

should increase the
predictability of the model
Analyst coverage,
measured as the
logarithm of the
number of analysts
Prior stock returns are

associated with analysts
forecast error
Two measures: (1)

the cumulative
market-adjusted
return for the
2quarters preceding
the quarter under
investigation, (2) for
quarter -4 to quarter
-2
Information uncertainty
decreases with size, so
size may be negatively
correlated with forecast
error
Firm size, measured

as the logarithm of a
firms market value
A high (low)
earnings-to-price ratio
points to value (growth)
stocks, which tend to have
low (high) earnings
volatility
The lagged
Analysts forecasts for Q4t

earnings might differ
systematically from other
quarters, because
negative extraordinary
items and losses are more
prevalent
A dummy variable for

forecasts made for
fourth quarter (Q4t)
earnings
Prior
stock
perform
ance
variable
s
Two
control
variable
s
Analysts behavior has

been significantly
influenced by the
introduction of the
Regulation Fair Disclosure
in fall 2000
Expect analysts
consensus forecasts to be
more pessimistic after the
enforcement of the
Regulation
A regulatory dummy
related to the
Regulation Fair
Disclosure introduced
in fall 2000
Prediction Models
Regress the forecast error on the variables above with a linear fixed
effects model
Robust regression approach: this is important for higher prediction
accuracy as outliers (extreme values) heavily affect the precision of
prediction models
Winsorizing helps: particularly in the case of the random walk model
Derive trading strategies for each of the four comparing models
1. Random walk; 2. Random walk with conditional filtering; 3.
Robust fixed effects models; 4. Robust fixed effects models after
winsorizing
Using OLS model before and after winsorizing as benchmark
model
Sort stocks by the predicted forecast errors: long (short) stocks with
negative (positive) forecast errors
Hold stocks for 7 days, starting 5 trading days before the earnings
announcements
Compare two trading strategies:
(1) Magnitude strategy: Long (short) stocks whose predicted
forecast error is below (above) the 10% (90%) decile of the
realized forecast error in quarter t-1
(2) Sign strategy: Long (short) stocks for which the forecast
error is predicted to be negative (positive)
Construct equally weighted portfolios with daily rebalancing
Because months of January, May, July and September typically
observe a high concentration of earnings reports on a daily basis
Calculate the profitability of perfect foresight strategies (assuming a
perfect prediction of analysts forecast error) as benchmark
Transaction cost assumptions: 0.24% for the largest stocks (5th

quintile), 1.39% for the second smallest stocks (2nd quintile)
Magnitude strategy generates significant returns
With perfect foresight, magnitude strategy earn a monthly 4-factor (net

of transaction cost) abnormal return of a 4.6% over a trading horizon of
7 trading days
Suggesting that predicting analysts forecast error can be a
source of alpha (Panel A of Table 5 and Figure 4)
Magnitude strategy without winsorizing (Panel A of Table 5)
Robust fixed effects Model (2) yields the largest gross returns of
1.4%
The 4-factor alpha is a significant 1.257%, with a Sharpe ratio is
0.5%
Winsorizing helps slightly (Panel B of Table 5)
The gross abnormal return of the robust fixed effects Model (2)
increases to 1.4%
The sign strategy significantly underperforms a magnitude strategy
(Figure 4)
Discussions
We think the proposed systematic approach may help researchers to
forecast analyst errors, and build longer-term strategies
However the transaction cost treatment is not conservative enough,
hence it may be flawed as a short-term strategy. As the authors say,
With a level transaction cost of 0.100%, the robust Model (2) would
still earn a significant net abnormal return of 1.018%. If the level of
transaction costs is increased to 0.353%, the net abnormal return of
Model (2) is reduced to an insignificant abnormal return of 0.110%
(table 5)
Data
Analysts quarterly earnings forecasts and actual earnings are from the
Institutional Broker Estimate System (I/B/E/S) database from 1995 to
2010
Keep the quarterly earnings announcement if the report date does not
exceed the SEC filing deadline, set at 45 days following the end of the
quarter
Stock prices, returns and market capitalization data are from CRSP
Paper Type:
Working Papers
Date:
2012-03-30
Category:
Novel strategy,
Title:
Seeking Portfolio Manager Skill--Active Share and Tracking Error

as a Means to Anticipate Alpha
Authors:
Michael J. Mauboussin
Source:
Legg Mason Working Paper
Link:
https://www.lmcm.com/905988.pdf
Summary:
How to predict which mutual funds will perform better? This paper
suggest that funds with High Active Share and How Tracking
Error are likely to outperform
Measures to evaluate managers need to have reliability and
validity
Reliability means that such measures are highly correlated
from one period to the next (i.e., persistence)
Validity means the measure is correlated with the desired
outcome (i.e., they lead to higher fund alpha)
The wide-used past returns is not a good measure
It fails to break down investment results to skill
and luck
Simulations show that even skillful managers
(those assumed to have higher ex-ante Sharpe
ratio) can deliver poor returns for years as a
consequence of luck
Defining active share (AS) and tracking error (TE)
AS is defined asthe percentage of the funds portfolio that
differs from the funds benchmark index.
In general, an active share of 60% or less is considered

closet indexing
Active shares of 90% or more is considered stock pickers
Two basic ways to raise active share: (1) set stocks
weights to be higher or lower than index (2) betting on
systematic risk factors
TE is defined as the standard deviation of the difference
between the returns of the fund and of the index
TE can capture systematic factor risk
In essence, TE give less weight to correlated active
bets than AS
AS and TE tend to move in tandem: clear relationship
between active share and tracking error
Grouping mutual funds using these two measures

Stock pickers: Top quintile AS, quintiles 1-4 TE
Concentrated: Top quintile AS, top quintile TE
Factor bets: Quintiles 2-4 AS, top quintile TE
Moderately active: Quintiles 2-4 AS, quintiles 1-4
TE
Closet indexers: Bottom quintile AS, quintiles 1-4
TE
Combining high AS and low TE can identify out-performing
mutual funds
Such combination is reliable (i.e, consistent): for 400
mutual funds (2007 to 2010) the coefficient of
(auto)-correlation for active share was 86% while tracking
error was 76% (exhibit 3)
Such combination is valid (i.e., funds picked by such
combination out-perform)
Per study by Petajisto
Similar results per LMCM study: stock pickers
funds (64 funds) generated annualized alpha of 3.8
percentage points from 2008-2010, much higher
than the rest of all 400 funds

Paper Type:
Working Papers
Date:
2012-02-29
Category:
Novel strategy, option markets, information spillover
Title:
Exploiting Option Information in the Equity Market
Authors:
Guido Baltussen, Bart Van der Grient, Wilma De Groot, Erik

Hennink, and Weili Zhou
Source:
SSRN Working Paper
Link:
Summary:
Equity option measures can predict stock returns in the largest

and most liquid 100 stocks. A long-short portfolio yields a
significant 7% per year
Background
Previous studies show that option information predicts
stock returns
Four widely studied measures: 1) out-of-the-money
volatility skew, 2) realized versus implied volatility
spread, 3) at-the-money volatility skew, and 4)the
change in the at-the-money volatility skew
This study finds such measures work in U.S. large caps
after transaction costs
Such large caps have an average (median) market
capitalization equals USD 9.19 billion (3.33 billion)
(Table 1)
4 option measures covered
Measure 1: OTM volatility skew (SKEW OTM)
The difference in implied volatilities (IV) between
OTM puts and ATM calls
Measure 2: Realized (historical) versus implied volatility
spread (RVIV)
The difference between realized volatility over the
past 20 trading days (RV) and implied volatility (IV)
Measure 3: ATM volatility skew (SKEW ATM)
The difference between the implied volatilities (IV)
of ATM put and call options
Measure 4: Change in the ATM volatility skew (SKEW
ATM)
The weekly change in the volatility spread between
the ATM put and call options
A combined measure: the average of z-score for each
measure above
Limited correlation among these measures

The average rank correlations between the four
option variables are low to moderate (Table 1)
Form equally-weighted quintile portfolios based on
Tuesday closes for each measure, with a one-day lag
(implementing with Wednesday closing data)
Hold portfolio for one week and rebalance weekly
Calculate excess returns controlling for market, size,
value, and momentum exposures
All four measures works in large-cap stocks (Table 2, 4) (Figure
1)
4-factor
adjusted return
spread
SKEW OTM
7.96
RVIV
7.06
SKEW ATM
7.96
SKEW ATM
5.52
Combined measure
10.06
Apart from RVIV, all strategies show stable performance in

the recent crisis period
Little correlations: the correlations between the weekly
Q1-Q5 quintile portfolio returns ranging between -3%
(between RVIV and SKEW OTM) and 44% (between SKEW
ATM and SKEW OTM) (Figure 1)
Stable out-performance including in the recent, previously
out-of-sample crisis years
Apart from a drawdown in 2009
The combined measure is robust over bull, bear (based on
positive and negative monthly market returns), volatile
and calm (based on the VIX being above or below its
median value) markets (Table 5)
Works in large cap stocks: performance in the 100 largest
stocks better (Table 7)
A modified strategy that suppresses turnover and enhances net

profit
A modified strategy: selects stocks like above, but holds
them until they migrate to the extreme opposite quintile
Applied to the 100 largest stocks, this modified
strategy generates an average net annual return of
7.6% (Table 7)
Robust to the shorting costs of estimated at 0.5% to 1.0%
annually
Data
January 1996 and October 2009 data for 1,250 largest
stocks are from Compustat
Option data is from OptionMetrics
Paper
Type:
Working papers
Date:
2011-03-29
Category: Novel strategy, co-integration, momentum

Title:
Does Long-Run Disequilibrium in Stock Price Levels Predict Future Returns?
Authors:
Vivian Chen, Jungshik Hur, Vivek Sharma
Source:
Eastern Conference paper
Link:
/S-2-70.pdf
Summary
:
Stock returns tend to move in tandem with market returns in the long run.
Stocks with the most positive (negative) co-integration residuals continue to
generate risk-adjusted positive (negative) return in future 1 to 6 months
Background of co-integration
Co-integration means that the linear combination of two variables is
stationary
- Suggests that there is a long-run equilibrium relationship
between the two variables, and the stock returns and market
return drifts together with each other
Stock returns are usually an non-stationary processes, as their means
and variances are not constant over time
But difference between stock and market returns may be stationary
- I.e. there exists co-integration relationship between stock
returns and market returns
The error correction term (also called the residual term) in the
co-intergration regression is termed ECT
Constructing the ECT portfolio
Step1: each month t, run co-integration regression for each stock i
using observations in the past 60 months
where ei,t- (i.e., ECT) measures how much stock return deviates from its
long-run relationship relative to market returns
Step2: Each month t, form 10 ECT portfolios and hold portfolios t+1
to t+T
Thus the holding period starts 1 month after the portfolios are
formed
T = 2, 4, and 7, respectively, corresponding to 1 month, 3
months, and 6 months holding periods
ECT portfolio generates decent returns
From January 1965 - December 2005, stocks with lowest ECT decile
earns 0.61% a month, while stocks with highest ECT earns 1.70% a
month
The monthly return spread is 1.09% and is statistically significant
Robust to common risk factors (beta, value, size), though correlated
with momentum:
High ECT - low ECT portfolio has a 3-factor alpha of 1.17% per
month (table II)
The 4-factor (after adding momentum) alpha is 0.51% per

month. Despite the drop, it is highly statistically significant
(table III)
Past 12-month return for lowest ECT is D1 -18.8%, and
highest ECT is 88.3%
Robust to sub-periods: similar findings for the period of 1965-1985
and 19862005 (Panel C, table I)
Robust to different holding period: such as 1 month and 3 months
(Table I)
Higher returns among noncointegrated stocks (Table V)
Intuitively, non-cointegrated stocks are those, based on observations
in the past 60 months, the co-integration relationship are less stable
and regression error term deviate further away (Equation 7)
D10 D1 portfolio among non-cointegrated stocks earns 1.57% per
month on average over 6-month holding period,
D10 D1 portfolio using cointegrated stocks earns 0.81% a month
(Table V)
This is because levels of non-cointegrated stocks may deviate more
from the long-run equilibrium
Data
January 1965 - December 2005 NYSE and AMEX stocks with at least
24 months of returns are used
Paper Type:
Working papers
Date:
2011-01-23
Category:
Novel strategy, patent
Title:
Misvaluing Innovation
Authors:
Lauren Cohen, Karl Diether, Christopher Malloy
Source:
HBS working paper
Link:
http://www.people.hbs.edu/lcohen/pdffiles/dimalco.pdf
Summary:
R&D investments are highly uncertain activity and yet have large
impact on stock returns. This paper finds that a firms R&D ability
(i.e. past track records) can predict its future success. A strategy
that long(short) firms that (1) make large R&D investments and
(2) exhibit high (low) R&D ability earns 11% abnormal annual
returns
Background and definition of good/bad R&D firms
Average R&D expenditures is roughly 17% of sales (table

I)
Limited style bias of firms with valid R&D data relative to
universe(table I)
Slightly larger market cap and a modest growth tilt
Price momentum, turnover and stock volatility are
nearly identical to the entire universe
No discussion of sector bias in this paper, though
intuitively sectors such as IT have high R&D
investments, and sectors such as financial have
little R&D
Compute firm R&D ability in 2 steps
Step1: run firm-level regressions of sales growth
on lagged (R&D/Sales). Use 5 different lags of R&D
(i.e., R&D from past 5 years)
Step2: take the average of these five R&D
regression coefficients as the measure of R&D
ability
Such R&D ability are fairly stable year-by-year: 70% firms
with top quintile ability remain in this same top quintile in
the following year (table II)
Good (bad) R&D stocks are those that (1) exhibit
top(bottom) quintile ability in the past and that (2) have
a R&D investment that ranked top 30%
Little correlation ( -0.04) between R&D size and Ability
(Table III)
Most profit come from long good R&D firms (Table IV)
Long only portfolio yields high returns: Good R&D firms
earns value-weighed excess monthly returns of 1.3%
(t=2.66) in the year following large investments in R&D,
with a 4-factor monthly alpha of 0.83% (t=2.31)
Short-only portfolio earns no returns: Bad R&D firms earns
-0.05% per month in 4-factor value weighted alpha
(t=0.19)
Long-short portfolio yields high returns: long(short)
good(bad) R&D firms has a 4-factor alpha over 10%+ per
year
By contrast, simple sorts on R&D alone earns no
returns (Table III)
Low turnover as portfolio rebalanced annually, as firms
only report R&D expenses once per year
Virtually no reversal of the abnormal returns
R&D ability predict real R&D outcomes
Good R&D firms are awarded significantly more patents,
achieve significantly more patent citations, and develop
significantly more new products
Data
This is confirmed by regressing number of future patents

on R&D track record
A one-standard deviation move in R&D by a high ability
firm leads to an additional 0.75 patents (a 47% increase
given the average firms number of patents of 1.6)
July 1980 to December 2009 stock data (including
research and development (R&D) expenditures, sales and
general administrative expenses) are from
CRSP/Compustat
Firm-level patent data are from the NBERs U.S. Patent
Citations Data File
Paper Type:
Working papers
Date:
2011-01-23
Category:
Novel strategy, value, gross profitability
Title:
The Other Side of Value: Good Growth and the Gross Profitability
Premium
Authors:
Robert Novy-Marx
Source:
Link:
http://faculty.chicagobooth.edu/robert.novy-marx/research/OSoV
.pdf
Summary:
Gross profits-to-assets ratio (GPA), especially when measured

within industry, can significantly predict stocks returns. GPA
works even better when combined with book-to-market ratio, as
it differentiates good growth firms from bad value firms
GPA is defined as ( revenue - cost of goods sold) /
(total assets)
Why gross profitability measure? Gross profits is the
cleanest measure of true economic profitability
The farther down the income statement, the more
polluted profitability measures become
GPA differentiate good growth firms from bad value
firms, because firms with high GPAs tend to be large-cap,
growth firms with lower book-to-markets ratios
GPA has equal or higher return predictive power than other value
measures
In Fama-McBeth regression, value measures (eg, earnings
and free cashflow) has weaker return predictive power
than GPA (table 2)
Book-to-market has comparable power as GPA (table 2)
A value-weighted portfolio that is long (short) the
top(bottom) quintile stocks by GPA generates an annual
excess return (over risk-free rate) of 4.0% during
1962-2009, with a three-factor alpha (adjusted for
market, size and book-to-market) of 6.6% per year (table
4)
GPA returns not driven by small cap stocks: the
Fama-French three-factor alpha is almost the same for
large-cap stocks and small-cap stocks (table 6)
GPA within
industries generates greater returns than GPA
across industries
Industry-adjusted GPA generates excess average
returns 1/3 higher than the unadjusted strategy
In terms of Sharpe ratio, industry-adjusted GPA is
0.99 compared with 0.49 when not adjusted by
industries (table 14)
Combining GPA and book-to-market greatly improves
performance
Especially among large, liquid stocks
A portfolio allocated 50/50 between GPA strategy and
book-to-market strategy generates an average monthly
excess return of 0.75%, nearly doubling that of one-factor
strategy (table 3)
A value-weighted portfolio based on high GPA and
book-to-market generates an average monthly excess
return of 1.16%
This may be because GPA has a growth tilt, so it provides
a hedge for value factor
GPA differentiate good growth and bad value stocks:
value effect is stronger among unprofitable stocks, while
the profitability effect is stronger among growth stocks
Data
1962-2009 US stocks annual data are from Compustat,
with financial firms excluded
Paper
Type:
Working papers
Date:
2011-01-23
Categor
y:
Novel strategy, Entrepreneurial Stocks
Title:
Betting on Entrepreneurial Stocks
Authors: Angus Loten

Source:
WSJ
Link:
http://online.wsj.com/article/SB100014240527487048281045760217332281
02322.html
Summar
y:
This paper defines entrepreneurial stocks based on 15 attributes, and shown

that such stocks outperform in US market, including in recent years
Intuition
Entrepreneurial companies tend to keep costs lean and debt
manageable
Entrepreneurs are more accustomed to seeking innovative ways to
stretch existing resources
Define entrepreneurial stocks using 15 attributes (We mark those that dont
seem easily quantifiable by question mark)
1. Organic growth opportunities (?)
2. Above-average ownership stakes among key stakeholders
3. Low selling, general, and administrative expenses
4. Above average return on invested capital
5. Sustainable growth
6. Manageable debt
7. Active strategic alliances/partnerships/licensing deals (?)
8. Aligned executive compensation packages
9. Low executive turnover
10. Transparent governance
11. Long duration of key managers
12. Low or no dividends
13. Family involvement (?)
14. Strong earnings before interest, taxes, depreciation and amortization
15. Other significant stakeholder relationships (such as key board
members) (?)
Quantifying entrepreneurism through various approximations (per NYSSA
article Investing in Troubled Times: Entrepreneurs are Your Safest Bet)
Entrepreneurial culture = a more efficient workforce that would
outperform non-entrepreneurial companies. Such culture can
measured using lower SGA (selling, general, and administrative
expenses), higher gross margins, and higher ROA
Entrepreneurial vision = superior growth characteristics compared to
other non-entrepreneurial peer companies in the same industry. These
characteristics include: (1) more organic growth, (2) more strategic
alliances/partnerships/licensing deals, (3) lower debt levels, (4) lower
or no dividends, and (5) higher sales turnover (sales divided by total

assets)
Companies with charismatic leader = key staff tenure longevity
However, WSJ call the stocks hand-picked
Beat benchmark each year 1997-2009/08 (per Investing in Troubled Times:
Entrepreneurs are Your Safest Bet, table1)
The large cap Entrepreneur index beat SP500 index each year from
1997-2009/08
But large draw-down (-40% return) in 2007-2008 (Fig2, eIQ US
Entrepreneur Shares versus S&P 500)
A hedge fund that is long (short) the stocks of the 30-50 most (least)
entrepreneurial firms during August 2005 through February 2009
generates a cumulative return of 4.7%, far outperforming the Russell
3000 Index
Favor small cap in IT and consumer discretionary sectors
Entrepreneurial firms tend to be smaller than average
Current fund consist mostly of U.S. small-capitalization stocks,
accounting for 60% of the 200-plus companies in the portfolio
Entrepreneurial stocks concentrate in the IT and consumer
discretionary sectors
Paper
Type:
Working papers
Date:
2010-12-20
Category:
Novel strategy, beta, multi-assets
Title:
Betting Against Beta
Authors:
Andrea Frazzini, Lasse H. Pedersen
Source:
Stern working paper
Link:
http://pages.stern.nyu.edu/~lpederse/papers/BettingAgainstBeta_Slides.pdf
Summary: For many asset classes (US stocks, global stocks, treasuries, credit markets,
futures of equity indices/bonds/currencies/commodities), high beta = low
alpha and low Sharpe Ratio A Betting-Against-Beta (BAB) strategy earns
large, consistent abnormal returns. E.g., it yields a Sharpe Ratio of 0.75 in
US stocks (higher than that of Value factor, 0.39) The reason: high beta,
high return is based on the flawed assumption of unlimited leverage
High beta, high return is a conclusion from CAPM, which is based
on the condition of unlimited leverage
In reality, some investors cannot, or choose not to, use leverage

(such as pension funds and mutual funds)
For investors who do borrow, they are limited by margin
requirements
Constructing the BAB portfolio
Calculate beta using from 1-year rolling regression of daily excess
returns over value weighted market index
Lag independent variable by 1 week to account for
small/illiquid securities
Sort stocks into deciles by beta, rebalance monthly
No currency hedging needed since all returns and alphas are
in base currency USD
To make the long-short portfolio beta neutral, rescale portfolios so
both long and short portfolios have a beta of 1 at portfolio formation
Effectively long the (levered) low-beta portfolio and short the
(de-levered) high-beta portfolio
BAB generate positive returns across all asset classes (page 17)
Significant alpha
For US stocks during 1964 2009, Decile1 (low beta)
outperforms Decile10 (high beta) by 0.71% monthly
Similar alpha for Global stocks (0.72% monthly)
Positive return in 18 of 19 international markets
Decent Sharpe Ratio(SR), higher than Value factor in US stocks
BAB has a SR of 0.75 in US stocks, By comparison, Value
Effect has a SR of 0.39, Momentum 0.50, Size 0.25
Treasuries: SR of 0.85 (long short-term bonds, short fewer
long-term bonds)
Credit: SR of 0.88
Futures: positive, but lower returns
Monotonicity with BAB
Alpha goes down monotonically when beta goes up, for all
asset classes
Sharpe Ratio goes down with beta monotonically, with
Country Bond the only exception
BAB factors have drawdowns when credit is contracting (like 2008),
in line with the leverage constraint theory
Decent performance in recent years (page 21)
Only 6 years see negative return in the 20 years during 1991-2009
(2008 saw large negative returns), only 2 negative years during
2001-2009
Data
Data for stocks are from CRSP (1927-2009) and Xpressfeed Global
(1984-2009)
Data for Treasury bonds are from CRSP Fama Bond Portfolio Returns
(monthly 1952 2009)
Data for credit securities are from Barclays Capitals Bond Hub
database (1973 2009)
Data for futures markets are from Bloomberg, Datastream, Citigroup,

various exchanges (1965 2009), including
Equity indices: 13 developed markets
Government Bonds : 9 developed markets, constant duration
Foreign Exchange : 9 developed markets
Commodities : 27 Commodities (Energy, Agricultural , and
Metal etc.)
Paper Type:
Working papers
Date:
2010-12-20
Category:
Novel strategy, analyst estimates, warranted forecasts
Title:
A New Approach to Predicting Analyst Forecast Errors:

Implications for Investment Decisions
Authors:
Eric C. So
Source:
SSRN Working paper
Link:
Summary:
A new earnings forecasting metric, Warranted Optimism (WO),

yields long-short average portfolio returns of 16% per year. Such
WO is better than analyst forecast since it forecasts future
earnings directly from lagged firm characteristics, and is not
related to analysts private information or incentive
Warranted Forecast (WF) are forecasts of future earnings
estimated directly from lagged firm characteristics
The regressors are the lagged values of the
following firm characteristics: enterprise value (Vj),
total assets (Aj), dividend levels (Dj), a binary
variable indicating zero dividends (DDj), net income
before extraordinary items (Ej), and a binary
variable indicating negative earnings (NEGE)
(Equation 9, Page 11)
Warranted optimism (WO) = (Warranted Forecast (WF) Analyst Forecast (AF)) / (Total Assets)
The WF approach is less biased since it is directly based on
It is well-known that Analyst Forecasts (AF) are
systematically biased
WF directly estimates future earnings based on firm

characteristics, instead of regressing realized
forecast errors on firm characteristics
So WF results in unbiased estimates of future
earnings, and WF forecast errors are unbiased
estimates of the realized analyst forecast error
Traditional approach to projecting analyst forecast errors are
biased
In this approach, analyst forecasts (Fj,t) are a linear
function of observable firm characteristics and analysts
private information and incentives
Traditional approach regresses FEj,t (Realized analyst
forecast errors, defined as FEj,t = Ej,t Fj,t ) on a set of
The regression parameters obtained from this step
are then used with current firm characteristics to
estimate the analysts forecast error for the next
year
But the analysts private information or incentives are
correlated with firm characteristics, so this traditional
approach is biased (Equations 1, 2, and 3 on Page 5)
Constructing portfolios based on WO
Sort stocks into quintiles by WO
Portfolios are formed at the end of June each year, and
hold for 1-3 years
Stock raw and risk-adjusted returns increase with WO
(Table 4)
Over the next year, the long-short portfolio raw
return spread is 16.4% (statistically significant)
The long-short portfolio returns are statistically
significantly positive for up to 3 years
Risk adjusted return returns increase with WO:
Returns adjusted for Fama-French factors show
significant alphas increasing in WO (Table 5)
Robust to earnings drift and accruals (Table 6)
Robust to size, book-to-market, momentum, accruals,
turnover, and long-term growth forecasts (Table 7), as
WO effects still exist in a two-way sorting
Robust to extreme outliers: beginning in the third month
following portfolio formation, average returns
monotonically increase with WO, so the finding is not
driven by a extreme performers (Figure 4)
Good (maybe too good?) year-by-year performance (Table 9)
The performance number look extraordinarily consistent:
only 1 year during 1976-2008 see negative return spread
of WO Quintiles
Data
WO long-short portfolio returns have been positive almost

every year during the 1976 - 2008 period. Over the
2003-2008 period, the size-adjusted long-short portfolio
return is between 5.19% and 19.71%
1976-2008 60,010 firm-years stock data are from CRSP,
Compustat and IBES
Paper
Type:
Working papers
Date:
2010-12-20
Category
:
Novel strategy, innovation efficiency, patent
Title:
Innovative Efficiency and Stock Returns
Authors:
David Hirshleifer, Po-Hsuan Hsu, Dongmei Li
Source:
USDC working paper
Link:
http://management.ucsd.edu/faculty/directory/li/docs/stock-returns.pdf
Summar
y:
Innovative efficiency (IE, defined as the patents granted per dollar of R&D
capital) is a new and effective stock return predictor, though weaker in recent
years. A portfolio of high IE stocks outperforms a portfolio of low IE stocks by
0.38% per month
Define IE as patents granted per dollar of R&D capital
Higher IE ratios suggest efficiency in innovation
IE is (firm is patent counts in year t)/ (its R&D capital in fiscal year
ending in year t2)
R&D capital is the five-year cumulative R&D expenditures
assuming an annual depreciation rate of 20%
Allow a two-year gap between the innovation input and output
as it takes on average two years for the USPTO to grant a
patent application
Constructing IE Portfolios
Sort stocks in to 3 portfolios by IE (Low, Middle, and High) at the end
of February based on the 33th and 66th percentiles of IE measured in
previous year
Annual rebalance (March through February of the following year)
Companies with valid IE measure tend to be large cap stocks (table 1)
Market capitalization is $1294mn, $4809mn, and $2764mn for

Low, Middle and High IE portfolios. By contrast, the market
average capitalization is $798mn
Average number of firms are 677 (Low), 248 (Middle) and
462(High)
<30% stocks have IE measures, on average 3300+ firms each
year missing IE data
IE is a new and effective stock return predictor
Positiverawreturn
spread
0.38%monthlyrawreturnspread(Table2)
Monthlyaverageportfolioreturninexcessoftbill
returnis0.41%fortheLow(L)portfolioand0.79%
fortheHigh(H)portfolio
HLlongshortaveragemonthlyportfolioreturnis
astatisticallysignificant0.38%
PositivealphainCAPM,
FamaFrench3factor
andCarhart4factor
models
Allmodelsyieldmonotonouslyincreasingalphas
fortheL,M,andHportfolios
HLalphaofabout0.45%forthethreemodels
(Table2)
Robustwhenadding
UMOfactor
UMOisthemispricingfactor(UndervaluedMinus
Overvalued),whichisthereturnstoa
zeroinvestmentportfoliothatgoeslongonfirms
withdebtrepurchasesorequityrepurchasesand
shortonfirmswithIPOs,SEOs,anddebtissuances
overthepast24months
AddingtheUMOfactorreducesfactorloadingsbut
doesnotremovethereturndifferencesasalphas
areabout0.31%forFamaFrenchplusUMOand
CarhartplusUMOregressions(Table3)
Robustwhencontrolling
foranumberofvariables
suchasSize,BM,
Momentum,Industry
FamaMcBethregressionsshowthatcontrollingfor
anumberofvariables(Size,BM,Momentum,
Industry,...)stillyieldsapositiverelationship
betweenIEandreturns(table5)
HigherSharpeRatiothan EMIhasanSharperatioof0.25,whichishigher
mostotherwellknown
thanthatofalltheotherfactorsexceptUMO(0.28)
factors
(Table9)
Lowcorrelationwith
otherwellknownrisk
factors
PanelBreportsthecorrelationbetweendifferent
factorreturns,andshowsthatEMIisdistinctfrom
otherfamiliarfactors."
EI is a good hedge with market downturn, but is weakening in recent years

Define a EMI (Efficient Minus Inefficient) factor as the difference
between the average value-weighted return on high IE portfolios and
the average value-weighted return on low IE portfolios
Per Figure 1, from 1982 to 2008, the EMI factor returns are negative
for only four years out of 27 years
By contrast, the market returns are negative for eight years
The EMI factor is a good hedge against market downturns
The EMI factor returns are almost always positive in those
years in which the market returns are negative
E.g., In 2008 when market were down 25%, EMI is positive
EMI is weaker in recent years: 2003, 2004 and 2006 see negative
returns
Discussions: industry bias?
No industry breakdown discussed, though the result is found to be
robust when controlling for a number of variables such as Size, BM,
Momentum, and Industry
Intuitively, stocks in certain sectors (such as technology,
pharmaceutical) file more patents than other. So there may be an
industry bias for this strategy
Data
January 1976 and December 2006 patent data are from the NBER
patent database, which contains detailed information on all US patents
granted by the US Patent and Trademark Office (USPTO)
Innovation Efficiency (IE) measures constructed for each year between
1981 and 2006
Stock data are from Compustat (accounting data), CRSP (accounting
data), IBES and the Thomson Reuters Institutional (13f) Holdings
dataset
Paper
Type:
Working papers
Date:
2010-11-22
Category
:
Novel strategy, daily return correlations, asset allocation
Title:
Average correlation and stock market return
Authors:
Joshua M. Pollet and Mungo Wilson
Source:
Emory University Working Paper
Link:
http://www.goizueta.emory.edu/Faculty/JoshuaPollet/documents/jp_mw_jfe_
forth.pdf
Summar
y:
An increase in the daily return correlations of the 500 largest stocks over a
quarter forecasts increase in the market excess returns over the next
quarter. The reason is higher correlation reflects higher market risk
Intuition: a higher correlation means higher market (systematic) risk

The return of each stock is partially driven by market factors (i.e.,
macro factors). A higher correlation means that stock return are more
driven by market factors than by idiosyncratic factors
Other things equal, an increase in market risk will cause increased
tendency of stock prices to move together, i.e., higher correlations
So a higher correlation among stock returns indicates a higher market
risk and a higher future market returns
Mathematically, average correlation partially drives market risk
Market risk (i.e., variance) can be estimated as (average correlation
between all pairs of stocks) * (the average variance of all individual
stocks)
Such estimation explains 98% of variation in stock market return
variance (table 2)
Average correlation accounts for 36.9% of variation in stock
market variance, average variance accounts for 69.82%
Average correlation predicts excess market returns, while average variance
does not (Table 4)
Regression: Future quarterly market excess return = Average
correlation + Average variance + GARCH(1,1) + rem + cay + pd + rf
Average correlation and variance are both market-value
averages for the largest 500 stocks
GARCH(1,1) is the in-sample conditional variance estimates for
CRSP log market excess returns generated by a GARCH(1,1)
estimator
cay from Lettau and Ludvigson (2001)
pd is the log ratio of the S&P 500 index level to the previous
one years dividends
rf is the log 3-month Treasury bill yield
Average correlation is a significant predictor future index returns
A one-standard deviation increase in the average correlation
forecasts a 1.86% additional stock market excess return over
the following quarter
This is true even when other predictors are included (Columns
4 and 5, Table 4)
Robust to sub-period tests except for 1985-1996
Though the predictive power is weaker in recent period
Robust when using different horizons
The pattern holds when forecasting monthly returns (instead of
quarterly) based on monthly correlation data(Panel B, Table 4)
The pattern holds when using past 1 to 30 months data.
Average correlation predicts excess log returns for longer
return horizons up to 30 months with a significance level of
more than 5% (Table 7)
The R2 of the regression is higher at 6 months (to 5.14%), and
is again higher at horizons of 18 months (6.82%) and 24
months (9.04%) falling slightly at horizons of 30 months

(8.33%)
Data
1963 2006 stock data are from CRSP
Paper
Type:
Working papers
Date:
2010-10-24
Category: Novel strategy, Twitter

Title:
Twitter mood predicts the stock market
Authors:
Johan Bollen, Huina Mao, Xiao-Jun Zeng
Source:
Arxiv working papers
Link:
http://arxiv.org/PS_cache/arxiv/pdf/1010/1010.3003v1.pdf
Summary
:
The collective mood derived from Twitter feeds can predict return of the Dow
Jones Industrial Average (DJIA) of up to 6 days
Background and methodology
This study is based on 9,853,498 tweets posted by approximately
2.7M users during 2008/02-2008/12
Measuring collective mood using two mood tracking tools
OpinionFinder(OF): a publicly available software package for
sentiment analysis, which quantifies mood in 2 dimensions
(positive vs. negative)
Google-Profile of Mood States (GPOMS): an online tool that
quantifies mood in terms of 6 dimensions (Calm, Alert, Sure,
Vital, Kind, and Happy)
As a cross-validation, both methods successfully measure the change
of public mood during special dates, namely the U.S presidential
election (November 4, 2008) and Thanksgiving (November 27, 2008).
E.g., the "Happy" index is much higher on Thanksgiving
The "Calm" indicator based on GPOMS can predict DJIA returns
The methodology is to regress DJIA return on lagged mood measures
For "Calm" indicator lagged by 2 to 6 days, the statistical significance
(p-values) are lower than 0.05 (table II), hence it is predictive of
future returns
OF measure and other GPOMS measures have no predictive power,
as indicted by higher p-values
Non-linear regression models (Self-organizing Fuzzy Neural Network
model) confirm such findings
The accuracy in predicting the sign of DJIA daily returns (up/down) is

87.6%
Discussions
A similar study, Widespread Worry and the Stock Market
(
http://social.cs.uiuc.edu/people/gilbert/pub/icwsm10.worry.gilbert.p
df
), construct an Anxiety Index based on a dataset of over 20 million
LiveJournal posts (
http://www.livejournal.com
, a virtual community
where Internet users can keep a blog, journal or diary)
Such Anxiety Index is predicative of future stock market returns. In
particular, for year 2008, a one standard deviation rise in the Anxiety
Index corresponds to S&P 500 returns 0.4% lower than otherwise
expected
Data
This study covers 9,853,498 tweets posted by approximately 2.7M
users from February 28, 2008 to December 19, 2008
After removal of stop-words and punctuation, group all tweets that
were submitted on the same date
Only take into account tweets that contain explicit statements of their
authors mood states, i.e. those that match the expressions I feel,
I am feeling, Im feeling, I dont feel, Im, Im, I am, and
makes me
Daily DJIA closing-values are from Yahoo! Finance
Paper Type:
Working papers
Date:
2010-10-24
Category:
Novel strategy, SEP, one-day price reversals
Title:
The Price Impact of Large Hedging Trades
Authors:
Brian J. Henderson and Neil D. Pearson
Source:
University of Illinois working paper
Link:
http://www.business.illinois.edu/finance/papers/2010/pearson.pdf
Summary:
Underlying stocks for Structured Equity Products (SEPs)

experience an average of 1% on the pricing dates of the SEPs.
This is because issuers of SEPs purchase the underlying stocks on
pricing day to hedge their exposure. This buying pressure pushes
the prices up. The underlying are typically large-cap, liquid stocks
Background of SEPs
SEPs are equity-linked notes issued by an investment
bank, and have payments based on the stock price of
another company, a stock index, or multiple stock prices or

stock indexes
There are two kinds of SEPs: SPARQS (issued by Morgan
Stanley) and STRIDES (issued by Merrill Lynch)
During 1998-2009, Morgan Stanley and Merrill Lynch
issued 183 SEPs with total proceeds of $5.6bn. The
underlying are typically large-cap, liquid stocks
Issuers of SEPs purchase the underlying stocks on pricing
day in order to hedge their exposure. This buying pressure
pushes the prices up
Pricing date is known beforehand: preliminary pricing
supplements were filed with the SEC between 6 and 29
days before the pricing date, with an average of 20.8 days
1% average returns on pricing dates (Table 3)
More pronounced for STRIDES (1.61%) than for SPARQS
(0.79%)
Market adjusted returns confirm the above finding
When trades are signed as buys and sells using the
outstanding bid and ask quotes from TAQ data, the figures
show that the day is characterized by net buying over the
day, intensifying towards the close (Figure 1 and 2)
Such finding is only a short-term effect (Table 6)
Partially reversed the next day (Day 1). Sample-wide
average return is -0.79%, again the reversal is more
pronounced for STRIDES
Cumulative returns are not statistically significantly
positive after the first two days (Day+1 and Day+2)
following the pricing day
Data
SEP issuers filings are from U.S. Securities and Exchange
Commission (SEC) EDGAR database website
Stock price data are from CRSP
Paper Type:
Working papers
Date:
2010-09-24
Category:
Novel strategy, options, implied volatility changes
Title:
The Joint Cross Section of Stocks and Options
Authors:
Andrew Ang, Turan G. Bali, Nusret Cakici
Source:
SSRN
Link:
Summary:
Long-short combined portfolios based on changes in option

volatilities in prior month yield average returns of ~1% over the
next month
Intuition: option data reflect the information of informed traders
It might be cheaper for informed traders to take short
positions through options trading rather than trading the
underlying
Options can provide additional leverage
Measures of volatility changes
CVOL and PVOL: the change in call and put implied
volatilities
%CVOL and %PVOL: percent changes in CVOL and
PVOL
Other time-series and cross-sectional measure considered,
and results are similar
Constructing volatility portfolios
Constructing 5 portfolios based on CVOL rankings,
rebalanced every month (Table 7, Panel A)
High CVOL - Low CVOL portfolio has a
statistically significant raw monthly return of 0.97%
Alpha increases with CVOL Monotonically: CAPM,
Fama-French 3- and 4- factor model alphas all
increase with CVOL and yield positive returns for
the long-short portfolio
Similar result for %CVOL (Table 7, Panel B) and PVOL
Double sorting on CVOL and PVOL increase portfolio
returns (Table 8)
Creates a set of portfolios with similar past PVOL
characteristics
Within each PVOL portfolio, returns increase as
CVOL increases
Regression tests confirm the findings
Regress stock return Ri,t+1 (next months returns) on
Fama-McBeth factors and option variables from prior
month
Increases in call volatility (CVOL and %CVOL) and
decreases in put volatility predict higher returns over the
Robust to sub-periods: splitting the sample period doesnt
alter the significance of these variables (Table 3)
Robust to other known stock return predictors: market
beta, size, book-to-market, momentum, illiquidity, stock
return volatility, the log call-put ratio of option trading
volume, the log ratio of call-put open interest, the

Data
realized-implied volatility spread, and the risk-neutral

measure of skewness
Similar (stronger) results are obtained at the 91-day
horizon
1996-2008 implied option volatilities data are from
OptionMetrics
The OptionMetrics Volatility Surface computes the
interpolated implied volatility surface separately for puts
and calls
This paper uses at-the-money call and put options implied
volatilities with a delta of 0.5 and an expiration of 30 days
CRSP/COMPUSTAT
Paper Type:
Working papers
Date:
2010-08-15
Category:
Novel strategy, cash utilization
Title:
The Firms Efficiency of Cash Utilization and the Cross-Section of

Authors:
Satyajit Chandrashekar, Ramesh K. S. Rao, and Hongfei Tang
Source:
FMA 2010 working papers
Link:
http://www.fma.org/NY/Papers/CashEfficiency.pdf
Summary:
Low cash efficiency firms outperform high cash efficiency firms by

10.1% per year
Definitions, background and intuition
A firms cash efficiency(CE) =
= (firms economic rents) / (cash holdings at the prior year end)
= (NPVs plus the value of growth options) / (cash holdings at the
prior year end)
= (market value of common equity - book value of the equity) /
(cash holdings at the prior year end)
So CE measures the wealth created by the firm (dollars)
per dollar of cash holdings
Intuition: capital always flows into stocks with the most
productive investments. All else being equal, a firm with
lower CE must reward its investors with a higher expected

stock return in order to attract capital flows
Cash holdings are sizeable: the median
cash-to-total-assets ratio for nonfinancial public firms
increased from 5.5% in 1970 to 12.5% in 2007. In the
second quarter of 2009, the 500 largest nonfinancial U.S.
firms held about $994 billion cash, 9.8% of total assets
Low CE firms have a high level of cash holdings, low level
of cash flow, high leverage ratis, low asset growth rates,
low market capitalizations, book-to-market equity ratios,
and low Return on Assets (ROA), high returns during the
past 6 months but low returns during the past 36 months
High CE firms tend to have the opposite
characteristics.
CE is persistent: low (high) CE firms tend to have low
(high) CEs over the preceding and following 5 years
relative to portfolio formation year (Table 2)
Sort stocks into decile portfolios based on CE, decile 1
being the low CE firms
Low CE firms outperform high CE firms from year t and up
to t+5 (Table 2 Panel B)
The difference in returns between low and high CE
firms is 10.1% (t-statistic 4.85) in the portfolio
formation year, 8.0%, 5.4%, 5.1% in the following
years, and 7.5% after 5 years (t-statistic 3.64)
Robustness
Correlated but stronger than book-to-market
After filtering out all the influence of
book-to-market equity ratio (which might include a
portion of CE effect), the coefficient of regression
residuals on CE is marginally significant with a
t-statistic of -1.77 (Table 7, panel A)
This suggests that the traditional book-to-market is
not as strong as CE in explaining future annual
returns
Robust to firm size: Table 3 shows that the effect persists
across firm sizes both in equally and value-weighted
portfolios
Robust to time period: Table 4 shows that the effect
persists when the sample period is broken into two
(1963-1985 and 1986-2005), thus it is not period-specific
Robust to other risk factors: Table 5 (Carhart 4-factor
regression) shows that the model alphas are consistent
with raw-return results; Table 6 shows that the findings
are persistent when adjusting for includes book-to-market
equity ratio, market equity capitalization, lagged 6-month
Data
buy-and-hold returns, and lagged 36-month buy-and-hold

returns
Robust to other cash-level measures: similar pattern when
using Cash-to-noncash-assets ratio, Annual cash flow to
total assets ratio, Leverage, Asset growth rate, Abnormal
capital investment
Lagged portfolio formation: when portfolios are formed
with a minimum four month lag between fiscal year end
and porfolio-formation month, CE effect still holds (Table
9)
This study covers all non-financial firms (SIC codes
between 6000 and 6999 excluded) from the
CRSP/Compustat Merged Database from July of 1963 to
June of 2008
This study uses natural log of CE, which requires the
market value of equity to exceed its book value in year
t-1. So it excludes firms for which the market value of the
equity is less than or equal to its book value
Paper Type:
Working papers
Date:
2010-03-31
Category:
Novel strategy, institutional investor ownership
Title:
Institutional Investors Investment Durations and Stock Return

Anomalies: Momentum, Reversal, Accruals, Share Issuance and
R&D Increases
Authors:
Martijn Cremers, Ankur Pareek
Source:
MFA 2010 conference paper
Link:
http://www.mfa-2010.com/papers/Investment_Durations_Anoma
lies.pdf
Summary:
Average stock duration (ASD) can be used to increase momentum

profits, as momentum only exists for stocks that are mostly held
by short-term investors. Moreover ASD can better explain other
anomalies such as momentum, long term-reversals, accrual, R&D
and share issuance
Definitions
For each stock i in a given fund j, its holding duration (HD)
is calculated by looking back to the time when that
particular stock has been held continuously in that fund

(Equation 1)
Example: if 5% of a fund is IBM, 2% of which it
bought 3 quarters back and the remaining 3%
shares bought 5 quarters back. The HD of IBM in
this fund is (23+35)/5 = 4.2 quarters
Average Stock Duration (ASD)
For each stock, ASD is the average of HD for each
institution that holds this stock, weighted by total
current holdings of each institution
Average Fund Duration
For each institutional fund, this is the weighted
average of its stock durations
Intuition: why ASD matters
ASD differentiates stocks that have been held by
institutional investor for a long time and stocks that were
just bought
Likely reason1: fund managers overconfidence. Fund
managers holding a stock for shorter periods may be more
overconfident about their own recent private signals
In other words, short term institutional investors
are overconfident, not more knowledgeable
Likely reason2: the information effect. I.e. long-term
investors may face lower information collection costs due
to familiarity with the stock, easier accessibility to firms
management, etc
ASD is distinct from the transient institutional ownership
measure
The difference is that transient institutional
ownership tries to infer trading motives of
institutions based on a factor analysis and classifies
investors into broad categories, while ASD
computes a continuous duration measure based on
actual changes in holdings over quarters
ASD measure has a negative correlation (-21%)
with percentage of Transient institutional owners
(Table 1, Panel B)
Momentum profits higher for stocks with shorter ASD
Five portfolios are formed by sorting stocks based on ASD
and then stocks past 6-month returns
Most momentum returns are driven by the short-duration
group(Table 3 Panel A)
Momentum returns is 0.67% for all stocks
0.96% for low-duration portfolio
0.63% for medium-duration group
0.26% (insignificant) for high-duration portfolio
Similar results when using Fama-French alphas

(Panel B), and multivariate regression (Table 5)
Robust to turnover
Using "residual" duration obtained by regressing
duration on turnover
The difference in momentum returns between the
top and bottom residual turnover groups is
insignificant (Panel B, Table 4)
Robust to analyst coverage
The interaction terms between momentum and
analyst coverage is insignificant (Table 5 - column
5)
Use ASD to explain other factors/anomalies
Higher ASD, higher stock volatility
A one standard deviation decrease in the ASD
measure is associated with a 0.22 standard
deviation increase in idiosyncratic risk
Suggesting that the overconfidence in investors
induce them to trade more, thus increasing stock
volatility
Return reversals are stronger for lower ASD stocks
Long term (Year+2 and Year+3) returns for
momentum and average duration portfolios are
examined and tabulated in Table 6. Reversals are
stronger with low-duration portfolios
Accrual anomaly strongest for stocks with low ASD
New explanation for accruals mispricing: such
mispricing arises because of the presence of
short-term investors who are more likely to fixate
on the level of short-run earnings
For the long-short portfolio of high accruals minus
low accruals, equal-weighted four-factor alphas for
the unconditional portfolio is -0.56%. For the low
average duration portfolio this value is 0.95%
(Table 7 Panel A)
Data
January 1980 to December 2007 stock returns and
accounting data are from CRSP/COMPUSTAT. Eliminate
stocks with low institutional ownership (bottom 33%) and
those smaller than the bottom size quintile of NYSE stocks
Thompson Financial CDA/Spectrum database of SEC 13F
filings: institutional investor holdings data
Since the institutional holding duration measure requires
five years data to estimate, the returns forecast and
portfolio selection starts in 1985
Paper Type:
Working papers
Date:
2010-03-31
Category:
Novel strategy, accruals
Title:
Percent Accruals
Authors:
Nader Hafzalla, Russell J. Lundholm, Edmund Matthew Van Winkle

III
Source:
SSRN working papers
Link:
Summary:
This paper proposes a new accrual measure (percent accruals)

which yields significantly higher returns than the conventional
accruals measure. The new measure scale accruals by earnings
(
the absolute value of net income
), instead of
total assets
. Such
percent accruals are not dependent on the presence or absence
of special items, and can differentiate loss firms as well as
profitable firms, and the improvement comes mostly from the
long position in low accrual stocks
Traditional Operating Accruals = (Net Income Cash from
Operations)/(Average Total Assets)
Percent Operating Accruals = (Net Income Cash from
Operations)/(absolute value of Net Income)
A percent accruals makes more sense since it directly
measures how distorted a reported earning is from actual
cash-based earnings
Specifically, stocks with extreme negative percent
accruals tend to have large positive cash from
operations, but then accrues cause net income to
go down to close to zero
By scaling the accrual by the level of net income,
percent accruals effectively pick out more
extreme combinations of cash flows and accruals
By contrast, the conventional accruals are scaled by
assets, and the resulting measure is essentially the
percentage change in operating assets
This paper uses income statement to construct accruals,
instead of balance sheet data
Backtest results
Better returns
An annually rebalanced portfolio based on percent
accruals yields an annual return of 11.7% (vs
6.9% based on conventional measure)
Returns more balanced

Percent accruals gives similar returns from long
and short leg: long (5.5%) and short (6.2%)
For the conventional accruals measure, most profits
are from the long leg (5.53%) than short (1.27%,
and in-significant)
Less size-bias
The bottom decile of stocks with lowest percent
accruals is larger in size ($1.5 billion ) than those
defined by asset-scaled accruals ($474 million)
Not sensitive to accruals definition
Return predictiveness of percent accruals exists,
independent of whether there are special items,
and whether earnings are positive or negative
More stable yearly returns, much better returns in recent
years
percent accruals outperforms conventional
accruals in 15 of 19 years during 1989-2007
Source: the paper

Not sensitive to firm negative/positive earnings
Earlier study show that conventional accruals have no
significant returns for any decile in firms with negative
earnings
Yet 34% of the observations in the population have
negative earnings
By contrsast, the percent accruals can differentiate
stocks with negative earnings
In fact, it worked better in the loss subsample than in the
profitable subsample
Data
1989 2008 stock prices and accounting data are from
Compustat and CRSP US databases. Total firm year
observations are 81,526 firm-years
Paper Type:
Working papers
Date:
2010-03-31
Category:

momentum
Title:
Authors:
Source:
SSRN working paper
Link:
Summary:

Definitions
earnings, SUE)
price momentum
Small cap bias

other (Table 6)
8)
0.63%)
(R1-R5)
each metric
Strong seasonality
January (Table 9)
"23% to 40%" (Table 10)
Data
date)

Paper Type:
Working papers
Date:
2010-03-31
Category:
Novel strategy, country allocation, country customer-supplier

relationship
Title:
Predictable Returns of Economically Linked Countries: Evidence

and Explanations
Authors:
Savina Rizova
Source:
SSRN working paper
Link:
Summary:
The author establishes the customer-supplier relationship among

countries based on exports and imports. A country allocation
strategy based on customer (supplier) relationship yields an
annual excess return of 13.3% (10.1%)
Intuition
The economies for different countries are inter-dependent
through the growing international trade
Consequently, the changes in economies in one country
may impact the economy (and stock market returns ) of
another country
Why there is a
customer
momentum: if a major
customers stock market is going up, (suggesting that the
economy of that country is doing better than thought),
this likely may to lead to a rise in exports, which in turn
should help stock market return of supplier countries
Why there is a
supplier
momentum: if a suppliers stock
market return is better than expected, this usually means
that firms in the supplier country may produce goods more
cheaply and efficiently, hence benefiting the customer
countries
Such inter-dependence may be exploited by using a
country allocation
Since such relationship are publicly available, the
existence of such abnormal returns is likely due to
investors lack of attention and information slow diffusion
Defining customer-supplier relationship among countries
Based on economic and trading activity such as exports

and imports
For any country,
customers
countries are those that
account for at least 5% of this countrys
exports
,
for any country,
suppliers
countries are those that account
for at least 5% of this countrys
imports
Sorting countries based on the equally weighted portfolio
of customer (suppliers) countries
Constructing three portfolios: the top 30% countries, the
middile 40% countries and the bottom 30% countries
Long the top 30% countries and short the bottom 30%
Hold portfolio for a month and rebalanced monthly
Equally weighted or sales-weighted
Empirical results
For
customer
momentum strategy, the monthly 3-factor
alpha is 1.11% (13% annually) when equally weighting
customer countries
For
supplier
momentum strategy, the monthly 3-factor
alpha is 0.84% (10% annually) when equal weighting
supplier countries
Profitability of the supplier momentum strategy is
not concentrated in small illiquid stock markets
Combining the two signals
Each month, sort producer countries based on the
equally weighted average of the prior-month local
currency returns of their major trading partners
(majortrading partners are defined as countries
that account for at least 5% of exports (imports)
when exports (imports) represent at least 20% of
GDP)
long the top 30% countries and sells short the
bottom 30% countries
three-factor adjusted monthly alphas 0.67% 0.95% (depending on weighting schemes)
Size bias, i.e., works better for small markets
Both customer and supplier momentum effects are
significantly weaker for the largest sample countries, i.e.,
countries with largest stock markets and GDP
This may be due to investor give more attention to large
countries
Robustness
This finding is robust when adjusting returns for global risk
factors
Similar finding when changing weighting scheme to
GDP-weight or value-weighting. E.g., for the portfolio
based on customer relationship, the monthly return is
1.13% when equally-weighted, 0.97% when

GDP-weighted, and 0.80% when value-weighted
Data
July 1981 to March 2009 data for 23 developed countries

and the 24 emerging countries included in the MSCI World
Index and the MSCI Emerging Markets Index are covered
(note that major customers and suppliers need not be
confined to the sample of 47 countries)
Exclude countries years when a countrys total exports or
imports account for less than 20 % of their GDP
Exports and imports of goods data are from the Direction
of Trade Statistics from International Monetary Fund
Country GDP data is from The World Development
Indicators database
Country stock market returns (the country MSCI indices,
and if not available, S&P/IFCI country indices) are from
MSCI and S&P/IFCI
Paper Type:
Working papers
Date:
2010-03-31
Category:
Novel strategy, blogs, text sentiment analysis, Japanese stocks
Title:
Outsider Trading
Authors:
Dorje C. Brody, Julian Brody, Bernhard K. Meister, Matthew F.

Parry
Source:
arxiv.org working paper
Link:
http://arxiv.org/abs/1003.0764
Summary:
A trading strategy that extracts information from blogs using

natural language processing (NLP) yield 40%+ return over a
7-month period based on 10 most popular Japanese stocks in
2009
Intuition: blogs leads traditional media in information
dissemination
Nowadays information is often published first on
blogs/twitter/bulletin boards, and then in the traditional
media (newspapers and television)
So capturing information early and trading on it may result
in profitable trading strategies
In 2009, nearly 20 million Japanese blog articles

appeared on the internet, making a daily average
of around 50,000 articles
Comparing the predictivesness of conventional sources (e.g.
newspapers) and blogs
Blogs lead conventional resources in information
dissemination due to their technological advantage
Methodology: measuring Signal-to-noise ratio
"Information" = Signal (the component of
information that is related to future return of an
investment) + Noise (the component that is
independent of future returns)
The effective signal-to-noise ratio from blogs is ,
which can be compared against the market
signal-to-noise ratio
/ (using simulation) is between 2.4 and 2.6
Construct the portfolio
Step1: Use Yahoo search engine to collect a large number
of blog articles, convert text into numeric sentiment
indicator using applied natural language processing (NLP)
Step2: NLP classifies blogs into positive, neutral, or
negative. This classification is then used to establish
sentiment index for each company
Step3: using such sentiment index to long/short stocks
Weighting each article weighted by page views:
those with insufficient views are considered to be
"pure noise" and disregarded
The paper doesnt discuss the periodicity of the strategy,
and only mentions that the process is repeated over the
next period (T to 2T)
Discussions
The authors do not give details of the model. Specifically,
the determination of the holding (and information
collection) periods and the long/short cutoffs, K, are not
clear. Also, there is not much on how exactly the NLP
works
The details of how they compute the 40% return is not
clear either
The model is calibrated using data from 2008 to the end of
2009, then applied to the 7 months following
Data
All Japanese blog articles from 2006-2009, focusing on the
10 companies for which the average number of blogs are
the highest

Paper Type:
Working papers
Date:
2010-02-28
Category:
Novel strategy, loss persistence
Title:
Do Investors Understand Loss Persistence?
Authors:
Kevin K. Li
Source:
SSRN Working Paper
Link:
Summary:
Investors incorrectly assume that all firm losses are transitory,

and a loss-forecasting model can capitalize on this mistake. A
portfolio that buys firms whose losses are predicted to be
transitory and sells firms whose losses are predicted to be
persistent yields an average annual return of 10.4%
Loss firms: firms with negative income before
extraordinary items and discounted operations
~1/3 companies are lose firms: In 2007, 33.7% of firms
report losses. The percentage of loss firms increases from
9.7% in 1976 to 45.2% in 2001, but the trend reverses
after 2001
Investors incorrectly assume that all losses are transitory
This paper develops a model to predict the earnings of a
loss firm
Compared to random walk models and a model that
assumes all losses are transitory, the model
developed here has smaller forecast errors
Methodology of the model
EARNt+1 = + EARN1t + EARN2t3 + SIZE3t +
SALESG4t + FIRSTLOSS+ LOSS_SEQ5t 6t +
DIVDUM7t + SPI8t + SPI9t3 + Q310t + Q411t +
t+1
Where,
SALESGt is the percentage growth in sales over quarter t;
FIRSTLOSSt is an indicator variable that is equal to 1 if the
current quarter loss is the first one in a sequence, and zero
otherwise;
LOSS_SEQt is the number of sequential quarterly losses over the
four quarters before the current loss;
DIVDUMt is an indicator variable that is equal to one if the firm
pays dividends during the loss quarter, and zero otherwise;
SPIt is special items;

Q3t and Q4t are dummy variables indicating the third and the
fourth fiscal quarters, respectively
Quarter t-4 to t-1 average estimated coefficients are used
to compute the forecast earnings (FEARNt), i.e., the
expected earnings in quarter t+1
Predicting persistent / transitory losses
Losses are classified into predicted persistent
losses (forecast earnings in the first quintile of the
distribution) and predicted transitory losses (the
fifth quintile of the distribution) using the quarterly
quintiles of the distribution of forecast earnings
(FEARNt)
Model performance
All but one variable in the regression above is significant
(Table 2, Panel A): only SALESG are statistically significant
Worse returns for predicted persistent loss firms (Table 2
Panel B):
Predicted persistent loss firms show persistent
actual losses over the next few quarters (-10% in
quarter t+4)
Predicted transitory loss portfolio has an average
return of 0.3% in quarter t+4
The model performs better than a random walk model, a
seasonal random walk model and a model that assumes all
losses are transitory (Table 2, Panel C)
Investors appear to treat all losses as transitory (as
evidenced by the Mishkin market efficiency test results in
Table 4)
Long transitory and short persistent firms starting
(earnings announcement date + 2) and hold for 90, 180
and 365 days
The buy-and-hold size adjusted returns are consistently
significantly positive for both equally-weighted and
value-weighted portfolios
Concentration around earning announcements
Most of the hedged returns comes from price
movements around [t-2, t+2], where t is the
earnings announcement date
Table 6: " 37% of the total hedge return (10.4%) is
realized in the announcement period, which
accounts for only 6% of the trading days"
Impact of analysts following and institutional investor
ownership
Data
Hedge returns are much weaker when firms are

followed by analysts (Table 7) and for firms with
high institutional investor ownership (Table 8)
This may be due to selection bias where analyst
follow firms with better prospects and institutional
investors choose firms better than the retail
investors do
The results are not driven by new economy stocks
which are increasing in their representation of the
overall economy and which are more likely to
report losses
Compustat (quarterly financial statement data), CRSP
(daily stock returns), I/B/E/S (consensus analyst forecast
of quarterly earnings per share), Thomson-Reuters Mutual
Fund Holdings database (institutional investor holdings
and shares outstanding) covering 1984 to 2006
Sample excludes financial firms (SIC between 6000 and
6999) and utilities (SIC between 4900 and 4999) as well
as thinly traded stocks
62,370 loss observations from 1984 to 2006 with
non-missing forecast earnings
Paper Type:
Working papers
Date:
2010-02-28
Category:
Novel strategy, sector specific models, subscription based

companies
Title:
The Analysis and Valuation of Subscription-Based Enterprises
Authors:
Massimiliano Bonacchi, Kalin Kolev, and Kalin Kolev
Source:
SSRN Working Paper
Link:
Summary:
Customer equity (CE) for subscription-based companies can be

used in identifying overvalued and undervalued stocks. Such
strategy generates an average annual hedged return of 13%
Subscription-based company (SBC): A business whose
customer pays a subscription fee to have access to the
firms products or services
Mostly telecommunication companies, web-based services

providers, pay-television broadcasters, movie-rental
services, etc
Not all SBCs disclose this information fully. Some just
make references or provide partial information
Dataset include companies that disclose retention rates or
churn rates in their financial reports. 51 companies
operating in 8 different industries (4-digit SIC codes)
identified as such (Table 1.)
The retention and the churn rate of customers are at the
heart of the business
Retention rate for period t (rt): proportion of
customers who were active at the end of period t1
and are still active at the end of period t
Churn rate: proportion of customers who were
active at the end of period t1 but who dropped out
in period t
Customer equity (CE): sum of the lifetime value of the
current and future customers of the firm
CE = CE_current + CE_future
Authors estimate CE by using a simplified model
that assumes the profit margin and retention rate
are constant over time
CE_current = n [m [r / (1 + i - r)]] where n is the
number of customers; m is the profit margin; r is
the retention rate; and i is the cost of capital
(Equation 4, page 10, visual representation in
Figure 2, page 11-12)
CE forecasts stock returns
Regression quarterly stock returns on
BVE (change in book value),
NI (change in net income)
CE_current (change in customer equity)
Equation 6 shows that Change in CE_current is
significantly and positively related to the quarterly returns
(Table 6)
Constructing zero-investment portfolio
Buy if the value ratio is below 1, sell if the ratio is above 1
Valuation ratio = price / (BVE + CE)
For each stock, buy/sell the stock one business day
after the 10-Q filing date
Holding the stocks for 1-year
Average annual return on the portfolio is 13% (Graph 2)
Data
Identifying SBCs: "we used the advanced search function
available on EDGAR Full-Text, searching each SIC
industry-group for the keyword churn". This is followed
by hand collecting customer related data from 10-Q and

10-Ks, financial statement data from the Xpressfeed
Compustat Quarterly database, and stock prices, returns,
and shares outstanding data from the CRSP Daily Tapes
for the period 20022008 (augmented by hand-collected
information from Finance Yahoo pages for more recent
period)
Final sample: 383 observations from 25 companies for the
period 20022009
Paper Type:
Working papers
Date:
2010-02-28
Category:
Novel strategy, housing index
Title:
Further Evidence on the (In-) Efficiency of the U.S. Housing

Market
Authors:
Felix Schindler
Source:
SSRN Working Paper
Link:
Summary:
There are exploitable patterns in the Case-Shiller indices, a

popular housing index. The underlying futures can be used to
generate profits based on these patterns
Background: Case-Schiller indices are tradable
The paper is based on Case-Schiller indices. Investors can
trade such index futures on CME since May 2006
There are indices for 20 cities and two aggregate indices
for the U.S
Such indices offer an appropriate representation of
the main regional and local U.S. housing markets
Futures products trade on the 10 metropolitan
areas plus the composite index based on these
cities
Significant short term momentum for most indices (Table 5)
Results confirmed by variance ratio tests (Table 6) and
indicate violations of weak-form market efficiency
Runs test (Table 7) show the same results as indicated by
much fewer runs than expected from a random-walk
series
Quarterly-data based analyses of similar kinds confirm the

findings
Trading strategy1: momentum
A trading strategy based on the estimated autocorrelations
of the indices
This paper allows for short selling (as one can short
futures)
Table 8: momentum based strategies dominate
comparable buy-and-hold strategies at lags 1month
through 12month
For instance, the composite index of 10 cities
(CS10) has an average of 117% annual return. The
3, 6, and 12 month moving average based returns
are 536%, 453% and 375% respectively
Trading strategy2: simple moving average
A buying signal occurs if the index value breaks through
its moving average bottom-up
A selling signal occurs when the moving average is
breached top-down
Three versions of moving averages: 3, 6, and 12 month
simple moving averages
Table 9: Moving average based strategies beat their
buy-and-hold benchmarks
Especially for shorter term moving averages
For instance, the composite index of 10 cities
(CS10) has an average of 118% annual return. The
3, 6, and 12 month moving average based returns
are 520%, 448% and 400% respectively
Data
Case-Shiller indices: Monthly house price indices from
January 1987 to June 2009
Paper Type:
Working papers
Date:
2010-01-30
Category:
Novel strategy, insider trading
Title:
Decoding Inside Information
Authors:
Lauren Cohen, Christopher Malloy, Lukasz Pomorsk
Source:
Harvard Business School working papers
Link:
http://www.people.hbs.edu/lcohen/pdffiles/pomalco.pdf
Summary:
Trades by opportunistic insiders generate abnormal profits: a

value-weighted portfolio that is long opportunistic insider buys
and short opportunistic insider sells earns monthly average
abnormal returns of 89 basis points (10% annually)
Definitions
Routine insider trader
: "an insider who placed a trade in
the same calendar month for at least 3 years in the past"
Opportunistic insider trader
: "everyone else, i.e. those
insiders for whom we cannot detect an obvious discernible
pattern in the past timing of their trades."
Quasi-routine trades
: trades by routine traders but in
non-routine months to avoid misclassification
44% of all trades in the dataset are opportunistic (Table 1)
Each month, form opportunistic buy, opportunistic sell,
other buy, and other sell portfolios
Hold these portfolios over the month following these
insider trades, monthly rebalance
Returns over the following month tend to be positive
(negative) for opportunistic buys (sells)
A equal-weighted portfolio that is long opportunistic
buys and short opportunistic sells has an average
monthly return of 1.64%
Comparable portfolio constructed based on other
(quasi-routine and routine) trades has an average
monthly return of 0.25%
The effect seems to persist to at least 6-months out
(Figure 3)
Table 3 (Fama-MacBeth regressions): 0.86% higher
returns for opportunistic buys relative to all trades
(Column 2), and -0.91% lower returns for
opportunistic sells (Column 4)
Quasi-routine and routine trades are typically
insignificant in Fama-MacBeth regressions
Number of firm-specific news increases following opportunistic
trades (Table V)
Such news events include: headline news events about the
firm, sell-side analyst research releases about the firm,
and important management disclosures about the firm
(e.g., SEO announcements and merger announcements)
Informed opportunistic traders trade more than other
inside traders prior to news
Local insiders more aware of coming news
Local insiders are those residing in the same state as the
firms corporate headquarters
Data
(per Table VI) the number of opportunistic trades by local

insiders is positively related to the total number of
firm-level information events in the following month
SEC Form 4 filings from the Thomson Reuters insider
filings database (January 1986 to December 2007)
Supplemental firm-level data from CRSP/Compustat
(monthly stock returns, market capitalization figures, and
book-to-market ratios).
Headline news data from various newswires using the
Factiva web interface
Paper Type:
Working papers
Date:
2010-01-30
Category:
Novel strategy, CDS, short term (one-day) strategy
Title:
Liquidity Provision and Informed Trading in the Credit Derivatives

Market
Authors:
Tejas Gala, Jiaping Qiu, and Fan Yu
Source:
SSRN working papers
Link:
Summary:
A rise in the Credit Default Swap (CDS) bid-ask spreads prior to a

credit event signals negative returns on the firms stock on the
event day
Banks in the CDS market play dual roles: they are market
makers and provide liquidity, meanwhile they also
maintain a prop trading desk that conduct informed
trading
So when they are informed about coming negative events,
they tend to withdraw quotes to protect themselves from
getting hurt by other informed traders
Higher number of quotes result in lower CDS spreads (Table 3)
I.e., liquidity drives the bid-ask quotes closer, thus
reducing the spreads
A one-standard-deviation increase in the number of quote
providers translates into a 3.68 3.35 12 bp reduction
of the CDS spread. This is an economically significant
effect given that the median CDS spread in our sample is
only 64 bp."
The increase in spreads prior to credit events predicts future

1-day stock returns, but decrease in spreads does not (Table 4,
7)
Examples of credit events are 1) one-day increase in the
CDS spread greater than 50 basis points, 2) one-day
increase in the CDS spread greater than the average
spread plus for standard deviations, and 3) the CDS
spread stays at 100 basis points or above for five, 30, or
90 consecutive days afterwards
This effect is stronger for shorter windows as trading
presumably increase prior to the credit events (Table 5)
So at the end of each day, a portfolio can be formed by
selling stocks with less quotes and hold till end of the next
day (though no portfolio results are given in the paper)
Data
This study covers 2001-08 and includes 806 firms with at
least 252 daily CDS spread observations
Markit Group: daily composite CDS spread (aggregated
quotes provided by major dealers) and the number of
quote providers. 5-year CDS spreads on senior unsecured
obligations of North American reference entity
Compustat annual and quarterly files (firm size, firm
leverage, profitability, and sales growth as well as monthly
Standard and Poors domestic long-term issuer credit
rating that is converted into a numerical scale from 1-AAA
to 22-D)
CRSP (daily stock returns used to compute annual average
stock returns and historical volatilities)
Paper Type:
Working papers
Date:
2010-01-30
Category:
Novel strategy, Inventory Growth
Title:
The Puzzling Inventory Growth Risk Premium
Authors:
Frederico Belo, Xiaoji Lin
Source:
SSRN Working Paper
Link:
Summary:
Long firms with low inventory growth rates and short firms with
high inventory growth rates generates an average 7% annual
return
Definitions
Inventory investment rate: the ratio of the change in total
inventory to the beginning of period inventory (HNt = Ht /
Nt-1)
Physical capital investment rate: the ratio of capital
expenditure (ie, physical investment) to the beginning of
the period Property, Plant and Equipment (ie, capital
stock) (IKt = It / Kt-1)
Intuition
Inventory change may be used as an earning management
tool
In fact, Thomas and Zhang (2002) show that the negative
relationship between accruals and future abnormal returns
is due mainly to inventory changes
Double sorting using inventory investment rate and capital
investment rate (using 33% and 66% cutoffs)
Compute the returns to these portfolios over the next year
Table 2: Low-High (combined) inventory growth
portfolio has an average value-weighted
(equally-weighted) annual return of 8% (10.2%)
Similarly low-capital investment growth portfolio
outperforms the high-capital investment growth
portfolio consistently
Fama-MacBeth regressions show that both capital growth
and investment growth rates are statistically significant
determinants of future returns (Table 3)
Annual inventory growth premium (excess return
on the combined portfolio that is long 10th
percentile and short 90th percentile of the cross
sectional inventory growth distribution holding
capital investment rate constant) is 3.9% per year
The capital investment rate premium is 2.9% per
year
The author also show that a theoretical model (which
captures the main aspects of the inventory behavior)
cannot replicate the inventory growth premium though
they capture many other aspects of the macroeconomic
data
Data
Data covering July 1965 - June 2006. Returns from CRSP,
and accounting data from COMPUSTAT:
Firm level capital investment (It ): data item 128
(Capital Expenditures)
Capital stock (Kt): data item 8 (Property, Plant and
Equipment)
Total inventory (Nt): data item 3
Paper
Type:
Working papers
Date:
2009-12-30
Catego
ry:
Novel strategy, capacity, capital expenditure, sales growth
Title:
Capacity Constraints, Profit Margins and Stock Returns
Author
s:
Bjorn N. Jorgensen, Gil Sadka, Jing Li
Source
:
UT Dallas working paper
Link:
http://som.utdallas.edu/academicAreas/accountingInfoMgmt/aimOther/docume
nts/Sadka%20-%20Paper.pdf
Summ
ary:
For companies in industries with high capacity utilization, high growth in sales
predicts abnormally low returns. Such combination of sales growth and capacity
is a better stock return predictor than capital expenditure (Capex)
Intuition
When companies have unused capacity
The average cost per unit will decline when production and sales
increases. Consequently, the profit margins will increase
In other words, sales growth for a company with idle capacity will
result in higher profit margins
When companies have no idle capacity
An increase in output must be preceded by a capacity increase
So for a company operating near or at full capacity, growth in
sales can result in lower profit margins, reflecting the increase in
fixed costs
Relationship with contemporaneous profit margins: revenue growth means
higher profit margins (Table 3)
At firm level, firms in industries with higher capacity utilization have
higher profit margins
At aggregate-level, aggregate profit margins are positively related to
overall US capacity utilization index
Relationship with future profit margins: Higher capacity utilization leads to lower
profit margins
Firms in industries with high capacity utilization experience declines in
profit margins
The reason may be investment to increase capacity
Constructing portfolios at industry-level

Using industry capacity utilization and industry-level sales
Sort industries into 5 portfolios based on (industry-level) capacity
utilization and (industry-level) sales growth
Industries with high capacity utilization and high sales growth
underperform industries with low capacity utilization and/or low sales
growth
Return spread is a statistically significant 0.7% monthly adjusted for risk
factors(table 4)
When using two or more years of sales growth, hedged portfolios do not
yield significant abnormal returns
Constructing portfolios at firm level
Note that firm-level estimates of capacity utilization are unavailable, so
need to use industry-level capacity utilization
Sort firms into 5 portfolios based on industry-level capacity utilization
and firm-level sales growth
Firms in industries with high capacity utilization and have high
(firm-level) sales growth underperform
Only works for 2- , 3-, 4-year sales growth, but not 1-year sales growth
3-year sales growth works best: generates highest abnormal
returns of 0.8% monthly (10% annually)
Portfolios based on 2- , 3-, 4-year sales growth generates
significant abnormal returns (table 5)
Combination of sales growth and capacity is a better measure of capital
expenditure (Capex)
Per table 6, firms do not immediately increase the capital expenditure
when sales growth or capacity utilization is high alone
Firms only invest in Capex when the sales growth remain high and
capacity insufficient
Implies that the reversal in profit margins is more pronounced in
cases with high growth in capital expenditures
Robustness
This finding is not subsumed by momentum, value, size and accrual
Data
Since firm-level estimates of capacity utilization are unavailable, this
paper uses 1977-2008 industry-level measures for capacity utilization for
Manufacturing, Mining and Utilities (covers the annual data in 26
industries) from the Federal Reserve
Accounting data are from COMPUSTAT. Firms with top and bottom 5% of
accounting variables (profit margin, capital expenditure growth and sales
growth) are excluded
Pape
r
Type
Working papers
:
Date: 2009-12-30
Cate
gory:
Title: The Importance of Accounting Information in Portfolio Optimization
Auth
ors:
Sour
ce:
UNC working paper
Link:
http://public.kenan-flagler.unc.edu/Faculty/handj/JH%20website/Hand%20Green
%20Importance%20of%20Acctg%20Info%20for%20PFOPT%2020091013.pdf
Sum
mary
:
This paper proposes a new stock optimization framework that may help avoid
quant crowd-ness. Weighting stocks as a linear function of certain accounting
measures (e.g., change in earnings, asset growth) can yield a higher information
ratio compared with price-based measures (e.g., size, book-to-market, and
momentum)
Such weighting scheme also perform better during (1) the Quant Meltdown of
August 2007 and (2) the bear market in 2008 (it earns 12% compared during
2008 as compared to the -38% for the stock market index)
An earlier paper, Parametric Portfolio Policies: Exploiting Characteristics in
the Cross Section of Equity Returns,
http://economics.ucr.edu/seminars/spring05/econometrics/RossenValkano
v.pdf
) proposes a simple parametric portfolio policy (PPP) technique,
where stocks weight is a linear function of firm characteristics
For example, stock weight = weight in benchmark + coefficients * rank of
asset growth
In PPP, the accounting measure may lead to higher stock weight in two
ways: (1) through generating alpha (2) through reducing portfolio risk
When weighting stocks using firm size/book-to-market/momentum, PPP is
shown to outperform value-weighted market index by 5.4% per year
Definitions
Price based portfolio (PBC): a portfolio that is optimized by weighting
stocks as a function of market capitalization (MV), book-to-market (BTM),
and momentum (MOM)
weighting stocks as a function of accruals(ACC), change in earnings(UE),
and asset growth(AGR)
Step1: The portfolio weight of each stock is set to be a function of the

firms accounting measures. E.g., weight = weight in benchmark +
coefficient * rank of asset growth
Step2: Estimate the coefficients in step1 by maximizing a utility function
(equation 11 in the paper). The investor is assumed to have constant
relative risk aversion (CRRA) preferences
In both in-sample and out-of sample, weighting stocks using 4 factors are
shown to generate significant excess returns (BTM, MOM, UE and AGR)
Accruals is not significant, suggesting that hedge returns to accruals have
disappeared in recent years due to wider use of such strategy
The PPP method yields reasonable mis-weights (maximum misweight 3.1%
and minimum misweight -1%)
ABC has twice as much short-selling than do price-based characteristics
Out-of-sample PBC portfolio 106% turnover per month, while the ABC
portfolio generates more than double this at 216%
No significance when short-sale not allowed: The out-of-sample Sharpe
ratio of the ABC falls from a significant 1.71 to in-significant 0.48
Change in earnings (UE) and asset growth (AGR) are still significant
The Sharpe ratio for the PBC+ABC out-of-sample portfolio was 1.89
(before transactions costs), but only 1.12 in the presence of variable
transactions costs
ABC portfolio more sensitive to transaction cost (due to higher turnover)
Suggesting that PPP is a less used strategy and avoided quant crowding
effect
Valueweight
index
200707-20070
9 quant
melt-down
2008
(financial
crisis)
Data
-38%
PBC
ABC
return
3.9%,
standard
deviatio
ns 1.7%
return
0.2%,
standard
deviatio
ns 0.4%
3.4%
12%
Jan. 1965 through Dec. 2008 monthly stock returns are from CRSP
monthly files, and financial data are from the Compustat annual industrial
file;
Paper Type:
Working papers
Date:
2009-12-30
Category:
Value, Idiosyncratic volatility (IV), Novel strategy
Title:
A New Value-to-Price Anomaly and Idiosyncratic Volatility
Authors:
Lee-Seok Hwang and Byungcherl Charlie Sohn
Source:
SSRN working paper
Link:
Summary:
This paper proposes a new value-to-price ratio which incorporates

shareholders option to liquidate the company when business
prospect looks bad. This new value measure can better predict
stock returns than the classic book-to-market ratios and the
residual-income-based ratios
Intuition
Stock holders can choose to liquidate the company when
its expected cash flow is lower than net assets. Stock
holders choose to maintain normal business when the
future cash flow are higher than net assets
Consequently, the value of a stock should be the sum of
(1) the value of companys net assets and (2) the value of
an abandonment option (the option to liquidate the
company)
Idiosyncratic Volatility (IV) may be important since in
theory it makes arbitrage costly and make the anomaly
sustainable
Valuing the abandonment option using Black-Scholes formula
Assets price: future cash flow, estimated as the present
value of future cash flow stream in the residual income
model
Strike price: book value (i.e., the net asset value)
Risk-free interest rate: the average of the previous 12
months of annual yields of one-year Treasury bill
Maturity: assumed to be five years (using different
maturities does not change results)
Volatility: the standard deviation of asset price for the past

five years
So the alternative value measure (compared with the
classic book/market): Vo/P = (value of net assets + value
of the abandonment option ) / price
For a long-only strategy
Buy stocks in both the top quintile of Vo/P and the top
quintile of IV
Over the 3-year holding period, the abnormal return
(size-adjusted buy-and-hold returns) is 33% (Table 4)
For a hedged strategy
Long high IV stocks in the top Vo/P quintile, shorts high IV
stocks in the bottom Vo/P quintile
The 3-year size-adjusted return is an statistically
significant 48%
At other levels of IV, the lowest hedged return is 14%
The Vo/P pattern is stronger for stocks whose
abandonment option is in the money, i.e., stocks whose
present value of the future cash flow stream is lower than
the book value. In such case, the hedged return in highest
IV is 55% (panel C, table 4)
Robustness
The pattern is the same when measuring returns based on
1- and 2-year returns (table 6) instead of 3 years
The pattern holds when measuring abnormal returns using
Fama-French factors, and when measuring IV over the
past 1- or 2- years instead of past 3 years
Discussions
Does this study merely confirm the importance of IV? It
would be more straightforward to compare the new value
measure (with the abandonment option) vs the classic
measure (book/market value)
Data
1976 2006 accounting data are from the 2009 version of
Compustats combined industrial annual data files; stock
prices, monthly returns, and monthly size-decile returns
from the CRSP database
Analyst earnings forecasts from the I/B/E/S database, and
institutional ownership data from the CDA/Spectrum
Institutional (13f) Holdings database
Paper Type:
Working papers
Date:
2009-12-30
Category:
Title:
Authors:
Source:
SSRN working paper
Link:
Summary:
This paper proposes a new value-to-price ratio which incorporates

shareholders option to liquidate the company when business
prospect looks bad. This new value measure can better predict
stock returns than the classic book-to-market ratios and the
residual-income-based ratios
Intuition
company)
sustainable
model
Volatility: the standard deviation of asset price for the past
five years
quintile of IV
Long high IV stocks in the top Vo/P quintile, shorts high IV

stocks in the bottom Vo/P quintile
significant 48%
the book value. In such case, the hedged return in highest
IV is 55% (panel C, table 4)
Robustness
The pattern is the same when measuring returns based on
1- and 2-year returns (table 6) instead of 3 years
The pattern holds when measuring abnormal returns using
Fama-French factors, and when measuring IV over the
past 1- or 2- years instead of past 3 years
Discussions
Data
1976 2006 accounting data are from the 2009 version of
Compustats combined industrial annual data files; stock
prices, monthly returns, and monthly size-decile returns
from the CRSP database
Paper Type:
Journal papers
Date:
2009-10-14
Category:
novel strategy, technical trading, contrarian
Title:
Profiting from a contrarian application of technical trading rules in

the US stock market
Authors:
Nauzer Balsara, Jason Chen and Lin Zheng
Source:
Journal of Asset Management, Vol 10
Link:
http://www.palgrave-journals.com/jam/journal/v10/n2/abs/jam2
00844a.html
Summary:
The variance ratio test suggests that we cannot reject the

random walk null hypothesis for three major US stock market
indexes between 1990 and 2007. Moreover, we find that the
nave forecasting model based on the random walk assumption
frequently generates more accurate forecasts than those
generated by the autoregressive integrated moving average
forecasting model. Consistent with this finding, we find that the
regular application of
three commonly used technical trading rules
(the moving average crossover rule, the channel breakout rule
and the Bollinger band breakout rule)
underperform the
buy-and-hold strategy between 1990 and 2007
. However,
we
observe significant positive returns on trades generated by the
contrarian version of these three technical trading rules
, even
after considering a 0.5 per cent transaction costs on all trades.
Paper Type:
Journal papers
Date:
2009-10-14
Category:
novel strategy, index change effect
Title:
Optimal Index Reconstitution Strategies
Authors:
Tony Foley
Source:
The Journal of Trading Spring 2009, Vol. 4, No. 2: 65-71
Link:
http://www.iijournals.com/doi/abs/10.3905/jot.2009.4.2.065
Summary:
Changes in benchmark composition can have considerable impact

on tracking error and generally entail significant portfolio turnover
if a manager wishes to maintain a given tracking error target.
Russell Investments, for example, announces its index
reconstitutions approximately one month before they take effect.
Under these circumstances, it is possible to
calculate optimal
single-stock strategies for transitioning stocks into and out of a
portfolio that tracks one of the Russell indices.
Paper Type:
Journal papers
Date:
2009-10-14
Category:
novel strategy, index change effect, options
Title:
Capturing the Index Effect via Options
Authors:
Srikant Dash, Berlinda Liu
Source:
Link:
Summary:
This article analyzes a less-known but profound impact of

additions to the S&P 500: the impact on publicly traded options of
the added company. The analysis shows that, in general, the
changes in at-the-money option prices are profoundly higher than
changes in the corresponding stock price.
Comparison between
the inter-index transfers and outside additions finds a far greater
index effect on option prices if the underlying stocks are
introduced out of the S&P 1500 index family. While it is not
possible to capture most of these price changes because they
happen very shortly after the announcement,
the article identifies
replicable trading strategies with large, statistically significant
returns.
Paper Type:
Journal papers
Date:
2009-10-14
Category:
novel strategy, macro factors, forecast index returns
Title:
Simple Model for Time-Varying Expected Returns on the S&P 500

Index
Authors:
James S. Doran, Ehud I. Ronn and Robert S. Goldberg
Source:
Journal of Investment Management, Q2 2009
Link:
Summary:
This paper presents a parsimonious, implementable model for the

estimation of the short and long-term expected rates of return on
the S&P 500 stock market index
. Sufficient statistics for the
expected return on the S&P 500 Index consist of the risk-free
rate of interest, the option markets (priced) implied volatility on
the S&P 500 Index, and a measure of the economys wealth level.
The short- and long-term risk-free rates of interest reflect the
impact of the level and slope of the risk-free term structure. The
implied volatility captures a forwardlooking measure of
uncertainty. Utility-function assumed decreasing relative risk
aversion gives rise to an increased willingness to invest in risky

assets when current wealth level is high. The models empirical
parameters are estimated using Livingston/Philadelphia Fed
growth rates substituted into a dividend-discount model
Paper Type:
Journal papers
Date:
2009-10-14
Category:
novel strategy, technical trading rules, identify local extremes
Title:
Making money in a downturn economy: Using the overshooting

mechanism of stock prices for an investment strategy
Authors:
Marco Folpmers
Source:
Link:
00841a.html
Summary:
In this paper we show that

a straightforward model to identify
local extremes
in a financial index can be applied to a subsequent
period
as a trading algorithm
. The theoretical justification of the
algorithm is the short-term behaviour of the index as an
oscillation with predictable frequency. The economic
interpretation of this behaviour relates to the overshooting and
mean reversion properties of the financial time series. The
algorithm is applied to the two main Euronext indices, sc. the AEX
index and the CAC40 index.
The algorithm outperforms the buy
and hold investment strategy considerably
in both cases.
Paper
Type:
Working papers
Date:
2009-07-06
Categor
y:
Novel Strategy, technical trading, Fourier transformation
Title:
Using Trading Dynamics to Boost Quantitative Strategy Performance
Authors
David Aronson
:
Source:
Hoodriver Research
Link:
http://hoodriverresearch.com/UsingTradingDynamicstoBoostQuantitativeStrate
gyPerformance.pdf
Summa
ry:
This paper proposes a novel portfolio construction technique called

performance boosting process (PBP). PBP improves quant model performances
by forecasting stocks expected returns and probability of profits given stocks
factor scores
PBP helps to magnify or dampen the size of stock trades given by quant model
Whenever the quant model gives a buy or sell signal on a stock, PBP
decides whether to add or reduce the size of the order
That is, PBP boosts the strategies profitability by allocating more (less)
position into stocks with expected higher (lower) returns
As an illustration (page3): Suppose a quant model ranks stocks using
RSI. History shows that when RSI has a value less than 30, signals
have had above average returns but when RSI is greater than 70
signals produce below average returns, so accordingly one can give a
positive(negative) boost to stocks with RSI ranks <30 (>70)
How PBP works
As mentioned above, for each set quant scores, PBP forecast the
expected returns and probability of profit
Use 3 types of indicators to forecast return
Individual stock specific volume and price data
Individual stocks index and universe specific data
An indicator measuring the correlation of the individual stock
with its universe
Use Non-Parametric Kernel Regression to better forecast the expected
return and probability of profits
For any strategy the PBP starts with a 200-500 input candidate list (i.e,
many factors like volume, volume/price, etc) and then reduce to two
variables
This is to reduce the noise in input variables and to reduce the number
of dimensions for output variables
A case study (which is not well explained)
As an illustration, this paper uses PBP on a quant strategy that uses two
factors: stocks recent price change normalized by volatility and recent
change in trading volume. It buys stocks with low recent returns and
declining trading volume
When applying PBP to the strategy, decile 10 return (1.76%) is highest
of all deciles, and decile 1 lowest (-0.64%)
Data
This paper uses price and volume TAQ data for the time period
1984-2004
Comments
The process described in the paper doesnt depend on any kind of

economic background. It is in a way combining non-structural technical
analysis with fundamental investment strategies without giving much
intuition
This paper is silent about the actual implementation of PBP. The way
the boosting of the signal from the investment strategy works is not
clear.
Paper
Type:
Working papers
Date:
2009-06-07
Categor
y:
VIX, sentiment indicators, novel strategy
Title:
Purified Sentiment Indicators for the Stock Market
Authors
:
David Aronson and John Wolberg
Source:
HoodRiver Research paper
Link:
http://www.hoodriverresearch.com/PurifiedSentimentIndicatorsfortheStockMar
ket5.04.09.pdf
Summar
y:
This paper finds that removing the impact of prices can improve the return
predicting power of VIX. Among the five sentiment measures covered in this
study, none can significantly predicting stock returns on a stand-alone basis,
and purification only helps VIX.
Intuition of the purification methodology
Any sentiment measures should be influenced by the markets recent
behavior. A down (up) trend should fuel pessimism (optimism)
Hence, a more clean (i.e., more predicative) measure of sentiment that
do not contain any price effect may reflect new information
The purified sentiment indicator = observed (actual) sentiment
indicator predicted sentiment indicator (Per Fig1, Fig2 in the
paper), where
Predicted sentiment indicator = coefficient1 * price momentum +
coeff2 * price acceleration
here coefficient1 and coefficient2 are coefficients of regressioning past
observations on price momentum and acceleration
Definitions:
Five sentiment indicators tested
the CBOE Implied Volatility Index (VIX)
the CBOE Equity Put-to-Call Ratio (PCR)

the American Association of Individual Investors Bulls minus
Bears (AAII)
the Investors Intelligence Bulls minus and Bears (INV)
Hulberts Stock Newsletter Sentiment Index (HUL)
Price variables
Price velocity(i.e., momentum), acceleration (i.e., second-order
price) and volatility
For each variable above, the moving average can be
11/22/44/65/130/260 days
Purification significantly improves predicting power of VIX signals (Fig. 27, Fig.
28)
9 of 10 rules based on purified VIX show a significant profit, while only
2 of 10 rules based on unpurified VIX do
The finding suggests that VIX contains predictive information beyond
price dynamics, but that past price dynamics mask this information
For non-VIX signals, purification did not add value
Predicted sentiment indicators highly correlated with actual sentiment
indicators
R-squared statistics ranging from 0.27 to 0.70, with an average of 0.55
Purification generally lowers the volatility of the sentiment indicators
The most predictive past price variables varies from indicator to
indicator: Poll-based sentiment indicators (AAII, INV and HUL) are
especially sensitive to the recent simple stock market trend (velocity)
Data
This study covers the time period of the five sentiment indicators from
initial availability (ranging from January 1963 to July 1987) through
October 2008
CBOE Implied Volatility Index (VIX) 1986 2008 are from Ultra
Financial Systems
American Association of Individual Investors Sentiment Survey (AAII)
1987-2008 are from Ultra Financial Systems
Investors Intelligence Advisor Sentiment Bulls - Bears (INV) 1963
2008 are from Investors Intelligence.
Hulbert Stock Newsletter Sentiment Index (HUL) 1985 2008 are from
Hulbert Financial Digest
CBOE Equity Put to Call Volume Ratio (PCR) 1985 2008 are from
Luthold Group
Paper Type:
Working papers
Date:
2009-05-08
Category:
Novel strategy, information, return/volume correlation
Title:
Information Revelation and Stock Returns
Authors:
Umut Gokcen
Source:
SSRN working paper
Link:
Summary:
Thepaperusescorrelationbetweenpricechangeandvolumetopredictstock
returns.Morespecifically,stockswithhigherinformationrevelationmeasure(i.e.,
informationallyrichstocks)havelowerfutureexpectedreturns.
Definitionofstocks"informationrevelation"
Itisthecorrelationbetweenpricechangeandvolume
Pricechange="theabsolutechangeinriskadjustedreturns".Specifically,
everymonthastocksdailyreturnsareregressedonmarketreturntogetthe
CAPMresiduals
ThemonthlycorrelationbetweenabsolutevaluesofdailyCAPMresiduals
anddailytradingvolumesiscalledtheinformationrevelation
Ahighcorrelationmeansthatlargepricemovesareaccompaniedbyahigh
volume
Intuition:lowrevelationmeanshigherriskbecauseinformationisnotavailabletoall
Pricechangeandvolumeshouldreactsimultaneouslytonewinformation
Forstockswithlargepricemovebutlittlevolume,itsuggeststhatsome
informationisknownonlytofewinvestors,henceinvestorsonaverage
requirecompensationforholding
1monthmeasureofinformationrevelationcanpredictfuture1monthreturn
Thestrategy:short(long)onstockswithstrong(poor)informationrevelation
Theinformationvariablepredictsfutureexpectedreturnsnegatively
Longshortportfoliossortedontheinformationvariablebring34%risk
adjustedreturnsperyear.
Monthlyreturns
Highinformation
portfolio
Lowinformation
portfolio
LowHigh
Rawreturns
0.57%
0.39%
0.18%
CAPMalpha
0.17%
0.04%
0.20%
FamaFrenchalpha
0.14%
0.10%
0.24%
Carhart4factor
alpha
0.17%
0.05%
0.22%
5factor(liquidity)
alpha
0.19%
0.02%
0.21%
Discussions
Thepaperpresentsanintuitiveportfoliostrategythatusesdailyreturnsto
estimatefuturewinners
Buttheremaybestrongsizebias
Data
Smallstocksmuchlikelytohavelowerinformationrevelation
measure
Indeedtheresultsaremuchstrongerforsmallstocksandnotvery
significantforlargestocks(fromtable4equalweightedreturns
showtheresultmuchbetter)
Thereturnsofportfoliosdontdecreasemonotonically(fromtable4,the
decileportfoliosdontshowmonotonicalresults)
Wesuspectthatitismorelikelytoseealargepricemovewithoutlarge
volumeanditshouldberaretoseealargevolumemovewithoutlargeprice
increase
Thepapercoverstheperiodof19632007
PriceandvolumedataaretakenfromCRSP
FirmlevelaccountingdataandearningsdataaretakenfromCOMPUSTAT
Paper Type:
Working papers
Date:
2009-05-08
Category:
Novel Strategy, Google search frequency
Title:
In Search of Attention
Authors:
Zhi Da, Joseph Engelberg, Pangjie Gao
Source:
SSRN Working Paper
Link:
Summary:
For each stock, high Google search frequency reflects the

(unrationally) high attention of naive investors. Segmenting
stocks with search frequency can enhance returns of IPO and
momentum strategies
Google search frequency and its change are correlated with stock
characteristics
Search frequency relates positively to market size,
turnover, analyst coverage and news flow
The change in search frequency correlates with abnormal
return, abnormal turnover and news flow
The higher the change, the higher the trading by individual
retail investors
Using search frequency to predict stock returns
For IPO stocks (evaluate returns of the first day after IPO
only)
Data
IPOs with highest increases in search frequency

during the week before IPO outperform IPOs with
small increases by nearly 7% during the day after
the IPO
IPO stocks with large increases in search frequency
tend to exhibit long-run return reversals
For momentum stocks
Momentum strategy1: limit to stocks with high
search frequencies
Momentum strategy2: limit to stocks with low
search frequencies
Strategy1 outperforms strategy2 across all holding
horizons. Over 1-year horizon, the outperformance
is almost 2.5%
For small stocks
Among the Russell 3000 stocks, search frequency
only predict returns for small-cap stocks
Virtually no predictability given turnover: small-cap
stocks with large increases in search frequency
outperform those with large decreases by an
average of about 0.08% per week during the next
two weeks (about 4% annualized) (note this
number is before transaction cost)
This study covers Russell 3000 and Initial Public Offering
(IPO) during 2004/01-2008/06
All search frequency data from Google Search Volume
Index
Paper Type:
Journal Papers
Date:
2009-04-20
Category:
novel strategy, short interest
Title:
Which Shorts Are Informed?
Authors:
EKKEHART BOEHMER, Charles M. Jones, XIAOYAN ZHANG
Source:
Link:
63&iid=2&aid=1324&s=-9999
Summary:
WeconstructalongdailypanelofshortsalesusingproprietaryNYSEorder
data.From2000to2004,shortingaccountsformorethan12.9%ofNYSE
volume,suggestingthatshortingconstraintsarenotwidespread.Asagroup,
theseshortsellersarewellinformed.
Heavilyshortedstocksunderperform
lightlyshortedstocksbyariskadjustedaverageof1.16%overthefollowing
20tradingdays(15.6%annualized).Institutionalnonprogramshortsalesare
themostinformativestocksheavilyshortedbyinstitutionsunderperformby
1.43%thenextmonth(19.6%annualized).
Theresultsindicatethat,on
average,shortsellersareimportantcontributorstoefficientstockprices.
Paper
Type:
Journal Papers
Date:
2009-04-20
Categor
y:
novel strategy, retail investors
Title:
Do Retail Trades Move Markets?
Authors
:
Brad M. Barber, Terrance Odean, Ning Zhu
Source:
Link:
http://rfs.oxfordjournals.org/cgi/gca?gca=22/1/151&gca=22/1/257&gca=22/1
/337&gca=22/1/371&sendit=Get+All+Checked+Abstract(s)
Summa
ry:
We study the trading of individual investors using transaction

data and
identifying buyer- or seller-initiated trades. We document

four results: (1)
Small trade order imbalance correlates well

with order imbalance based on
trades from retail brokers. (2)

Individual investors herd. (
3) When measured
annually, small
trade order imbalance forecasts future returns; stocks heavily
bought underperform stocks heavily sold by 4.4 percentage points

the
following year. (4) Over a weekly horizon, small trade order

imbalance reliably
predicts returns, but in the opposite direction; stocks heavily bought one week
earn strong returns the subsequent

week, while stocks heavily sold earn poor
returns.
Paper Type:
Journal Papers
Date:
2009-04-20
Category:
novel strategy, sentiment
Title:
HOW DOES INVESTOR SENTIMENT AFFECT THE CROSS-SECTION

OF STOCK RETURNS?
Authors:
Malcolm Baker, Johnathan Wang, and Jeffrey Wurgler
Source:
Journal of Investment Management, Second Quarter 2008
Link:
https://www.joim.com/abstract.asp?IsArticleArchived=1&ArtID=2
85
Summary:
Broad waves of investor sentiment should have larger impacts on

securities that are more difficult to value and to arbitrage.
Consistent with this intuition,
we find that when an index of
investor sentiment takes low values, small, young, high volatility,
unprofitable, non-dividend-paying, extreme growth, and
distressed stocks earn relatively higher subsequent returns.
When
sentiment is high, the aforementioned categories of stocks earn
relatively lower subsequent returns.
Paper Type:
Journal Papers
Date:
2009-04-20
Category:
statistic methodology, investment horizon, novel strategy
Title:
Optimal Trading Strategy with Optimal Horizon
Authors:
Edward E. Qian
Source:
Journal of Investment Management, Third Quarter 2008
Link:
https://www.joim.com/abstract.asp?IsArticleArchived=1&ArtID=2
97
Summary:
Portfolio implementation is an essential part of active investment

strategies. The trading horizon-the length of time allocated for
trade implementation, is an important consideration in portfolio
trading.
Previous research on optimal trading limits the trading
horizon as a fixed value. In this paper, we treat it as an
endogenous factor and find the optimal trading horizon as a part
of optimal trading strategy to further reduce trading costs.
We
derive analytical results for optimal trading strategy with optimal
horizon and provide numerical examples for illustration.
Paper Type:
Journal Papers
Date:
2009-04-20
Category:
Novel strategy, order flow, industry returns, currency/future
Title:
Marketwide Private Information in Stocks: Forecasting Currency

Returns
Authors:
Rui Albuquerque, Eva de Francisco, Luis B. Marques
Source:
Link:
63&iid=5&aid=1398&s=-9999
Summary:
Wepresentamodelofequitytradingwithinformedanduninformedinvestors
whereinformedinvestorstradeonfirmspecificandmarketwideprivate
information.Themodelisusedtoidentifythecomponentoforderflowdueto
marketwideprivateinformation.Estimatedtradesdrivenbymarketwide
privateinformationdisplaylittleornocorrelationwiththefirstprincipal
componentinorderflow.Indeed,wefindthat
comovementinorderflow
capturesvariationmostlyinliquiditytrades.Marketwideprivateinformation
obtainedfromequitymarketdataforecastsindustrystockreturns,andalso
currencyreturns
.
Paper Type:
Journal Papers
Date:
2009-04-20
Category:
momentum, credit, novel strategy
Title:
Authors:
DORON AVRAMOV, Tarun Chordia, Gergana Jostova, Alexander

Philipov
Source:
Link:
62&iid=5&aid=1282&s=-9999
Summary:
Thispaperestablishesarobustlinkbetweenmomentumandcreditrating.
Momentumprofitabilityislargeandsignificantamonglowgradefirms,butit
isnonexistentamonghighgradefirms.Themomentumpayoffsdocumented
intheliteraturearegeneratedbylowgradefirmsthataccountforlessthan
4%oftheoverallmarketcapitalizationofratedfirms.
Themomentumpayoff
differentialacrosscreditratinggroupsisunexplainedbyfirmsize,firmage,
analystforecastdispersion,leverage,returnvolatility,andcashflowvolatility.
Paper
Type:
Journal Papers
Date:
2009-04-20
Category: novel strategy, liquidity, emerging markets

Title:
Authors:
Geert Bekaert, Campbell R. Harvey, Christian Lundblad
Source:
Link:
http://rfs.oxfordjournals.org/cgi/gca?gca=20/6/1783&gca=20/6/1865&gca=
20/6/1901&sendit=Get+All+Checked+Abstract(s)
Summary
:
Given the cross-sectional and temporal variation in their liquidity,

emerging
equity markets provide an ideal setting to examine

the impact of liquidity on
expected returns.
Our main liquidity
measure is a transformation of the
proportion of zero daily

firm returns, averaged over the month. We find that
it significantly
predicts future returns, whereas alternative measures such as
turnover do not.
Consistent with liquidity being a priced factor,
unexpected
liquidity shocks are positively correlated with contemporaneous

return
shocks and negatively correlated with shocks to the dividend

yield. We
consider a simple asset-pricing model with liquidity

and the market portfolio
as risk factors and transaction costs

that are proportional to liquidity. The
model differentiates
between integrated and segmented countries and time
periods.
Our results suggest that local market liquidity is an important
driver
of expected returns in emerging markets, and that theliberalization process
has not fully eliminated its impact.
Comment
s:
Paper Type:
Working Papers
Date:
2009-04-14
Category:
Title:
Authors:
Source:
SSRN Working paper
Link:
Summary:

that month
Industry
recommen
dation
sorted
portfolios
Cumulative
returns
(months)
t,t+2
High
recommen
A
l
p
h
a
p
e
r
m
o
n
t
h
dation
(P1)
Low
recommen
dation
(P4)
P1 - P4

better
returns
recommendations
Stock
level
recom
mendat
ions
A
l
p
h
a
p
e
r
m
o
n
t
h
Double
sorting
(by
industr
y and
stock
level
recom
mendat
ion)
Upgrad
ed
0
.
5
%
Upgrad
ed-high
recom
mendat
ion
(U-H)
Comments:
Downgr
aded
0
.
0
1
%
Downgr
aded-lo
w
recom
mendat
ions
(D-L)
Upgrad
ed-dow
ngrade
d
0
.
3
%
(U-H) (D-L)
Discussions:
This is because
9)
Data:
industry
Paper
Working Papers
Type:
Date:
2009-04-14
Category: Earning levels, earnings announcement, novel strategy

Title:
Post Loss/Profit Announcement Drift
Authors:
Karthik Balakrishnan, Eli Bartov, Lucile Faurel
Source:
NYU working paper
Link:
http://archive.nyu.edu/bitstream/2451/27762/2/Post+Losses+Announcemen
t+Drift+10-2008.pdf
Summary
:
Stocks with highest earnings outperform those with lowest earnings.

Specifically, stocks with highest profits (highest loss) generate a 120-day
Carhart-factor adjusted return (following the quarterly earnings
announcement) of -0.52%(-8.49%)
Constructing the portfolio:
Earning levels are measured as the earnings before extraordinary
items/total assets
announcements:
Portfolio
Abnormal
return (per
quarter)
All loss
firms
Size-Adjusted
Cahart 4 factor
alpha
All Profit
firms
[-2,0]
days
[1,60]
days
[1,120]
days
-0.91
%
-2.80%
-5.07%
-0.96
%
-4.34%
-8.49%
Size-Adjusted
0.64
%
0.08%
1.50%
Cahart 4 factor
alpha
0.59
%
-0.01%
-0.52%
Robustness:
This earnings level phenomenon is not subsumed by other know
anomalies, such as earnings surprise and accruals
This finding is robust to alternative risk adjustments, distress risk,
short sales constraints, transaction costs, and sample periods.
Comment
s:
Discussions:
It is easier to understand why high loss firms are mispriced: investors

do not have a formula for those firms as common valuation measures
(P/E) do not apply on such stocks.
Intuitively stocks with highest earnings can be more easily valued.
Indeed, these high earning stocks generate abnormal returns much
closer to 0 compared with high loss firms.
Earnings level is a less studied area: most other papers studies
earning surprises, measured as the deviation from analysts consensus
(as opposed to earning levels)
Regarding earnings level, we covered The Pricing of Accruals for
Profit and Loss Firms
(
)
before, where it shows that the accrual strategy is related to the
companies profitability: the accruals for profit firms are overpriced,
with a hedged return ~15%; while the accruals for loss firms are
slightly underpriced, with an insignificant hedged return ~6%
Data:
1976-2005 earnings data are from Compustat quarterly database.
Stock daily returns are from the CRSP
Stocks with stock prices below $5 are eliminated
Paper Type:
Working Papers
Date:
2009-04-14
Category:
Stock repurchases, buybacks, novel strategy
Title:
Repurchases, Reputation, and Returns
Authors:
Alice A. Bonaime
Source:
SSRN working paper
Link:
Summary:
For stocks that make share repurchase announcements, the

higher the "repurchase completion rates"(RCR), the higher the
future 2-year stock returns.
Definitions of "Repurchase completion rates" (RCR):
RCR = (number of shares bought) / (the amount specified
in the announcement)
In other words, RCR is the level of completion of previous
repurchases
Past repurchase RCR can predict future repurchase RCR
Of course, only those repeated repurchasers have prior

RCR
Intuition:
Repurchases are generally viewed as positive signals from
company management
But on average only 80% of announced shares are actually
repurchased
Announcements made by firms with high prior RCR are
viewed by investors as more credible
Double sort stocks based on 1) previous announcement
period 3-day return and 2) past RCR
Long announcing stocks that falls into lowest quintile of
previous return and highest quintile past RCR
Prior RCR predicative of short-term (3-day) returns
Low prior RCR predicts low 3-day announcement returns
of another repurchase
In terms of 3-day return, companies in the highest decile
of past RCR yield a 2.5% higher than those in the lowest
decile
This suggests that investors cast doubt on repurchase
announcements from firms with low prior RCR
Prior RCR predicative of long-term (2-year) returns
Within repeated repurchase companies,
For those with above-median past RCR, 2-year returns are
13.64%
For those with below-median past RCR, 2-year returns are
7.43%
Double sorting on RCR and 3-day announcement returns (Table
VI)
The 2-year abnormal returns to stocks with the lowest
announcement returns are 17.33%
Within such stocks (those with lowest quintile of prior
announcement returns), stocks with above-median past
RCR yield a 2-year return of 27.13%
Comments:
Discussions:
PCR may be used for quant managers to improve their
existing stock repurchase factor
Limited number of observations: only 2729 repeated
repurchasers covered in study, that is less than 200 stocks
per year
Lack of intuition for the predicting power of announcement
3-day returns: if low prior RCR leads to low announcement
3-day returns, then why stocks with lowest 3-day return
have highest 2-year return? (Table VI)
The paper profit sounds too good to be true: with

countless factors that can impact stock returns, "prior
RCR" does not stand out to be a critical one. It is
surprising to us that it can differentiate stock returns by
such a large margin
Data:
1990-2004 repurchase announcements are from the
Securities Data Corporation (SDC) database
Return and accounting data are from CRSP/Compustat.
Earnings data are from IBES.
Paper Type:
Working Papers
Date:
2009-04-14
Category:
Novel strategy, CEO ownership
Title:
CEO Ownership and Stock Market Performance
Authors:
Ulf von Lilienfeld-Toal and Stefan Ruenzi
Source:
SSRN Working paper
Link:
Summary:
The paper shows that firms with non-trivial voluntary CEO

ownership outperform the market
Intuition: CEOs with high ownership are more motivated to
increase stock returns
In more technical terms, higher CEO ownership can
mitigate the agency costs. That is, the interests of
CEO/managers are more aligned with those of the
shareholders
For 17% of the S&P 1500 firms, CEOs voluntarily held 5%
or more of the companys stock in 2000
For 7% S&P500 stocks, CEOs voluntarily held 5% or more
Constructing CEO ownership portfolios using for S&P 500 (S&P
1500) stocks
Every year the portfolios are sorted by the managerial
ownership
The portfolios are created using cut-off fractions of 2.5%
to 15% of managerial ownership
A value-weighted portfolio consisting of all S&P 500 (S&P
1500) firms in which the CEO holds more than 5% delivers
abnormal annual returns of 9%
SP1500
stocks
Comments:
Monthly 4
factor-adju
sted alpha
SP500
stocks
Monthly 4
factor-adj
usted
alpha
Ownership >
2.5%
0.31%
Ownership
> 2.5%
0.42%
Ownership >
5%
0.68%
Ownership
> 5%
0.73%
Ownership >
7.5%
0.80%
Ownership
> 7.5%
0.87%
Ownership >
10%
0.96%
Ownership
> 10%
1.03%
Ownership >
12.5%
1.12%
Ownership
> 12.5%
1.22%
Ownership >
15%
1.25%
Ownership
> 15%
1.37%
Concerns:
Limited number of stocks: in 2003 for example, only 35
S&P500 company CEOs hold 5%+ of company shares. For
S&P1500, the number is 195.
Better measure of CEO ownership should include options,
and this paper omits the effect of executive options
Data:
The sample period is 1992-2003
Return data is taken from CRSP and accounting variables
are taken
Paper
Type:
Working Papers
Date:
2009-03-18
Categor
y:
Novel strategy, advertising, sector-specific
Title:
Advertising, Attention, and Stock Returns
Authors
:
Thomas Chemmanur and An Yan
Source:
SSRN Working Paper
Link:
Summar
y:
The paper shows that advertising stocks (stocks with high increase of
advertising expense) have lower returns in the year
after
the advertisement,
although their contemporary returns in the advertising year(month (-12,0)) is
higher.
The intuition
Advertising increases investor attention and stock prices
increases with increased attention
In the subsequent years when the attention drops, so do the
stock returns
The change in investor attention is in the short- and long-run is
documented using two proxies for investor attention: Number of
financial analyst covering the stock, and trading volume
oChanges in advertising expenditures are shown to be higher for
large firms, value firms and with high increases in past
revenues.
Each month, stocks are sorted by the annual change of
advertising expenditures. I.e., it is the ads expense(year(0))
ads expense (year (-1))
The effect of advertising on future stock returns is stronger for
small firms, value firms and firms with poor prior return and
operating performances.
Holding Period returns
Portfolio
month (-12,0)
Subsequent 6
months (1,6)
The next 6
months (7,12)
Monthly raw returns

Low
advertising
P1
-0.007%
0.95%
0.97%
High
advertising
P10
0.16%
0.003%
0.002%
P10-P1
0.168%
-0.92%
-0.94%
Monthly four factor Fama-French Alphas
Low
advertising
P1
0.75%
0.61%
High
advertising
P10
-0.39%
0.095%
P10-P1
-1.13%
-0.51%
Robustness
The finding is robust to size, book-to-market, and momentum
Similar pattern found in the out-of-sample study of 1980-1993,
though the result is weaker since there was no universal
standard to expense advertising prior to 1994.
Discussions
Industry bias: there must be an industry bias in this study.
Industries like industrials do much less ads than consumer
sectors. So the long and short portfolios are mostly likely made
up of stocks in few industries. We cannot find related
discussions in the paper, though the authors adjust the
holding-period return of any stock by industry and size effects
Defying the usual return momentum pattern: advertising
stocks (stocks with high increase of advertising expense) enjoy
higher contemporary returns, so higher returns in subsequent
year are expected. This merely reinforces the findings in this
paper.
Data
The paper covers the period of 1996-2005 and uses CRSP for
stock returns, IBES for analyst coverage data, COMPUSTAT for
accounting variables (advertisement data is compustat item
#45)
Paper Type:
Working Papers
Date:
2009-03-18
Category:
Novel strategy, maximum-minimum returns, return reversal
Title:
The long memory in stock price shocks
Authors:
Hai Lu, Kevin Q. Wang and Xiaolu Wang
Source:
SSRN Working Paper
Link:
Summary:
The paper shows that maximum or minimum short-term (3-day)

low returns lead to high future expected returns over the
subsequent 12 months.
Portfolio construction: sorts stock by minimum and
maximum 3-day return and hold for 12 months
At the end of each month, stocks are sorted by the
minimum and maximum three-day market adjusted
abnormal return in the month
Maximum (minimum) three-day abnormal returns
corresponds to stocks with short-term hikes (drops)
Decile portfolios are formed and held for 12 months
Ranking
Monthly Raw
return
Monthly
Fama-French
alpha
High decile (10)
1.23%
0.16%
Low decile (1)
0.58%
-0.69%
High-low (10-1)
0.65%
0.85%
High decile (10)
0.85%
-0.40%
Low decile (1)
1.15%
0.01%
High-low (10-1)
-0.30%
-0.41%
Minimum 3 day
abnormal return
Maximum 3 day
abnormal return
Robustness
The finding is robust to size, book-to-market, and
ranking mont returns
This finding cannot be explained by microstructure
factors such as trading volume, turnover, spread,
or illiquidity
The intuition: there is an asymmetric long-term effect
after abnormal returns
After short term abnormal hikes there is a strong
long-term reversals
After short term abnormal drops there is a strong
long-term drift
Concerns
There is little reason to believe that stocks with

highest minimum return (and lowest maximum
return) are any different from any average stocks.
Indeed, the table above shows that such stocks
have close to 0 Fama-French alpha
This said, the focus should be on stocks with lowest
minimum return (and highest maximum return).
Lack of economic intuition: it is hard to believe that
the 3-day price hike/drop will impact the return for
the coming 12 months
We covered a similar paper before, Maxing out:
stocks as lotteries and cross-section of expected
returns,
(http://papers.ssrn.com/sol3/papers.cfm?abstract_
id=1262416), it is shown that there is a negative
relationship between the stocks maximum daily
return over the prior one month and expected stock
returns.
Data
The paper uses CRSP, IBES, TAQ and ISSM, First
Call, Thompson Financial and SDC for the time
period of 1963-2006
Paper
Type:
Working Papers
Date:
2009-02-25
Category:
Novel Strategy, price level
Title:
The Price Level Puzzle
Authors:
Omid Sabbaghi
Source:
MFA 2009 conference
Link:
http://www.mfa-2009.com/papers/Price_OMID_SABBAGHI_CHICAGO_BOO
TH_NOV2008.pdf
Summary:
The lower price levels, the higher future abnormal returns,

particularly since 1999
In other words, cheaper priced stocks have higher expected
returns
The estimated annual premium between a $10 and a $100

stock is about 2.8% after controlling for Fama-French Factors
The low price portfolio enjoys a 20% annualized average
excess return after controlling for Fama-French factors. By
contrast, the high price portfolio and market portfolio yield
6.69% and 7.77% respectively.
Equal-weighting stocks give similar (though weaker) results
as value-weighting.
Per Fig. 11-12 in the paper, from 1986-1999, this price level factor
did not work well. But it worked very well since 1999
Robustness
The results are robust to
stock splits
, size, idiosyncratic
volatility, earnings-to-price and book-to-market effects
Concerns: lack of economic reason
The most troubling factor is that there seem to be no
economic reason behind such findings.
A weak reason may be that many fund managers would not
include stocks below certain prices (e.g., $5) in their
investment universes. This may be cause such stocks to be
an less efficient area
Data
1967-2005 US stock data are from CRSP/COMPUSTAT
Paper Type:
Working Papers
Date:
2009-02-25
Category:
Analysts forecasts, novel strategy
Title:
Long-Term Earnings Growth Forecasts, Limited Attention and

Return Predictability
Authors:
Zhi Da and Mitch Warachka
Source:
SSRN Working Paper
Link:
Summary:
The paper shows that optimism in long-term analyst forecast

predicts negative abnormal returns.
Definition of long-term analyst optimism
The procedure compares the long-term analyst

forecast (LTG) with the implied short-term forecast
for the current year (ISTG)
LTG is the long-term analyst forecast from IBES
ISTG = ( realized earnings in the previous year) /
(annual earnings forecast for current year)
Optimism is defined as high LTG/ low ISTG stocks
The intuition: analysts tend to underestimate the impact of
bad news in the long run
In the case of long-term
optimism
, bad information
gradually diffuses from short-term to long-term
forecasts. So high LTG coupled with low ISTG is a
bad sign
In the case of long-term
pessimism
, there is no
slow diffusion of good information from short-term
to long-term analyst forecasts
Industry-neutrality: LTG and ISTG are compared
across firms within the same industry (across 11
different industries)
This is necessary because "a long-term forecast of
20% may simultaneously be optimistic for utility
companies and pessimistic for technology
companies."
Each month stocks are double-sorted into 9
portfolios by LTG and ISTG
The portfolio are held for 1 month and generates
significant returns
Ra
w
ret
ur
n
(p
er
m
on
th)
C
a
r
h
a
r
t
4
f
a
c
t
o
r
a
l
p
h
a
(
p
e
r
m
o
n
t
h
)
low
LTG/
high
ISTG
(pes
simis
m)
1.
44
%
0
.
2
1
%
high
LTG/
low
ISTG
(opti
mis
m)
0.
84
%
0
.
2
7
%
Spre
ad
portf
olio
0.
6
%
0
.
4
8
%
A strategy based on change of ISTG (denoted dISTG) also

works
The modified trading strategy produces a
risk-adjusted return of almost 6% over a
twelve-month holding period through buying low
LTG / high dISTG stocks
Concerns
The return predictability persists only for 1 month
after the portfolio formation (table 2-panel b),
which is troubling and may cause high turnover
Data
The paper uses the following data sources between
1983-2006: CRSP for returns, COMPUSTAT for firm
level accounting variables, and IBES for analyst
forecasts.
Paper
Type:
Working Papers
Date:
2009-02-25
Category:
Liquidity factor, Global markets, novel strategy
Title:
A look at the liquidity factor in GEM2
Authors:
MSCI Barra
Source:
MSCI Barra white paper
Link:
http://www.mscibarra.com/resources/pdfs/research/RB_Liquidity_Factor.pdf
Summary: The paper shows that the liquidity factor in the Barra Global Equity Model
(GEM2) can strongly predict stock returns
Definition of liquidity
Liquidity is measured as turnover ( the ratio volume to the
number of shares outstanding)
Three different turnover measures are used: at monthly,
quarterly and annual frequencies
Liquidity can predict stock returns
Factor
Value
Liquidity
Momentu
m
Annualize
d return
4.71%
2.93%
Annualize
d risk
Risk-ret
urn
ratio
1.64%
2.87
1.48%
1.97
5.20%
3.32%
1.57
Size
0.89%
2.25%
0.40
Growth
0.45%
1.26%
0.36
Size-nonli
nearity
0.46%
1.45%
0.32
Financial
leverage
-0.41%
1.52%
-0.27
Volatility
-3.12%
5.97%
-0.52
Barra factor selection methodology: Every week cross-section

of returns are regressed on factors and the significance of
coefficient estimates are analyzed
Liquidity factor has a significant coefficient estimate for 53%
of the weeks
Performance of the liquidity factor is a function of market conditions
The liquidity factor seems to perform better than the world
index
in bear markets
(Figure 1)
Liquidity explains returns very well when the world market

does very well and very badly (19% and -37% per annum on
average, respectively)
Discussions
Like some other factors, liquidity here shows a
counterintuitive positive risk premium. Illiquidity is known to
possess a positive risk premium on the cross-section of
stocks.
This perhaps should not be too surprising as reality
sometimes does not obey financial rules. We have discuss
similar factors before, such as high volatility, low returns.
(The Volatility Effect: Lower Risk without Lower Return,
Data
The paper covers the 1992-2008 period. MSCI world and
country indices are from MSCI. Datastream is used for stock
level international data.
Paper Type:
Working Papers
Date:
2009-02-25
Category:
Title:
Authors:
Source:
SSRN Working Paper
Link:
Summary:

Methods

profitable
Paper Type:
Working Papers
Date:
2009-02-25
Category:
Title:
Authors:
Source:
SSRN Working Paper
Link:
Summary:

Methods
profitable
Paper Type:
Working Papers
Date:
2009-02-25
Category:
Novel Strategy, productivity, manufacturing stocks, industry

selection
Title:
The influence of Productivity on Asset Pricing
Authors:
Laurence Booth, Bin Chang, Walid Hejazi and Pauline Shum
Source:
NFA-2008 conference
Link:
Summary:
The paper shows that industry level productivity can predict

industry expected returns
The productivity factor is created using industry level
productivity data
NBER and CES publishes productivity data from
various manufacturing industries
The high productivity stocks are defined as the
stocks that have high OLS-factor betas for the
Limited data availability: In 2002 only 16% of
number of firms in CRSP is from manufacturing
industries (34% of the total market capitalization).
High productivity, high returns
During 1963 2002, the productivity factors yields
up to 2.41% per annum
Performance better since 1990
Robustness: robust to size and B/M portfolios
(Table 5), though productivity factor has a bigger
impact on small firms and high growth firms.
Data
1963 2002 US manufacturing company
productivity data are from the Manufacturing sector
Database of NBER and the U.S. Census Bureaus
Centre for Economic Studies (CES)
This database includes three- and four-digit SIC
industry total factor productivity estimates. This
paper adopts the five-factor productivity measure.
Paper Type:
Working Papers
Date:
2009-02-25
Category:
Novel Strategy, stock price promotion, manipulation
Title:
Does it help to secretly buy stock recommendations?
Authors:
Nadia Massoud, Saif Ullah and Barry Scholnick
Source:
NFA 2008 meetings
Link:
Summary:
Some companies hire "stock price promoters" to increase their

stock prices. This paper shows that companies that hire
promoters but dont report such relationship experience abnormal
high short-term stock returns
first 4 days the promoter starts
working and the first 4 days starting with the filing
Background of stock price promoters
Promoters offer their expertise to raise the firms
share price in exchange for a fee and they are hired
by some listed firms to increase their trading
volume and price
Such promoters are is required to disclose its
affiliation with the hiring firm
SEC has filed 40 cases between 1995-2006 because the
promoters failed to disclose their relationship with 273
listed firms
Data available on SECs website
Both stock promoters and SEC filings cause abnormal
returns
The mean cumulative average abnormal returns for
promoted firms are 11.94% in the first 4 days the
promoter starts working
The mean cumulative average abnormal returns for
the firms SEC is filing for are -32.94% in the first 4
days starting with the filing
Smaller firms, firms with higher capital expenditure
and firms with lower leverage are more likely to
hire promoters
Insiders sell after the hiring of the promoters,
implying that there are big private benefits of
control problems with managers
Data
1995-2006 promoter data are from SEC website
Fairly small companies: The largest firm has
market size of $2.6 billion, average mean size only
$70mn. Most firms listed on Non NASDAQ OTC
Paper Type:
Working Papers
Date:
2009-02-01
Category:
novel strategy, idiosyncratic volatility
Title:
Return Reversals, Idiosyncratic Risk and Expected Returns
Authors:
Wei Huang, Qianqiu Liu and S.Ghon Rhee
Source:
SSRN Working Paper
Link:
Summary:
The paper shows that lagged idiosyncratic volatility (IV) has positive
predictive power on the stock expected returns, after controlling for
return reversal
Conflicting evidence regarding the predictive power of IV
IV stands for the volatility of return that is not explained
by CAPM or Fama-French 3-factor model (FF3) factors.
Ang, Hodrick, Xing and Zhang (2006): Negative relation
between monthly realized idiosyncratic volatility
(estimated with daily returns) and next months
value-weighted portfolio returns
Malkiel and Xu (2002): Positive relation at firm or
portfolio levels (when idiosyncratic volatility estimated
using monthly returns)
After controlling for past month return, the negative

relationship (per Ang paper) disappears
There is negative autocorrelation in monthly stock
returns
There is also positive contemporaneous correlation
between idiosyncratic volatility and expected returns
Therefore if there is no control for last months returns,
there is a spurious negative correlation between
expected returns and lagged idiosyncratic volatility
To correct for the bias, the monthly idiosyncratic volatilities are
estimated using daily returns
Exponential GARCH model is used to model monthly
idiosyncratic volatilities by controlling for the return
reversals in monthly returns
The conditional idiosyncratic volatility estimates from the
model are shown to be positively correlated with
expected returns.
Type of idiosyncratic
volatility
Fama-MacBeth Coefficient
on past idiosyncratic
volatility
Last months realized

idiosyncratic volatility
-0.019
Last 24 months ARIMA

-0.04
Last 36 months ARIMA

-0.032
Last 30 months EGARCH

idiosyncratic volatility with
controls on return reversals
0.251
The monthly return reversals also cause value-weighted

portfolio returns to be lower than the equal-weighted ones
The reason is that the winner stocks in value-weighted
portfolios have higher weights and lower expected
returns due to return reversals.
In the case of equal-weighted portfolio returns current
winners dont have higher weights.
The fact that negative predictive power of lagged
idiosyncratic volatility only exists for value-weighted
portfolios also confirm the effect of return reversals
Data
Daily stock data for the time period 1963-2004 are from
CRSP and COMPUSTAT databases. Fama-French 3 factors
are from Kenneth Frenchs webpage
Paper
Type:
Working Papers
Date:
2009-01-12

Title:
Authors:
Junhua Lu
Source:
S&P research paper
Link:
df
Summary
:
Thepapershowsthat
termstockreturns
ways
demand
industries
40outof46industries
46industries
inthepastthreeyears
marketconditions
Regim
Strateg
Average
Sharpe
e
y
Annual
Ratio
return
Overall
Inflation
10.7%
0.64
timing

Market
4.1%
0.36
High
Inflation
12.7%
0.91
inflatio
timing
n

Market
7.7%
0.54
Low
Inflation
10.3%
0.44
inflatio
timing
n

Market
2.4%
0.17
Ourconcerns
markets
Data
global1200index.
Paper Type:
Working Papers
Date:
2009-01-12
Category:
Industry-Specific Human Capital, labor income growth,

idiosyncratic volatility(IV), novel strategy
Title:
Industry-Specific Human Capital, Idiosyncratic Risk and the

Cross-Section of Expected Stock Returns
Authors:
Esther Eiling
Source:
SSRN Working paper
Link:
Summary:
The paper shows that higher exposure to "industry specific

human capital returns" (i.e., industry average labor income
growth) corresponds to higher expected returns.
Such factor can
explain the idiosyncratic volatility (IV) puzzle and can greatly
improve CAPMs ability to explain stock returns.

straight-forward, but we think that "industry average labor
income growth" is an interesting new factor because (1) it makes
economic sense (2) the empirical study in this paper show that it
can predict stock returns.
Definitions
"Industry specific human capital returns" is defined
as the growth rate in labor income in a certain
industry
Proposed reasons
Industry specific human capital returns affect
investors optimal portfolio choices
The labor income is important for the optimal
portfolio choice of individuals
The industries used in this study are goods
producing, manufacturing, service, distribution and
government (as defined by the Bureau of Economic
Analysis.)
Previous study show that stocks with high IV have
After controlling for labor income growth, the IV
premium disappears
In the table below, labor income beta is the
coefficient of regressing industry returns on labor
income growth
Paper Type:
Working Papers
Date:
2009-01-12
Category:
Alternative risk measure, Gain-Loss Spread, Risk, novel strategy
Title:
The Gain-Loss Spread: A New and Intuitive Measure of Risk
Authors:
Javier Estrada
Source:
IESE working paper
Link:
http://web.iese.edu/jestrada/PDF/Research/Others/GLS.pdf
Summary:
This paper proposes to use the gain-loss spread (GLS) to

measure investment risk, instead of the most widely used
standard-deviation measure.
A intuitive definition:
GLS is measured as
GLS = (the expected gain) - (the expected loss)
= (probability of gain)*(average gain) - (probability
of loss)*(average loss)
Probability of gain(loss) is measured as: (number
of years with positive(negative) returns )/(total
number of years)
Average gain(loss) is measured as: average
return during years with positive (negative) returns
GLS is shown to be a superior risk measure
Stronger correlation between return and risk:
Comparing with standard deviation and
beta, GLS correlates stronger with returns
for country and industry indexes
The most risky tercile of country indexes
outperform the least risky tercile of country
indexes by an annualized 11.4% when using
GLS to measure risk, and 9.8% and 4.3%
using SD and Beta
Hence better satisfying the higher risk,
higher return principle
GLS strongly correlates with standard deviation, so
it incorporates very similar information about
volatility
An investment strategy based on GLS is profitable
and comparable to a strategy based on standard
deviation, and is better than a strategy based on
beta.
Data
MSCI database of countries and industries was
used. The database contains monthly data on 49
countries (22 developed and 27 emerging) and 57
industries. The starting time point varies from
1970-1995, the ending time are 2007/12.
Paper Type:
Working Papers
Date:
2008-12-20
Category:
Quant factor timing, novel strategy, style
Title:
Anomaly Timing
Authors:
Devraj Basu and Chi-Hsiou Hung
Source:
2008 NTU International Conference
Link:
https://editorialexpress.com/cgi-bin/conference/download.cgi?db_na
me=MMF2008&paper_id=56
Summary:
Thispaperdiscussesaquantfactortimingstrategythatturnsonandturnsoffa
quantfactorconditioningonpriormonthsmarketreturns.
Comparedwitha
conventionalsinglefactorportfolio,suchalternatingstrategyyieldshigherreturns
withreducedvolatility.
Definitions:
Anomalyportfoliosaresinglefactorportfolios.Theyarebuilt
usingoneofthefourquantfactors:momentum,booktomarket,
sizeandlongtermreturnreversal.
Momentumanomalyportfolio:select(both)winnerandloser
stocksbasedonreturnsinprevious212month
Booktomarketanomalyportfolio:select(only)stockswithhigh
booktomarketattheendofeachJune
Sizeanomalyportfolio:select(only)smallcapstocks,
constructedattheendofeachJune
Longtermreversalanomalyportfolio:select(both)winnerand
loserstocksbasedonreturnsinmonthst60tot13andheldfor
4years
Strategymethodology:
Twotypesoftimingstrategiesdiscussed.Theyalternate
betweenananomalyportfolioand1monthTreasurybills:
TypeIstrategy
TypeIIstrategy
Conditioningonthe
marketindexduring
month
t1
Duringmonth
t
,investin
>0
theanomalyportfolio
<=0
Tbills
>2%
theanomalyportfolio
<=2%
Tbills
ThetimingstrategyyieldshigherSharpeRatio:
Thetimingstrategiesyieldshigherriskadjustedreturnand
higherSharperatio(onlyexceptioniswinnermomentum
portfolio)
Somerepresentativestatistics
Robustto1%2%roundtriptransactioncostsassumptions
Proposedintuition:
Thistimingstrategyseemtocapturethereturnupsidewhile
avoidthedownsideloss(Table4)
Addinganupmarketfactortothemodelconfirmthattheprofits
areduetosuccessfulmarkettiming(Table8and9).
Aconditional,multifactor,dynamicmodelbasedon
macroeconomicvariablesandanUpmarketdummyvariable
explainsthereturnsoftheTypeIandIIstrategyportfolioreturns
muchbetterthanthe4factorFamaFrenchCarhartdoes.
Comments:
1. Discussions
If the finding here is true, then there should be a correlation
between prior month market return and the current month
single-factor portfolio returns. If confirmed, this will be a very
useful pattern.
It would be interesting to discuss the conditioning effect of
strong negative market returns, such as when the market
index is down more than -2%.
2. Data
1975-2006 NYSE, AMEX, and NASDAQ stocks data are from
the CRSP and Compustat files.
Paper Type:
Working Papers
Date:
2008-11-30
Category:
novel strategy, funds, Stock return model, mutual funds

performance evaluation
Title:
Should Benchmark Indices Have Alpha? Revisiting Performance

Evaluation
Authors:
Martijn Cremers, Antti Petajisto, Eric Zitzewitz
Source:
University of Texas Working paper
Link:
http://www.mccombs.utexas.edu/dept/Finance/fea/papers/f2-sho
uld-benchmark-indices.pdf
Summary:
This paper proposes a simple method that can better explain

stock returns and better evaluate mutual fund returns.
Challenges to existing asset pricing models:
Factor models (e.g., Fama-French three-factor
model and Carhart four-factor model) generate
very low R2 in stock return regression
I.e., these models have very low explaining power
for stock returns
Challenges to existing mutual fund evaluation methods:
Practitioners typically compare the fund
performance to its self-declared benchmark
performance. This is sub-optimal because there is

no explicit adjustment for risk
Academia typically uses a factor model (e.g.
Fama-French three-factor model and Carhart
four-factor model), this is problematic because
major market indices have alphas
Major indices do generate alphas in factor-model
framework
There exist significant annual alphas for both
S&P500 Index (0.82%) and Russell 2000 (2.41%)
for 1980 to 2005 period. (Table 2)
Hence, even index fund managers would appear to
have significant positive or negative skills
The new method: adding several index-based factors
Adding 3 index-based size factors (to replace the
size factor in conventional models)
S&P 500
The difference between the Russell Midcap
index and S&P 500 (RM-S5)
The difference between the Russell 2000
and Russell Midcap index (R2-RM).
Adding 4 index-based value-growth factors (to
replace the book-to-market factor)
The return spread difference between the
value and growth components of the S&P
500 (S5VS5G), Russell Midcap index
(RMVRMG), Russell 2000 index (R2VR2G),
Russell 3000 index (R3VR3G)
In other words, the new asset pricing regression is
stock return = alpha + S&P 500

return
+ return difference between Russell

Midcap and S&P 500 (RM-S5)

small-cap and S&P 500 return (RM-S5)
+ return difference between S&P

large-cap value/growth indices

Midcap value/growth indices

2000 value/growth indices
+ momentum
A simplified version (four new factor plus a
momentum factor) still perform much better than
the Carhart model.
The new model greatly better predict stock returns and
better evaluate mutual funds performance
Improve R2 to 48%-64% from the 29% R2 of the

four-factor Carhart model
The biggest impact comes from a midcap factor
For mutual fund evaluations, the new model shows
5% per year impact on Fama-French and Carhart
alphas when comparing small and large-cap funds,
big enough to fully reversing the old conclusions
Data
1996 - 2005 US indices are from Standard and
Poors, Frank Russell, and Dow Jones Wilshire.
Stock data are from CRSP.
Paper
Type:
Working Papers
Date:
2008-11-30
Categor
y:
Title:
Author
s:
Angelo Ranaldo
Source: Swiss National Bank working paper

Link:
http://www.snb.ch/n/mmr/reference/working_paper_2007_03/source/working
_paper_2007_03.n.pdf
Summa
ry:
Domestic currencies exhibit a time-of-day effect where they depreciate during

domestic working hours, and appreciate during foreign working hours. A
trading strategy based on this finding makes significant profit, even after
trading cost.
Reasons:
Domestic-currency bias: "traders located in one country tend to
hold assets denominated in the currency of that country"
opportunistically only when they need to (international
trade or speculation)
Domestic-time bias: "investors have a tendency to trade mainly
in their countrys working hours"
Consequently, during domestic trading hours, local traders buy

foreign currencies, which results in a selling pressure that pushes
the domestic currency down.
Exchange rate movements over 4-hour periods:
GMT
US
EST
(GMT
- 5)
Mai
n
trad
ing
acti
vity
in
Midni
ght to
4 am
7pm 11pm
Jap
an
8 am
to
Midda
y
3 am
- 7am
Eur
ope
4-8
pm
11am
- 3pm
US
Example: for Swiss Franc(CHF)/USD:

Similar observations for other currency pairs, all statistically
significant
Zero-investment strategy yields economically and statistically significant
profits.
For instance a strategy that is long (short) USD against Swiss
Francs during the peak European (American) 4-hour trading
period yields an annualized mean return of 12.38%
Even incorporating transaction costs yields sizeable returns
Day-of-the week effect: Thursday trading profits tend to be
higher
Data:
The database provided by Swiss-Systematic Asset Management
SA, Zurich and includes spot exchange rates for: CHF/USD,
DEM/USD, EUR/USD, JPY/EUR and JPY/USD.
Different sample periods for different currencies that span
January 1993 - August 2005.
Tick-by-tick FXFX Reuters midquote price (the average price
between the representative ask and bid quotes).
Paper
Working Papers
Type:
Date:
2008-11-30
Category:
novel strategy, funds, Change of institutional ownership, independent

Title:
Independent Institutional Investors and Equity Returns
Authors:
Yawen Jiao and Mark H. Liu
Source:
Link:
http://www.fma2.org/Texas/Papers/IndepInstandEquityReturnsJan2008.pdf
Summary: This paper improves the institutional ownership factor. It shows that the
predictive power of institutional ownership is mainly driven by independent
institutional investors, as opposed to gray institutional investors.
Definitions:
Independent institutional investors: those that have no
existing or potential business relationships with the firms in
which they invest. These are mainly investment advisers and
investment companies
Grey institutional investors: mainly bank trust departments
and insurance companies, which have various business
relationship with the companies they invest in.
Intuition: why independent institutions holdings are more
informative
Without other business connections with the companies they
invest in, independent institutions have stronger incentives to
monitor management than grey institutions do
Change of independent investor ownership can predict stocks
returns (Table 3, 4, 6)
Zero-investment strategy that buy (sell) the portfolio that
shows the highest (lowest) increase in ownership.
Statistically significant positive returns (~4% per annum,
~0.9% per quarter)
Similar portfolios based on grey institutional trading not
profitable
Most of the predictability is in firms where a high level of information
asymmetry exists
Measured by book-to-market ratios (growth versus value)
and analyst forecast error
Data:
Institutional holding data from Thomson Financials
CDA/Spectrum 13F filings for all common stocks traded on
New York Stock Exchange (NYSE), American Stock Exchange
(AMEX), and NASDAQ
From the first quarter of 1980 to the third quarter of 2006.

Stock-related data from CRSP and Compustat, and analyst
earnings forecasts from I/B/E/S
Paper
Type:
Working Papers
Date:
2008-11-30
Category
:
Title:
Authors:
Source:
Link:
/2008-athens/Muradoglu.pdf
Summar
y:
The paper confirms previous findings that low leverage implies higher
expected returns, and further shows that in UK market, abnormal returns
increase with average industry level leverage.
Definitions:
Firm level leverage is defined as (market value of total debt)
/ (market value of equity)
"Average industry level leverage" is defined as the average
leverage levels of the individual firms in an industry
Empirical findings contradict text-book theory of Modigliani and Miller
(1958)
This theory implies a positive relationship between leverage
and expected returns, because high leverage increases firms
riskiness
But previous study and this study find the opposite in empirical
study
At stock level, high leverage suggests lower future return in most
cases
, high leverage firms have
much lower abnormal returns (-0.99% per year) compared to
low leverage firms (6.28% per year).
Within most industries, high leverage means lower returns.
Only oil&gas and basic materials industries show a
positive leverage spread of returns: the high-low
portfolio return for basic materials is 3.91% per annum

and for oil&gas it is 8.82% (Table 2).
At industry level, average industry level leverage predicts higher
expected returns
It is tested as
return(stock i) = average industry leverage(industry which
stock i belongs to) + stock i leverage
Across all stocks in all industries, average industry leverage
significantly predict positive future returns, while firm level leverage is
significantly negative for cross-sectional returns (1.14 vs -0.22)
For technology, telecommunications, industrials, consumer services
and consumer goods industries, higher average industry level leverage
means significantly positive returns.
Only for basic materials and healthcare sectors, the average industry
level leverage affects returns negatively.
Data
1965 - 2004 data for stocks listed in London Stock Exchange
are from Datastream.
Paper
Type:
Working Papers
Date:
2008-11-30
Category
:
novel strategy, UK market, stock split, Global markets
Title:
The UK Equity Market Around The Ex-Split Date
Authors:
Elena Kalotychou, Sotiris K. Staikouras And Maxim Zagonov
Source:
European FMA 2008 working paper
Link:
/2008-athens/ZAGONOV.pdf
Summar
y:
UK stocks experience statistically significant abnormal positive returns on the

day of a stock split (or the day after the split)
Positive abnormal returns on split day (or in the case of 2:1 splits on
the day after the split)
Between 6.1% (5:2 splits) to 0.8% (2:1 splits) for various split
categories
Larger split factors, lower post-split share prices (relative to
the market average), lower stock-price volatility
Likely reason: higher liquidity attracts individual investors
Possibly reflecting a liquidity effect due to an expanded

shareholder base because of an increase in small shareholders
which find the lower priced stock more attractive
Post-split period shows an increase in the number of trades but
the share volume does not change in a statistically significant
way, implying a drop in the average shares per trade.
Such lower shares-per-trade suggests more involvement from
individual investors.
Data:
January 1990 - May 2007 period, firms based in the UK and
listed in the London Stock Exchange
Daily bid, ask and closing adjusted prices, market
capitalization, trading volume, number of trades and market
indices from Thomson DataStream
Paper
Type:
Working Papers
Date:
2008-11-05
Category:
novel strategy, Order backlog
Title:
Information in Order Backlog: Change versus Level
Authors:
Li Gu, Zhiqiang Wang, and Jianming Ye
Source:
EFMA 2008 working paper
Link:
http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETING
S/2008-athens/Wang.pdf
Summary: The higher the change of the order backlog / assets ratio (BKLG), the
higher the future expected returns(13% per annum). The level of the order
backlog/ assets ratio (BKLG), however, is less informative and only predicts
sales growth and profitability.
Order backlog is an intuitive measure with long history
Order backlog is the aggregate value of orders received from
customers less the revenue recognized.
It represents the unfulfilled portion of contractual orders and
is an important leading indicator of future sales and earnings.
Available through COMPUSTAT going back to 1969.
BKLG: (Level of order backlog) / assets
BKLG: (Change in the ratio of order backlog) / assets
Zero-investment portfolios based on BKLG yield significant profits
(Table 3)
Long (short) deciles of stocks with highest (lowest) BKLG

generates an average abnormal return of 13% per year
Results similar using raw return or size-adjusted returns, or
using annual regressions.
Level-of-order-backlog (BKLG) based portfolios do not perform
similarly
Robustness to value effect, accruals and analysts estimates
BKLG still shows up in two-way sorts based on BKLG and
Book-to-Market (BM) or Accruals (Table 4, 5)
While actual earnings are related to BKLG, analyst estimates
are not (Table 7), resulting in significant relation between
forecast errors and BKLG.
Implication: market appears to not price BKLG while it
clearly affects future returns
BKLG more informative than BKLG in predicting stock operating
performances
Such as sales growth (SaleGr), profitability (ROA), the total
earnings (Table 2)
The regression controls for lagged market-to-book ratio, the
change in the inventory-to-assets ratio, and
accruals-to-assets ratio.
Implication: most information regarding order-backlog is in
the change, not the level.
Comment
s:
1. Discussions
This paper presents an interesting strategy based on an intuitive story. Our
concerns are mainly related to its statistics treatment:
The 13% abnormal returns are only adjusted for size, although
regressions in table 5 shows the significance of BKLG after
controlling for B/M momentum. This at least leaves out the
momentum and size effect.
Potential size biases: Per table 1, the paper uses 28225 stock per
year observations during 1971-2006, this is about 700 stocks per
year, not a huge number as in other papers. But do these stocks tend
to be large or small?
2. Data
COMPUSTAT data from 1971-2006, includes firms that have reported
non-zero order backlog (COMPUSTAT item #98), also sales revenue,
assets, earnings for year t and t1, and t+1.
Stock returns from the CRSP database.
Analyst estimates from IBES
Paper Type:
Working Papers
Date:
2008-10-15
Category:
novel strategy, Commodity, less-than-a-month returns, stock

index returns, stock/bond allocation
Title:
Return Predictability Revisited
Authors:
Ben Jacobsen, Ben Marshall and Nuttawat Visaltanachoti
Source:
Link:
http://www.fma2.org/Texas/Papers/20071130TIO.pdf
Summary:
Past returns on commodities, measured at less-than-a-month

intervals, can predict monthly stock index returns in many
countries around the world. A trading strategy generates much
higher Sharpe ratio.
Methodology:
Single factor regression: Stock index returns
(month 0) = intercept + commodity return (prior 1
day, or prior 2 days, or prior 22 days)
22 commodities are tested as predictors
Stronger predictability for non-monthly intervals
For example, aluminums 17-day cumulative
returns predict equity market returns in 13 of the
17 international markets, yet aluminums monthly
returns predict in just 2 of the 17 markets
Table 5: short list of 12 commodities with best
predictive power
Predictions at monthly intervals are weaker
"A two standard deviation shock in the 17 day
cumulative return of aluminum results in a 2.1%
change in the return of the US equity market in the
following month, and this represents approximately
48% of market volatility."
Lagging monthly returns works for some commodities
E.g., the t-statistic for West Texas crude oil is -3.51
(- 4.65) when the monthly interval is lagged by 1
day (6 days)
Two proposed explanations:
Near term efficient market hypothesis: if markets
are fairly (though not perfect) efficient, information
will be impounded in the prices fairly fast, probably
in less than a month, thus using periods shorter
than a month can predict future returns better
Comments:
Slow information diffusion hypotheses: if it takes

markets a while to incorporate recent information,
using data with a delay can better predict future
returns than using most recent data can
Robust to several factors:
Holds in US markets and international stock
markets as well (Table 6)
Worked in recent years 1989/02 to 2008/02 (Table
7)
Robust to commonly-used business cycle variables
such as (Table 8 Panel A) lagged market return,
inflation, default spread, dividend yield, and market
volatility
Robust to Fama-French (1993) model plus liquidity
and momentum factors
Can be used to implement a trading strategy
Monthly trading where one invests in either t-bills
(if predicted market return is less than the current
t-bill rate) or the market (if predicted market
return is greater than the current t-bill rate) based
on the prediction from the model
Incorporates a flat transaction cost of 0.1% for
one-way trade
Compared with buy-and hold strategies, similar
return yet much lower risk. Sharpe ratios is much
higher (0.483 vs 0.076, Table 13)
1. Discussions
Though the paper is long (and somewhat extreme in robustness
checks), it is based on a simple idea, and the results seem to be
surprisingly robust.
The main innovation is using past data at non-monthly intervals.
We think both the Near term efficient market hypothesis (if
markets are fairly, yet not perfectly, efficient, information will be
reflected in prices in less than a month) and Slow information
diffusion hypotheses (it may take markets several days to
incorporate recent information) make sense. The same theories
should work for any other stock return predictors as well.
Our major concern is that, good paper profits do not translate
directly into a sound strategy. It is hard to imagine that
commodity prices can single-handedly explain the stock market
returns to such a large extent. (Table 11 shows R-squared as
high as 18.5% in the case of the US market, compared with 1%
R-squared of using dividend-yield to explain US market returns).
One would think stock investors do not pay all their attention to
commodities.
2. Data
For the period of 200303-200802, 22 commodities with the
largest world production over the last five years (as measured by
the Goldman Sachs Commodity Index) are covered.
Spot commodity data are from both Global Financial Data (GFD)
and DataStream. Stock market data is the MSCI total return
series in US Dollars for all developed markets that have been in
the MSCI from 1970 (17 markets in total). Macroeconomic data
from Global Financial Data (GFD).
Paper Type:
Working Papers
Date:
2008-10-15
Category:
novel strategy, maximum past returns, reversal
Title:
Maxing out: stocks as lotteries and cross-section of expected

returns
Authors:
Turan Bali, Nusret Cakici and Robert Whitelaw
Source:
SSRN working paper
Link:
Summary:
The paper shows that there is a negative relationship between the

stocks maximum daily return over the prior one month and
expected stock returns.
The intuition: investors preference of lottery-like playoffs
Investors have shown to prefer assets with
lottery-like playoffs
Higher MAX, lower returns:
MAX defined as the last months maximum daily
returns (MAX)
Each month, 10 portfolios are sorted by MAX
Decile10 - decile1 zero-investment portfolio has an
average value-weighted return of -1.03% per
month and Fama-French alpha of -1.18% per
month. (Table 1)
The MAX factor is robust to size, momentum,
liquidity, short-term reversal and book-to-market
(Table 4)
Control
Decile10
decile1 MAX
average return
(per month)
Decile10 - decile1
MAX Fama-French
Alpha (per
month)
None
-1.18%
-1.03%
Size
-1.22%
-1.19%
BM
-0.93%
-1.06%
Momentum
-0.65%
-0.70%
Liquidity
-1.11%
-1.12%
Short-term
reversal
-0.81%
-0.98%
Comments:
Similar (though weaker) results related to worst prior

month return (MIN)
Results are controlled for MAX
The return and alpha are positive and statistically
significant
Yet less significant than MAX
1. Discussions
Several questions we have are:
The rationale: prior month best/worst returns are not a
widely published number. Hard to imagine that an average
investor will deliberately calculate MAX before he invests.
Also the time horizon choice is somewhat arbitrary. Would
2-month, 6month MAX also work?
The decile10 - decile1 portfolio spread is insignificant for
equal-weighted portfolio returns, which suggests that the
effect is much stronger for large stocks. This is a bit
surprising.
Table 3 shows that high MAX portfolios have higher
market betas, lower past returns and are much more
illiquid. Therefore the results might be manifestation of
other factors.
Table 8 shows that MAX factor has the same loadings as
the idiosyncratic volatility, would be interesting to further
test the relationship.
2. Data
CRSP and COMPUSTAT tapes are used for the sample period
1926-2005.

Paper Type:
Working Papers
Date:
2008-10-15
Category:
novel strategy, Time-varying betas, conditional beta
Title:
The Conditional Beta and the Cross-Section of Expected Returns
Authors:
Turan Bali, Nusret Cakici and Yi Tang
Source:
FMA working paper
Link:
http://www.fma.org/Orlando/Papers/Conditional_Beta.pdf
Summary:
The paper shows that higher conditional betas predict higher

expected returns.
3 measures of conditional betas
For each stock, realized betas are estimated using
the daily returns within the month according to
CAPM.
Conditional betas based on 3 different assumptions
of time-series persistence of realized betas:
AR(1) and MA(1) measures estimate the realized
betas based on assumption of constant realized
beta-volatility.
GARCH(1,1) measure estimate the realized betas
allowing for conditional heteroskedasticity.
Higher conditional betas, higher 1-month expected return
(Table 3)
Portfolios sorted by conditional betas show negative
expected return spread.
Portfolios sorted by estimated conditional betas show
significantly positive average returns and CAPM
alphas.
Return
spread
(% per
month)
Realized
betas
Estimated
with MA(1)
Estimated
with AR(1)
Estimated
with
GARCH(1,1
)
Portfolio
10-1
average
return
-0.49
0.74
0.78
0.92
Portfolio
-0.48
0.50
0.53
0.60
10-1
CAPM
alpha
Comments:
Only GARCH(1,1) conditional betas have longer term

(>1month) positive predictive power
Portfolio 10-1 average return spread and
Fama-French alpha spread are higher for smaller and
high BM stocks.
Higher GARCH(1,1) conditional betas have higher
from 1-month to 12-month ahead out-of-sample
average return and CAPM alphas
The predictability decreases as out-of-sample
horizon increases (0.71% per month CAPM alpha for
1 month-ahead returns vs. 0.43% per month CAPM
alpha for 12-month).
Intuition: beta should be time-varying
Unconditional CAPM is based on the assumption that
stock betas are constant through time.
In reality, the beta should be time-varying
1. Discussions
Our concerns:
One finding that troubles us is, the three conditional beta
measures are used to simulate realized beta, but the return
predicting results are reversed for MA/AR/GARCH and
realized beta (ie, negative for realized beta, and positive for
predictors). This looks fairly strange to us and casts doubt
on the soundness of these conditional beta measures.
Realized betas are calculated with respect to the CAPM only,
and not for accounting for other cross-sectional factors such
as Fama-French model or momentum.
Robust return predictability only exists for GARCH(1,1)
conditional betas, which means that conditional
heteroskedasticity in time-varying betas is the crucial
element for return predictability. This result can be driven
by conditional heteroskedasticity in returns instead.
Only equal weight portfolio results given, so the results may
be subject to cap bias.
2. Data
CRSP for stock returns and COMPUSTAT for firm-level accounting
variables are used for the period 1963-2004.
Paper
Type:
Working Papers
Date:
2008-09-25
Categor
y:
novel strategy, macro factors, Labor hiring, investment
Title:
Labor Hiring, Investment and Stock Return Predictability in the Cross Section
Authors: Santiago Bazdrech, Frederico Belo and Xiaoji Lin

Source:
SSRN working paper
Link:
Summar
y:
The paper shows that 1) higher firm level labor hiring rates and/or 2) higher
investment levels predict lower stock returns.
Lower hiring and investment levels, higher expected returns:
Investment is measured as (Capital Expenditures) / (Property,
Plant and Equipment)
Hiring rate is measured as (Net employee change) / (Total
number of employees)
Proposed explanation: over-investment in labor and capital expenditure
destroys value
High hiring rates result in labor search and training costs
The negative effect of investment rates on returns is only strong
for capital intensive firms and it again brings extra costs on
adjusting to new technologies
Robustness to Fama-MacBeth style factors (Table 3)
The predictive power of hiring and investment rates are robust
to size, BM, momentum, accruals, share splits, asset growth
and profitability
Both factors are stronger than size and BM
The predictive power is stronger in the latter half of the sample
(1986-2006)
Comme
nts:
1. Discussions
Our concerns are mainly related to the extra alpha that these two factors can
add to typical value factors. Two findings worth note on this point:
Both hiring and investment rates seem to increase the exposure to
market and Fama-French factors. The market, SMB and HML loadings
increase with the hiring and investment rates monotonically, which is
not healthy for the robustness of the results (Table 8).
After the inclusion of BM factor in regressions, the t-stat for labor hiring
is still significant for hiring, though less so for the investment factors.
2. Data
Labor and other stock-specific data are from CRSP-COMPUSTAT merged tapes
for 1965-2006 time period.

Paper
Type:
Working Papers
Date:
2008-09-25
Categor
y:
novel strategy, Social rating factors, Socially Responsible Investing (SRI)
Title:
The relationship between social rating factors and stock returns
Authors: Dinusha Peiris, John Evans and David Gallagher

Source:
SSRN Working paper
Link:
Summar
y:
The study shows that social ratings scores imbedded in the Domini 400 index
can predict relative stock returns.
Socially Responsible Investing (SRI) index is measured using several
social/ethical factors:
Including corporate governance, diversity, employee relations,
environment, human rights and product quality.
Provided by Domini 400 social index, which is made up of a
total SRI score, and scores on employee relations, environment,
human rights and product quality
Higher SRI score, higher risk-adjusted returns (except for corporate
governance score)
Likely reasons for the better performance:
Higher stakeholder satisfaction corresponds to higher expected
returns on the cross-section of stocks
More socially responsible investment and operation techniques
is not fully priced by the financial markets
Commen
ts:
1. Discussions
We think that this SRI strategy may have a rather strong size bias and sector
biases. Domini index exists only for large stocks in certain industries (alcohol,
tobacco, gambling, weapons and nuclear power industries are excluded).
Nonetheless it may be used as a new data source.
For all the ratings criteria, the high score portfolios have significantly higher
momentum loadings than the low score portfolios, which raises the question
whether the results are the manifestation of the momentum factor.
2. Data
SRI scores are from Domini 400 social index. Stock-level return and
accounting variables for the time period 1991-2006 are from COMPUSTAT and
CRSP
Paper Type:
Working Papers
Date:
2008-09-25
Category:
novel strategy, Investor sentiment, earnings-based trading

strategies
Title:
Investor sentiment, Post-earnings announcement drift and

accruals
Authors:
Joshua Livnat and Christina Petrovits
Source:
SSRN working paper
Link:
Summary:
The paper finds that profitability of earning and

accrual-based strategies are a function of prior
periodsinvestor sentiment
Sentiment measured using six factors
Baker and Wurgler (2007) composite sentiment
index is derived through a principal component
analysis of the six measures: closed end fund
discount, NYSE share turnover, number of IPOs,
first-day returns on IPOs, equity share of new
equity and debt issues, and dividend premium.
Key findings: good news stocks (e.g., stocks with positive
earning surprises, or low accruals) perform better
following pessimistic period
Returns of positive
earnings surprise
stocks
Following
optimistic period
Following
pessimistic period
Lower
Higher
Returns of low
accruals stocks
Lower
Higher
Analyst forecast
revisions (
number of upward
revisions - number of
downward revisions)
Lower
Higher
Excess returns
around the
preliminary earnings
announcements
lower
higher
Likely reasons: Investors under-react to information

contrary to the prior period market sentiment
When market sentiment is pessimistic, investors
tend under-estimate good news (ie, positive
earnings surprise, low accruals)
Paper
Type:
Working Papers
Date:
2008-09-25
Category:
novel strategy, Trading Volume, US and East Asian market, Global markets
Title:
Institutional Ownership, Market States and the High-Volume premiums
Authors:
Zhaodan Huang, James B. Heian, Ting Zhang
Source:
FMA working paper
Link:
http://www.fma2.org/Texas/Papers/High_volume_premium_US_Int_08.pdf
Summary:
Higher trading volume, higher returns in US and East Asian stock

markets.
The strategy is to long (short) the high (low) trading volume
stocks
Rebalance every week, and the profit is 65 bps per week

during 1963-2007.
Significant positive excess returns only during the first
month of the holding period.
Stocks with the lowest volume happen to be small stocks.
Robust check
Profitability is robust to size
Profitability gets stronger for stocks with high institutional
ownership.
Why institutional holdings matter: institutional ownership is
related to high trading volume, and they also tend to be
more rational and informed traders compared to individual
investors.
Profitability a function of market status and geographic regions
Stronger in down-markets compared to up-markets.
In East-Asian markets the volume-premium only exists for
large stocks, contrary to US market
Paper
Type:
Working Papers
Date:
2008-08-13
Category
:
novel strategy, Price reversals, analysts target price
Title:
Short run reversals in the market for large stocks
Authors:
Zhi Da and Ernst Schaumburg
Source:
Kellog Business School working paper
Link:
http://www.kellogg.northwestern.edu/faculty/schaumburg/htm/ResearchPape
rs/TargetPrice.pdf
Summar
y:
The paper shows that for large cap US stocks, an industry-neutral target
price implied expected return" strategy can predict short-run price reversals,
much better than using past return metrics.
Definition of target price implied expected return" (TPER)
TPER = (the consensus 12 month ahead target price) / (current
market price) 1
Likely reason: TPER can differentiate liquidity and fundamental driven
price moves
Large price move may be due to two reasons:
Commen
ts:
1. Liquidity driven, in which case consensus target prices

should not change, so TPER will change
2. News(fundamental) driven, in which case consensus
target prices may very likely change with stock prices,
so TPER will change less
Therefore, a large TPER ratio is a signal of price move caused
by liquidity events, which tend to reverse.
Sorting on the TEPR picks out stock reversals better than
sorting on past returns
Strong and robust empirical results, last for up to 1 month
Between 1999-2004, a TPER-based long-short strategy results
in excess return of 1.77%/month across S&P 500 stocks
The return predictability based on TEPR lasts up to 1 month
The long-short strategy is mostly profitable in the first 2-weeks
The results are robust to transaction cost, a short-term price reversal
factor and risk factors
The five-factor adjusted alpha is 2%/month
The spread portfolio only loads significantly on market and
momentum factors
Similar international evidence
As stated in footnote 11, the authors claim that the TPER
strategy worked in Japan from December 2001 to February
2006, and such strategy has very low correlation with that of a
conventional strategy based on P/E ratios.
1. Discussions
This is a fairly interesting paper based on an intuitive story, a less used
database, as well as solid robust check (e.g, turnover, short-term return).
The fact that the authors focus on large cap stocks, which many believe to be
most efficient group of stocks, adds to the power of the findings here.
Our concern is that it is based on a rather short time period (1999-2004). The
market may have gone through great changes since then, especially for
analyst-based strategies.
In a related paper which we covered earlier in 2006, The Value of Equity
Analysts Target Prices
(
), it is
found that a strategy that is long stocks with high TPER, and short stocks with
low TPER can generate significant returns in longer horizon.
2. Data
First call database for target prices of analyst forecasts for the period
1996-2004. CRSP and NYSE TAQ databases are used for stock price data and
COMPUSTAT for accounting variables. Remaining analyst forecasts are from
IBES.
Paper Type:
Working Papers
Date:
2008-08-13
Category:
novel strategy, Intangible Returns, Accruals, Return Reversal
Title:
Intangible Returns, Accruals, and Return Reversal: A Multi-Period

Examination of the Accrual Anomaly
Authors:
Robert J. Resutek
Source:
SSRN working paper series, 2008
Link:
Summary:

the well-documented accrual effect can be
subsumed by "intangible returns" from the period prior to accrual
formation.
Definition of intangible returns
Defined as the returns not explained by accounting
measures
Intuitively, it reflects investors anticipation of
future growth not yet captured by accounting
measures
Study accruals in 3 periods, not 2 periods. PPIR is
short for prior period (ie, year t-5 to year t-1)
intangible return, CPIR is short for current period
(ie, year t-1 to year t) intangible return
period 1 (prior 4 years return):
ret (t-5, t-1) = book/market (t-5) +
log (change of book value) + issuance + PPIR
period 2 (formation year return) :
ret (t-1, t) = book/market (t-1) +
total accruals (TACC) + non-accrual growth
(N_TACC) + issuance + CPIR
period 3 (future 1 year return): ret(t, t+1)
PPIR is driving previous accrual results
Based on a regression of ret(t, t+1) = Book/market
components + PPIR
The return predicting power of current period
accruals are due to the relations between prior
period intangible return.
Once PPIR are controlled, the negative association
between future returns and current period accruals
disappears.
Accrual anomaly is a derivative of value/growth anomaly
Comments:
Both anomalies are driven by the intangible

returns.
Likely reason: return maybe driven by factors orthogonal
to accruals
Mechanically interpreting relationship between
future returns and current period accruals ignores
the fact that price can move for reasons that are
orthogonal to that captured by accounting metrics.
1. Discussions
This paper is related to the Market Reactions to Tangible and
Intangible Information,
(
,
reviewed in 2006/04/07 issue), where it is shown that changes in
BM due to changes in book equity (so-called tangible
information) do not predict returns, but changes in price
unrelated to changes in book equity (intangible information)
have marginal forecast power.
A logical question people may ask is: will PPIR predict formation
year return, Ret(t-1, t), as well? It would be see why not if the
proposed reason is that stock return maybe driven by factors
orthogonal to accruals.
2. Data
Listed US firms from CRSP/Compustat merged dataset for the
period of 1968 to 2005. Firms needs to appear on the
CRSP/Compustat merged database and have positive book value
of equity at fiscal year end for years t-5, t-1.
Paper Type:
Working Papers
Date:
2008-08-13
Category:
novel strategy, Leverage and return predictability
Title:
Leverage, Excess Leverage and Future Returns
Authors:
John Hughes, Jing Liu and Judson Caskey
Source:
SSRN Working paper
Link:
Summary:
The paper finds that for US stocks, high excess leverage means
lower future returns and low excess leverage means higher future
returns.
Definition of excess leverage:
Excess leverage is defined as (actual debt) / (debt
capacity). Debt capacity is the maximum amount of
leverage a firm can carry by not exhausting net
taxable income.
In other words, it is the ratio of the maximum
interest that could be deducted for tax purposes
before expected marginal benefits begin to decline,
to actual interest incurred.
Excess leverage depends on the firms future
uncertain earnings and its entire marginal
corporate tax curve.
Intuition: over-leverage may hurt stock returns
Excess leverage a firm is holding beyond its debt
capacity should hurt expected returns in the future.
Confirmed in empirical test:
A low debt-to-debt capacity (low excess leverage)
is shown to correspond to higher expected returns
(Table 7)
The four-factor alpha of the low excess leverage
portfolio is 0.6%/month higher than high excess
leverage firms
Comments:
1. Discussions
The results in the paper are based on the marginal corporate tax
curves, which is hard to estimate because of the uncertainty
about the future earnings and the assumptions related to interest
deductions. A factor that is based on estimating noisy firm-level
variables can be misleading and it might be a manifestation of
another phenomena.
The paper doesnt control for the effect of leverage on firm-level
betas. The established results can be due to the effect of time
varying betas with respect to the capital structure.
2. Data
CRSP for returns and COMPUSTAT for accounting variables for the
period of 1980 to 2006.
Paper Type:
Working Papers
Date:
2008-07-20
Category:
novel strategy, Liquidity
Title:
Liquidity and Investment Styles
Authors:
Jeff Brown, Doug Crocker, Stephen Foerster
Source:
Link:
kup/Steve%20Foerster1/$file/Steve%20Foerster1.pdf
Summary:

contrary to common wisdom,
higher
liquidityis associated with
higher
returns for S&P 500 and Russell
1000 stocks.
Two liquidity measures used
Average daily trading volume measured on a
3-month basis
Annualized trading volume as a percentage of
shares outstanding.
Higher liquidity, higher alphas
For a hedged portfolio that is long top 20% most
liquid stocks and short bottom 20% least liquid
stocks, the average monthly mean (median) return
difference is 0.67% (0.78%) for S&P 500 stocks
and 0.93% (0.71%) for Russell 1000 stocks.
In monthly regressions based on a 3-factor
Fama-French model, monthly alpha is 0.44% for
S&P500 stocks and 0.61% for Russell 1000 stocks.
Likely reason: liquidity measure may be a proxy for other
factors
"...
For example, during up markets it may indicate
increased interest and buying pressure in stocks
while in down markets it may indicate increased
selling pressure
".
Not subsumed by known factors:
Liquidity can in fact enhance market capitalization,
return momentum, and book-to-price measures.
Reversed during down markets
For the down-market period, 2000/09 to 2002/09,
most of the liquidity findings are reversed
Possibly implying that liquidity in this period is
dominantly associated with selling.
Comments:
1. Discussions
The findings here may be unique to large cap stocks, since this
study only covers large and liquid stocks in S&P 500 and Russell
1000. Consequently, one may ask whether size factor might be
the driving force of the premium, not liquidity itself.
Another recent paper Diminishing Liquidity Premium
(
,
also discussed in this paper) contradicts the finding of this paper.
This may be due to the fact that they cover a different universe
(ie, all NYSE common stocks from CRSP database). Their findings
is that the average annual liquidity premium has declined from
1.8% in the 1960-70s to statistically zero from 1970 onwards.
2. Data
January 1991 to January 2006 Stock price and trading volume
data are from Ford Equity Research.
Paper Type:
Working Papers
Date:
2008-07-20
Category:
novel strategy, Liquidity Premium
Title:
Diminishing Liquidity Premium
Authors:
Azi Ben-Rephael, Ohad Kadan and Avi Wohl
Source:
SSRN Working Paper
Link:
Summary:
Paper
Working Papers
Liquidity premium has declined over the period of

1964-2005. The study is based on all NYSE/NASDAQ
stocks.
The average annual liquidity premium has declined from
1.8% in the 1960s and early 1970s to statistically 0 from
1970 onwards
Financial instruments like ETF might be reducing the
sensitivity of returns to liquidity
Type:
Date:
2008-06-27
Category:
Novel strategy, risk, leverage change
Title:
Leverage change, debt capacity, and stock prices
Authors:
Jie Cai, Zhe Zhang
Source:
EFA conference Paper
Link:
8/S-1-95.pdf
Summary: The paper documents that quarterly change of firms leverage ratios can
significantly predict subsequent months returns: higher leverage change,
lower returns.
Leverage ratios is defined as the book-leverage:
Leverage = (book value of total liabilities) / (book value of total
assets)
The value-weighted decile portfolios sorted by the change in leverage
ratio in the previous fiscal quarter generates a 4-factor risk adjusted
annual return of ~6%. (0.5% monthly)
The negative effect of leverage-change on expected returns are
higher for the firms that have already high leverage ratios (i.e.,
those with low debt capacities):
The leverage change spread across value-weighted quintile
portfolios are -0.23% per month for low leverage companies,
and 0.74% per month for high leverage ones.
The high-low spread across value-weighted quintile portfolios
are 0.70% per month for small total asset portfolio companies
and 0.39% per month for the large total asset portfolio ones.
Increase in leverage ratio leads to lower future real investment: one
standard deviation increase in leverage ratio leads to a decrease of
6% in Tobins Q, 5.2% in investment rate and 0.54% in R&D for the
next quarters.
Likely reason:
This result supports the pecking-order theory where
increase in leverage reduces the future debt capacity, causes future
underinvestment and lower returns.
Comment
s:
1. Discussions
This paper documents a new cross-sectional pricing factor for common
stocks, which may be used to improve quant models. Our concern is, the
results might be weaker than they seem at first glance. Table 8 reports that
most of the return predictability comes from the long-term leverage
changes, which may lead people to challenge the effectiveness of the
strategy in shorter horizons.
2. Data
Monthly stock returns and market capitalizations are taken from CRSP for
1975 to 2002. All the firm characteristics are from COMPUSTAT quarterly
industry file
Paper
Type:
Working Papers
Date:
2008-06-27
Category: novel strategy, Asset Growth, Stock Return

Title:
Balance Sheet Growth and Predictability of Stock Return
Authors:
Louis K.C. Chan, Jason Karceski, Josef Lakonishok, Theordore Sougiannis
Source:
University of Florida Working Paper series
Link:
http://bear.cba.ufl.edu/karceski/research%20papers/balance_sheet_growth
_0408.pdf
Summary
:
This paper finds that growth in total assets can negatively forecast cross
section of future stock return, but such effect varies depends on what cause
the asset growth.
Asset growth is defined as TAGROW= (TA t/ TA t-1) -1
Firms that experience high growth in total assets earn abnormal
return of -5.88% in the following year and -4.85% in the second
year.
When categorizing total asset growth into several scenarios, key
findings:
M&A firms with high

TAGROW
High growth in
Property,
Plant and
Equipment
(PPE)
Abnormal return after

1 year
Abnormal return
after
2 years
-8.77%
-6.23%
-9.69%
-7.46%
Comment
s:
TAGROW funded by
equity
-9.28%
Insignificant
TAGROW funded by
debt
-7.09%
Insignificant
Growth in cash
+2%
Insignificant
Poor Corporate
Governance firms
with high TAGROW
-7.21%
Insignificant
1. Discussions
In an earlier paper, What best explains the cross-section of stock returns?
Exploring the asset growth effect
(
www.mgmt.purdue.edu/faculty/mcooper/assetgrowth_071305.pdf
), it is
shown that total asset growth can negatively forecast stock returns. This
paper further investigates the different drivers and scenarios of total assets
growth. This will help quant managers to evaluate the effect of different
component (i.e. cash, PPE) and refine their strategies.
One of our concerns is causality: its hard to conclude that the poor
performance is driven by total asset growth. For example, managers
overconfidence can lead to poor M&A decision. This will lead to two things
simultaneously - asset growth and poor stock performance, which might be
independent events but occurring concurrently.
2. Data
1968-2004 US Stock Return data from CRSP, Financial Information from
Compustat, M&A data from SDC
Paper Type:
Working Papers
Date:
2008-06-27
Category:
funds, novel strategy, Institutional Herding, institution entry and

exit
Title:
Institutional Herding: Destabilizing Buys, Stabilizing Sells
Authors:
Source:
SSRN working paper
Link:
Summary:
This paper finds that when institutions herd to buy (sell) a stock,
returns show reversals (continuations) in future two years, and
the extreme entry herding (both buy and sell) forecast future
negative returns.
Herding is measured as
Herding measure = (total number of net institution buyers) /
(total number of net institution buyers and net sellers.
Both institution entry (when institutions first establish a
position in a stock) and exit (when they sell the entire
holdings of a stock) herding by institutions result in
negative
returns in the next two year window.
Stocks that experience extreme entry buy herding decline
by about 5% over two years; those that experience
extreme exit sell decline by about 6% over the same
horizon
Return reversals following buy herds are the result of the
temporary price impact of institutional trading.
Institutions with good stock-picking skills exploit reversals
following buy herds, mostly at the expense of individual
investors. This reversal phenomenon is not observed
following sell herds possibly since institutions face short
selling constraints.
Comments:
1. Discussions
As in many study, the results are stronger for small stocks. This
is where transaction costs would play a bigger role in establishing
and closing positions due to relative illiquidity of these stocks.
One somewhat puzzling result that we cant explain is that both
entry buy and exit sells have negative abnormal returns; -5%
and -6% respectively over the two years following herding.
2. Data
13F filings of institutional investors from Thomson Financial
covering the period 1980 - 2005.
Additional data comes from CRSP and Compustat.
Paper Type:
Working Papers
Date:
2008-06-27
Category:
Novel Strategy
Title:
Exploitable Predictable Irrationality: The FIFA World Cup Effect on

the U.S. Stock Market
Authors:
Guy Kaplanski, Haim Levy
Source:
SSRN Working paper
Link:
Summary:
We think this strategy is a result of data snooping, but just for

your information (and entertainment):
The paper is based on the idea of negative psychological
effects of losing in soccer games on investors and
consequential abnormal negative returns in the US market
during the past 15 soccer World Cups.
Although soccer is not popular in US, the effect of foreign
traders is shown to have a large impact on the stock
market: 304 event trading days had an average annual
return of -27.7% compared to 16.1% average return of
14,379 non-event trading days
The results are robust to day of the week effects, previous
returns, the season of the year the world cups are played
in and the beginning of the taxation year. But there is no
control for the foreign ownership in the US market, which
constitutes the main idea in the paper.
Paper Type:
Working Papers
Date:
2008-06-08
Category:
size, novel strategy, Low price stocks, small cap effect
Title:
Waiting for the Rise of the Phoenix
Authors:
Cam Hui
Source:
SeekingAlpha blog
Link:
http://seekingalpha.com/article/79507-waiting-for-the-rise-of-the
-phoenix?source=news_sitemap
Summary:
This blog proposes buying Phoenix stocks (those with low

prices, bad recent performance and insider buying) after market
bottoms. Stock price is a simple factor and yet is not in most
quants models.
Phoenix stocks are those stocks
with low price
with very bad recent performance (70-90% off
from the 52-week high)
with high-leverage and near bankrupt
that are likely to benefit greatly from an improving
economy
with recent insider buying (at least lack of insider
selling)
During the one year after the four market lows from 1980
2008 (1982/08, 1990/10, 2001/09, 2002/10), the
small-cap Russell 2000 index outperformed the large-cap
S&P 500 by ~17%.
Large cap usually outperform during the initial period after
market bottom
In this perspective, the recent 2008/03 market low may
not be the true bottom since small cap out performed
during the following months.
Stocks with lowest deciles prices outperform top decile by
annual 110% after the 2002/12 market low, though
admittedly this study suffers from survivorship bias.
Comments:
1. Disucssions
The strategy is simple and intuitive. For us, one big challenge
seems to detect the market bottom. And if one can detect market
bottom, he probably is already very rich and does not need this
strategy :)
The other concern is that the author only tested 4 market
bottoms for the past 20 years.
Paper Type:
Working Papers
Date:
2008-06-08
Category:
novel strategy, statistic methodology, (combining) technical

trading strategies
Title:
A Combined Signal Approach to Technical Analysis on the S&P

500
Authors:
Camillo Lento
Source:
SSRN Working paper
Link:
Summary:
The paper finds that combining signals of three major technical

trading strategies (defined below) can increase profitability in
timing S&P index.
Definitions:
Strategy 1 - moving-average cross-over
rule(MAC-O): compares a short moving average to
a long moving average to identify a change in a
trend. It brings 1.3%, 1.9% and 1.1% excess
returns per annum for 1/50, 1/200 and 5/150 days
(first number the short moving average, the second
number the long moving average), respectively.
Strategy 2 - the filter rule: buys when the price
rises by f % above the most recent trough and sells
when the price falls f % below its most recent peak.
It has 5.2%, -2.4% and -1.8% excess returns per
annum for f values of 1%, 2% and 3%,
respectively.
Strategy 3 - the trading range breakout rule
(TRB-O): buys when the price breaks out above the
resistance level and sells when the price breaks
below the support level. It brings -2%, -0.7% and
-0.5% excess returns per annum for 50, 150 and
200 days of local max/min, respectively.
On a stand-alone basis and before transaction costs,
only
one strategy (1/200 day and 5/150 day moving-average
cross-over rules) is able to earn excess returns during
1950-2008.
After transaction costs,
all the three main technical
strategies perform significantly worse than benchmark:
On average the technical trading rules seem to be useful
in timing the S&P 500 index( note this is not excess
return):
10 day cumulative returns after buy signals are
on average 0.43% and 0.26% for sell signals.
The Combining Signal Approach (CSA) works, even after
transaction cost :
CSA uses 9 strategies based on the three technical
strategies each using three different parameter
choices, so 9 strategies in total.
CSA buys (sells) when a total number of n of 9
trading strategies gives the buy (sell) signal and
brings non-negative excess returns for all scenarios
tested in the paper: (excess returns before
transaction costs are 3.2%, 1.8%, 1.9%, 1.8%,
1.8% and 0%, and after the transaction costs are

1.6%, 0.0%, 0.1%, -0.2% and -2.6% for values of
n=2, 3, 4, 5 and 6, respectively).
Comments:
1. Discussions
The paper empirically documents the robust profitability of the
CSA approach which uses the signals from three technical rules in
a straight-forward manner.
Our concern is, as stated in the paper there are no theoretical
frameworks behind any of the technical trading rules, and the
parameter choice is completely arbitrary. The paper argues that
these problems can be mitigated by using the combined signal
approach, which seems doubtful to us.
2. Data:
S&P 500 index for the period of January 1, 1950 to March 19,
2008 are covered in the study.
Paper Type:
Working Papers
Date:
2008-05-01
Category:
Supplier/customer, industry returns, novel strategy
Title:
Market Segmentation and Cross-Predictability of Returns
Authors:
Lior Menzly, Oguzhan Ozbas
Source:
USC Working paper
Link:
http://www-rcf.usc.edu/~ozbas/SegMktCrPred.pdf
Summary:
The paper finds that there exists a return predictability across the
stocks in related supplier and customer industries. S
tocks in
customer and supplier industries may cross-predict each others
returns.
The likely reason: the supplier and customer industries
have correlated fundamentals. Due to the lack of informed
investors that take advantage of slow information diffusion
among industries, these industry stocks prices may lead
each other at different times.
Comments:
A trading strategy based on buying industries with high

returns whose supplier industries have high returns over
the previous month and selling the ones with low supplier
industries past returns yields an annual premium of 6.7%
and a Sharpe ratio of about 0.6.
The same strategy based on past customer industry
returns brings annual premium of 7.1% with a Sharpe
ratio of 0.6.
Orthogonal to known risk factors (Fama-French 4-factors):
The monthly intercepts from regressing customer
(supplier) portfolio on four factors is 0.61% (0.42%).
Two sources of gradual information leaking:
Institutional investors: institutional investors
increase (decrease) their holdings in customer
industries at the same time they increase
(decrease) their portfolio allocations in supplier
industries.
Analysts: Changes in earnings forecast for stocks
are positively related to the lagged changes of
earning forecasts in supplier and customer
industries
1. Discussions
This paper uses a new database (Benchmark Input-Output Survey
of the Bureau of Economic Analysis) and the economic story
sounds reasonable. Readers may remember other papers on the
customer-supplier relationship, most notably Economic Links and
Predictable Returns
(
).
Our concerns:
Causality: should customer industry lead supplier industry
or the other way around? The authors suggest that both
are possible. But people may argue that this should be
one-way: when customers business suffers, suppliers will
suffer for sure. The opposite is not necessarily true.
Small-cap bias: Table 6-panel B shows that the predictive
power of past customer and supplier industry returns
declines with analyst coverage, meaning that the strong
crosssectional predictability holds mainly for stocks with
low analyst coverage and high information asymmetry.
Therefore the implementability of the strategy can depend
too much on using stocks with high information
asymmetry.
2. Data
The Benchmark Input-Output Survey of the Bureau of Economic
Analysis is used to identify supplier and customer industries. The

paper also uses CRSP monthly returns and CRSPCOMPUSTAT
merged database for the period 1963-2005. I/B/E/S database is
used to construct measures of analyst coverage and earnings
expectations. Thomson Financials 13F holdings are used to
construct measures of institutional ownership.
Paper
Type:
Working Papers
Date:
2008-05-01
Category: Novel strategy, investment-to-asset, earnings-to-assets

Title:
Neoclassical factors
Authors:
Lu Zhang, Long Chen
Source:
UBC conference paper
Link:
http://www.finance.sauder.ubc.ca/conferences/summer2007/files/NeoFactor
s07June.pdf
Summary
:
The paper finds that two new factors (investment and productivity) have
strong explanatory power on anomalies including momentum, financial
distress, profitability, net stock issues and valuation ratios.
Their model: Rj Rf = aj + bj MKT + ij INV + pj PROD + error
The investment factor:
defined as INV = investment-to-asset
can explain book-to-market, earnings-to-price ratios, and net
stock issues
earns an average return of 0.43% per month 1972-2006
The productivity factor:

defined as PROD = the earnings-to-assets
can explain short-term prior returns, negative average returns
with financial distress
earns an average return of 0.96% per month 1972-2006
Adding these two factors can better explain size and momentum
portfolios returns than CAPM and Fama-French model
It also better explains net stock issue effect than CAPM and
Fama-French models (regression alpha of -0.28% per month,
Comment
s:
whereas CAPM and Fama-French have significantly negative alphas of

-1.06% and -0.82% per month, respectively).
From the perspective of investment factor loadings, winner stocks are
more profitable than losers.
1. Discussions
The paper develops an interesting alternative to traditional multifactor asset
pricing models, and is easy to implement. Its relative success compared to
conventional model is certainly tempting for testing return predictability on
the cross-section of stocks.
It is interesting to test the known anomalies in this new perspective. For
example, the authors find that winners have higher loadings than losers on
both the low-minus-high investment factor and the high-minus-low
Our concerns:
Lack of strong rationale: There isnt a deep intuition or a theoretical
model behind the proposed empirical factors. As stated in the paper,
the relative success of the model is due to the high correlation of the
productivity factor with momentum and financial distress. Therefore it
is reasonable to argue that the model has an ad-hoc nature.
Questionable causality: Consequently, people may challenge the
causality and ask which factor is really the driver. Eg, is
investment-to-asset driving earnings-to-price? Also linking
momentum (a technical factor) and profitability seems intriguing and
a bit farfetched to us.
2. Data
CRSP and COMPUSTAT tapes for the time period 1972-2006.
Paper Type:
Working Papers
Date:
2008-05-01
Category:
Novel strategy, mispricing risk
Title:
Systematic mis-pricing
Authors:
Michael J. Brennan, Ashley W. Wang
Source:
Anderson School of Management
Link:
http://www.anderson.ucla.edu/documents/areas/fac/finance/1-07.pdf
Summary:
This paper finds that stocks with greater mis-pricing risk earn higher
excess returns. A long-short strategy based on this measure
generates 8% risk-adjusted returns.
Mis-pricing risk is measured with regard to Fama-French
3-factor model (FF3).
Mis-pricing risk (t) = expected (error of FF3 forecast of
return t+1) = expected (stock return (t+1) - FF3
forecast stock return (t+1))
In more technical terms, such difference is assumed to
follow an AR(1) process, and is estimated from a
Kalman filter applied to the residuals associated with
the Fama-French three factor model.
Such mis-pricing risk is correlated with firm characteristics:

negatively with size, positively with growth, positively with
stock price level
A strategy that is long (short) stocks with high (low) risk,
generates a risk-adjusted profit of 0.75% per month (9%
annually)
The spread in risk adjusted returns between high and low
systematic mis-pricing portfolios is 0.70% per month (8.5%
annually) when controlling for average aggregate mis-pricing
levels.
Aggregate mis-pricing is robust after controlling for size,
momentum, beta, value, and liquidity risk.
Comments:
1. Discussions
The mis-pricing measure reminds us of the idiosyncratic volatility
(IV), which has been a popular and debated topic. In fact, both
measures are related to residuals of asset pricing models. The
difference is that IV is defined as the volatility of such residuals,
whereas the mis-pricing beta measure is the expected value of such
residuals. Some academics reported high IV, low returns, which
seems counter-intuitive and is not inline with the findings of this
paper as well.
Our concerns:
Impact of momentum: FF3 does not include momentum, so it
is perfectly plausible that the mis-pricing individual measure
found in this paper just represents common sensitivity to
excluded known factors like momentum.
Impact of small stocks: the findings that the mis-pricing risk is
much higher for small, high growth and low price stocks are
alarming. This may suggest that paper profits documented in
the paper may be illusionary and may not be realizable by
investors. An interesting extension is to repeat the test in

large cap, higher quality stocks.
2. Data
Individual stock return data is from CRSP, and includes all the stocks
listed on NYSE, AMEX, and NASDAQ, in the period of
1962.01-2004.12. The market, size, book-to-market and momentum
factors, and the one-month Tbill are obtained from Kenneth Frenchs
website. Several measures of market liquidity are taken from WRDS.
Paper
Type:
Working Papers
Date:
2008-04-09
Category:
Company pricing power, novel strategy
Title:
Deep habits and the cross-section of expected returns
Authors:
Jules H. Van Binsbergen
Source:
Link:
http://faculty.chicagogsb.edu/workshops/finance/pdf/binsbergen.habits.pdf
Summary:
For firms that produce goods whose demand is relatively stable (i.e, low
demand elasticity, indicated by larger product price increase), their stocks
on average yield 6% lower annual return. The reason: these firms are less
risky, since they may easily increase prices to adjust for macro-economy
downturn
In more technical terms, such products have a low consumption
surplus ratio, or, their consumption level is closer to the habit level
Consumer demands for these goods remain strong even if
consumers income decreases, since consumers are very unwilling to
scale back on such goods. As a result, it is easier to producers to
increase prices and adjust for downturn
By contrast, in economic downturn, producers of goods whose
consumption level decreases greatly (i.e., high income elasticity
goods) may suffer more earning drop since their demand drop more.
Hence their stocks are riskier and return should be higher.
Portfolios based on recent price changes, as measured by the
industry level producer price index (PPI), creates a significant return
spread of 6%
Such return spread cannot be explained by unconditional
CAPM or four-factor model
Such return spread decreases when the pricing is done with

respect to CAPM and increases once Fama-French and
momentum factors are included, since recent price decreases
correlate negatively with the book-to-market factor.
Comments
:
1. Discussions
This paper may help practitioners improve their industry-allocation
strategies. Our concerns:
Applicability on service industries: PPI is mainly designed for
industrial goods-producing companies and its applicability on the
companies in service sectors is questionable.
Value tilt: the author documents that the portfolio formed based on
price changes has a value tilt, the loading of the DMI portfolio on
the book-to-market factor is negative and statistically significant.
Sector bias: producers of low demand elasticity goods likely to
concentrate in certain sectors like consumer staples
This paper can be viewed as a (more general) extension of a related paper
we covered back in
2006, Durability of Output and Expected Stock Returns
(http://w4.stern.nyu.edu/salomon/docs/conferences/Gomes_Kogan_Yogo.p
df), where it is shown that since the consumption of durable goods is much
more cyclical than services/non-durables, the stock returns of durable-good
producers higher since they are exposed to more systematic, business-cycle
risk.
2. Data
1983 - 2005 output prices are taken from Producer Price Index (PPI)
Program and CRSP tapes are used for return data. 4-factor returns are
taken from Kenneth Frenchs website.
Paper Type:
Working Papers
Date:
2008-04-09
Category:
Fortune magazine Admired (Despised) companies, company

reputation, novel strategy
Title:
Affect in a Behavioral Asset Pricing Model
Authors:
Meir Statman, Kenneth Fisher, Deniz Anginer
Source:
SSRN working paper
Link:
Summary:
This paper finds that the annual Fortune magazine list of Most
Admired (Despised) companies can be used as a contrarian signal
and the expected return is 4.6% per year.
Such findings support
the affect pricing theory which says that investors tend to rate
stocks based on their feelings.
The list is based on survey responses from 10,000+ senior
executives, directors and security analysts who rate the
eight attributes of reputation for 10 largest companies in
their industries.
This paper focuses on one attribute score: the Long-Term
Investment Value (LTIV) rating score given by those
surveyed, since it reflects investors perceptions.
Despised Companies on average outperform Admired
stocks by 4.6% per year (when portfolio is rebalanced
every four years)
The average annual return of Admired (Despised)
stocks during 1982-2006 is 15.1% (19.7%), based
on a portfolio that is rebalanced every four years.
When rebalance period is 2- or 3- years, the spread
is 3.4% and 1.5% respectively.
The likely reason: investors prefer stocks with
positive images, and these preferences (over) boost
the prices and depress the future returns of such
stocks.
The Despised stocks tend to be riskier: compared with
Admired stocks, they have higher betas, higher P/E and
P/B, smaller market capitalizations, lower growth rates,
and lower returns on assets.
However investor tend to have a wrong perception of good
stocks: based on a 2007 survey of high-net worth clients,
an average investor tend to think that stocks of admired
companies have low risk and high expected return, which
suggests that investors perception is dominated by
emotion, not finance theory.
Comments:
1. Discussions
It is interesting to see that investors treat stocks media coverage
differently: they seem to overreact to the admired company list,
but under-react to other lists, such as Employee Satisfaction
survey list, also published by
Fortune
. Our previous issue covered
Does The Stock Market Fully Value Intangibles? Employee

Satisfaction and Equity Prices
(
http://w4.stern.nyu.edu/salomon/docs/conferences/edmans.pdf
),
which finds that Employee
Satisfaction (based on the membership of
Fortune
magazines
100 Best Companies to Work For in America) can significantly
predict stock returns.
As with other media coverage based strategies, we are concerned

with the statistic significance, particularly since each year only 20
companies can make the
Fortune
list for admired companies.
Besides, the return spread (3.4%, 1.5% and 4.6% for 2-, 3-,
4-year rebalance portfolio) is relatively low. When adjusted for
risk-factors (table 2), these paper returns is even lower (1.5%,
0.5%, 2% respectively)
2. Data
1983-2006 Despised and Admired companies list is from
Fortune
magazine. The survey is based on responses from 10,000+ senior
executives, directors and security analysts who rate the reputation
of ten largest companies in their industries.
Paper Type:
Working Papers
Date:
2008-04-09
Category:
Analysts, UK markets, global markets, Novel strategy
Title:
Sell side school ties
Authors:
Lauren Cohen, Andrea Frazzini, Christopher Malloy
Source:
Link:
http://faculty.chicagogsb.edu/andrea.frazzini/pdf/malcofrazII.pdf
Summary:
This paper finds that (before Reg-FD) equity sell-side analysts

that share educational backgrounds with firms' board members
have informational advantages.
More specifically, buy
recommendations from school-tied analysts outperform
recommendations from non-school-tied analysts by 5.4%
annually.
Worked for buy recommendations:
A portfolio that is long
on stocks after buy recommendations by school-tied
analysts and short on stocks after buy recommendations
by non-school-tied analysts earns 0.45% per month (5.4%
annually), the risk-adjusted return is 0.40% per month.
Did not work for sell recommendations:
In the case of sell
recommendations, there is no difference in the raw returns
Comments:
of portfolios associated with sell recommendations by

analysts with and without school ties.
When the long-short portfolio consists of stock upgrades
only, the profit is 0.35% and 0.30% per month, when the
ties are related with (i) both senior management and
board of directs and (ii) senior management only.
Only worked before Reg-FD:
In the Pre-Reg FD period, the
return premium from school ties is 8.16% per year, while
for the post-Reg FD period, the return premium is nearly
zero and non-significant.
Same pattern in UK:
there is a large and significant school
tie premium associated with buy recommendations:1.87%
and 1.67% per month in raw and abnormal returns,
respectively.
1. Discussions
These are very interesting findings, especially when UK market
shows similar pattern. But we are not convinced by the economic
intuition of the story:
Though no one would has statistics, analysts would have
far more opportunity to meet a companys management
than board members.
Even if analysts meet board members, and such board
members know insider operational information, dare the
board members disclose insider information to someone
merely because they went to the same school?
We covered a related paper (whose rationale we do not agree),
The Small World of Investing:
Board Connections and Mutual Fund Returns
(
http://faculty.chicagogsb.edu/andrea.frazzini/pdf/w13121.pdf
),
where the same authors show that portfolio managers tend to
overweight stocks whose corporate board members share
education network, the likely reason is that such portfolio
managers may get more information than public. A strategy that
is long connected stocks held by fund managers, and short
nonconnected stocks generates 8.4% per year.
In a related paper by the same authors, Valuing Reciprocity,
(http://www.econ.yale.edu/~af227/pdf/malcofrazIII.pdf), it is
found that analysts who write good recommendations about the
firm are more likely to get appointed to board of directors of the
same company later on. The positive bias (13% in percentage of
strong buys) in the recommendations and long-term growth
forecasts of board-appointed analysts causes higher (though
limited) abnormal stock returns in the following year (2%).
2. Data
I/B/E/S contains all sell-analysts who provide at leas one
recommendation on domestic stocks.
The analysts' educational backgrounds are obtained from
http://www.zoominfo.com
and BrokerCheck search engine
available on the Financial Industry Regulatory Authority website.
Biographical information for boards of directors and senior
company officers is provided by Boardex of Management
Diagnostics Limited.
Accounting and stock return data is from CRSP/COMPUSTAT. The
sample includes educational background data on 1,820 analysts
issuing a total of 56,994 recommendations on 5,132 stocks
between October 30th, 1993 and December 20th, 2006.
Paper
Type:
Working Papers
Date:
2007-12-03
Category:
Liquidity, UK, Global markets, novel strategy
Title:
Cross-Sectional Stock Returns in the UK Market: the Role of Liquidity Risk
Authors:
Source:
Link:
S/2007-Vienna/Papers/0680.pdf
Summary: This paper examines the role of liquidity on stock return for UK stocks
from1987-2004.
Liquidity is measured using the absolute change in stock
price per unit of turnover (defined as the fraction of firm market
capitalization traded). Key findings:
Liquidity works well in UK
: stocks with highest decile of liquidity
outperform low liquidity stocks by a significant 18% annually on
risk-adjusted basis (size, value, momentum, and macroeconomic
factors)
Such liquidity factor is correlated with, but has extra explanation
power to the value factor
Size works opposite to US pattern
: stocks with largest decile of
market cap outperform small stocks by a insignificant 5.7% on
risk-adjusted basis
Comment
s:
Value works in UK
: stocks with highest decile of book-to-market ratio
outperform low book-to- market stocks by a significant 10% on
risk-adjusted basis
1. Why important
This paper illustrates the point that, although most quantitative financial
studies originate in the US market, one should never take for granted that
all quant factors work universally.
2. Data
DataStream.
Paper Type:
Working Papers
Date:
2007-04-17
Category:
Novel strategy
Title:
How to Make Money in a Bear Market: Learning from Options and

Futures Traders
Authors:
Devraj Basu, Roel Oomen, Alexander Stremme
Source:
Danish Center for Accounting and Finance conference paper
Link:
http://www.d-caf.dk/links.pdf
Summary:
This paper combines VIX and "hedging pressure" to build a

market timing strategy to optimally allocate assets between
stocks (S&P
500) and gold.
This strategy is shown to generate an

annual return thats ~14%higher than the buy and hold
strategy during 2000
"Hedging pressure" is
based on government data
(
www.cftc.gov
)., and
is
defined as
Hedging pressure =
sum of all non
hedging
long
future contracts) / (
sum of all non
hedging future contracts)

The reason is "hedging pressure" represents small investors view
of markets, and such investors tend to be wrong in market
timing.
Comments:
1. Why important
The CTFC database is not very widely used (as opposed to other
business cycle related, macro economicindicators), so hopefully it

will lead to new profitable strategy.
2. Data
2005 weekly returns on S&P 500 and gold are from the CBOE
(
www.cboe.com
).
Two predicators are used, "open interest" (the sum of all futures
contracts) and "hedging pressure (total long future positions
divided by total long and short positions) are from the CFTC
Commitment of Trader Report
(www.cftc.gov
). Futures are held
by 3 types of investors:
commercial traders(use future to hedge)
commercial traders(use future to speculate)
reportable traders(all others)
Consequently there are three measures of hedging pressure, and
the non reportable is shown to be most effective.
3. Discussions
Findings in this paper echoes those in paper Small trades and
the cross section of stock returns
(
http://gates.comm.virginia.edu/uvafinanceseminar/2006-Hvidkja
erPaper.pdf
), which shows that that stocks favored by retail
investors (small trader investors) tend to under perform. This
paper essentially says that agood time to sell stocks is when retail
investors are long sp500 futures.
Some concerns:
As the authors find, neither VIX nor hedging pressure can
predict returns but why the product of these two measures
can?
We are not sure whether this is a result of data snooping,
after all this paper covers a rather short period of time.
We are also struggling to find an economic story to explain
why "The VIX by itself provides a signal to change the
weight on the market while hedging pressure alone
indicates when to do it".
Seems the success rate of this strategy is tied to whether
we are in a bull or bear markets. But who knows if we are
in a bull (bear, or transition) market
The pattern of VIX changed drastically since 2003, a year
year result should be helpful.
Since VIX and hedging pressure indicates the investors risk
aversion level, one interesting extension is to test whether these
two predicators can forecast the relative performance of
value/growth stocks, or high beta vs low beta stocks.
Paper
Type:
Working Papers
Date:
2006-11-18
Category: Strategy, mutual fund holdings, funds, novel strategy

Title:
The Investment Value of Mutual Fund Portfolio Disclosure
Authors:
Russ Wermers, Tong Yao, and Jane Zhao
Source:
University of Maryland working paper
Link:
http://www.rhsmith.umd.edu/faculty/rwermers/holding_200610.pdf
Summary
:
The strategy:
long stocks that are overweighted (underweighted) by successful
(unsuccessful) managers,
short stocks that are underweighted (overweighted) by unsuccessful
(successful) managers.
The risk adjusted (size, b/p, momentum) annual return is 7%+. This
strategy has a low correlation with other known factors.
Comment
s:
1. Why important
This strategy is built on a convincing story that since skillful managers may
continue to pick better stocks,people can benefit from their skills by studying
their portfolio holdings.
The persistence of their good performance is substantiated by the findings of
Morningstar Mutual Fund Ratings Redux"
http://webpage.pace.edu/mmorey/publicationspdf/redux.pdf , where it is
shown that the highly rated Morningstar mutual funds tend to outperform
over the next few years.
2. Data
1980 2002 US equity mutual fund data (only include funds with the
investment objectives of aggressive growth, growth, or growth and income)
are from CDA/Spectrum and CRSP mutual fund database. Stock data are
from CRSP/Compustat, and analyst earnings forecasts are from IBES.
3. Discussions
We reviewed a related paper, "Portfolio Manager Ownership and Mutual Fund
Performance"
http://www.gsb.stanford.edu/FACSEMINARS/events/finance/Papers/ownperf
funds.pdf
which shows that fund manager ownership can predict fund
performance. This paper uses past performance as a predictor. We are

curious to see whether the combination of these two can help us pick better
funds and better stocks, especially when applied on more recent time period
(this paper only cover still 2002).
We are also wondering whether there will be seasonality: will this strategy
work better in certain quarters say September is the fiscal year end for most
mutual funds, will managers do differently in the third quarter each year?
Contrasting this paper with " Trader Composition and the Cross Section of
Stock Returns
which claims that
anomalies (momentum, value, earning surprise) are stronger in the stocks
with low FIT (fraction of institutional trading volume) in total volume, (since
institution investors have more information) it would be interesting if we can
refine FIT by applying it to trades of better funds.
Paper
Type:
Working Papers
Date:
2006-11-18

Title:
Authors:
Source:
Link:
Summary
:
The strategy:
Comment
s:
1. Why important

2. Data
3. Discussions
Performance"
funds.pdf

Stock Returns
which claims that
Paper Type:
Working Papers
Date:
2006-11-03
Category:
Strategy, Corporate Political Contributions, Novel strategy
Title:
Corporate Political Contributions and Stock Returns
Authors:
Michael Cooper, Huseyin Gulen, Alexei Ovtchinnikov
Source:
Owen School working paper
Link:
http://www2.owen.vanderbilt.edu/fmrc/mara/politicalcontributions.pdf
Summary:
This paper finds that companies that make more campaign

contributions significantly outperform otherstocks. This is more
evident for companies donating to Democratic candidates and House
candidates.
Paper Type:
Working Papers
Date:
2006-08-24
Category:
Strategy, convertible bonds, Novel strategy
Title:
Who Shorts? Convertible Bond Arbitrage, Liquidity Externalities

and Stock Prices
Authors:
Darwin Choi, Mila Getmansky, Heather Tookes
Source:
Link:
http://www.som.yale.edu/faculty/het7/ConvArb_Draft3_May15.pdf
Summary:
Short companies issuing more convertible bond, long companies

issue less convertible bonds. The 120-day excess shown to be
15.6% (0.13% daily return, table 4b panel B)
Comments:
1. Why important
The focus of this paper is on stock liquidity and price volatility, but
we think practitioners may be interested since we may develop a
relatively new strategy based on less used dataset.
This strategy makes sense to us since, when a company issues
convertible bonds, arbitrageurs like to buy such bonds and hedge
by selling company stocks. This simple mechanism will create
selling pressure on stocks in 1-3 months horizon.
2. Data
1991-2005 convertible debt issues (public, private and Rule 144a)
are from the SDC Global New Issues database. Monthly short
interest data are from the NYSE Stock pricing and accounting data
are from CRSP/COMPUSTAT.
3. Discussions
The authors show that convertible issuance has a negative impact
on stock prices, even when short-selling is controlled for. This
suggests that issuance news on average is predicting a
deteriorating performance although no direct result is given, we

would not be surprised if the strategy to short companies issuing
convertible bond, and long stocks with similar characteristic is also
profitable.
Two caveats:
1.) Sector and style-bias: we would not be surprised if the issuing
companies are concentrated in certain sectors and styles. Like
other strategies related to public market financing, some years will
see far more issuance than others.
2.) The universe of stocks issuing convertible bonds: this study
covers a sample of 1,356 such issues with an average market cap
of ~$3 billion, which means quite some issuing companies will fall
into the mid- small cap category.
Paper
Type:
Working Papers
Date:
2006-08-24
Categor
y:
Liquidity measure, emerging markets, novel strategy, Global markets
Title:
Authors: Geert Bekaert, Campbell R. Harvey, Christian Lundblad

Source:
Link:
http://faculty.fuqua.duke.edu/~charvey/Research/Working_Papers/W67_Liqui
dity_and_expected.pdf
Summar
y:
This paper proposes a liquidity measure for emerging markets based on the
proportion of zero daily stock returns. It is shown that the this measure can
predict future returns better than the alternative measures (e.g. turnover).
Comme
nts:
1. Why important
More money are moving into international stocks than ever, yet for quant
practitioners, international stock data are notorious for paucity and low
quality. We believe that the simple liquidity measure proposed in this paper
can be of help. The authors also discussed an asset pricing model, whose
factors include liquidity and the market portfolio, and the model can
differentiate between integrated and segmented countries and time periods.
2. Data
1993-2003 data of stock returns in 19 emerging equity markets (in local

currency) are from the Datastream research, country index data are from
Standard Poors Emerging Markets Database (EMDB).
3. Discussions
By using the zero-return measure to gauge liquidity, this paper seems to be
more useful to international managers who cover not just large cap universe.
Though the paper studies emerging market countries in S&P/IFC Global Equity
Market Indices, such countries have a large overlap with those covered in the
more popular indices (MSCI emerging markets).
Those more statistics-savvy may like the model developed in the paper, since
it can be applied to markets both integrated and segmented, reflecting the
fact that quite some emerging markets are going liberalization stage.
Paper Type:
Working Papers
Date:
2006-08-10
Category:
Strategy, Takeover targets, novel strategy
Title:
Takeover, Governance and the Cross-Section of Returns
Authors:
Martijn Cremers, Vinay B. Nair, Kose John
Source:
NYU working paper
Link:
http://w4.stern.nyu.edu/finance/docs/WP/2005/pdf/wpa05009.pdf
Summary:
Long stocks more likely to be take-over target (those with low

cash-adjusted-leverage) and shorts stocks less likely to be taken
over. The annual value-weighted risk-adjusted return is shown to
be 8% from 1980 - 2003.
Comments:
1. Why important:
2005-2006 is characterized by high cash holding level of many
public companies worldwide. Consequently, we are seeing a much
higher level of merger and acquisition. This paper offers a nice
framework to identify take-over targets and may be helpful to
quant managers.
2. Data
The authors use data from Investor Responsibility Research Center
(IRRC) to construct a take-over factor, which includes information
on stocks cash-adjusted-leverage, takeover defense, and public

pension fund holdings.
3. Discussion
As the authors discussed in the paper, smaller firms are more
likely to be targeted. In this sense we think this strategy may be
more relevant for small-mid cap quant managers.
We believe that this strategy will work far better in certain stages
of a business cycle - compared with these two years, 2001-2003
saw very light merger and acquisition activity. Also we would like
to see a decomposition of the portfolio return: how much of the
return comes from stocks that were actually taken over? And
whats the number of companies identified as take-over targets
were taken over by other companies?
The authors use cash-adjusted-leverage (CAL, defined as (debt cash)/total assets)) to measure likelihood of being a take over
target. We are curious to know what would be the result if we use
other more widely- used, popular measures (say, enterprise
value/ebitda, or combine leverage with past performance). A
consistent performance will be encouraging and help ease the
doubt of data mining.
Paper Type:
Working Papers
Date:
2006-06-15
Category:
Novel strategy, machine learning
Title:
Can Machine Learning Challenge the Efficient Market Hypothesis?
Authors:
Robert J. Yan, John Nuttall, Charles X. Ling
Source:
2006 FMA annual meeting paper
Link:
http://www.fma.org/SLC/Papers/cnPKR161m.pdf
Summary:
This paper presents a relatively easy-to-follow, machine-learning

based stock selection strategy, which uses past weekly stock
return and volume to forecast future stock return. The authors
claim that this weekly rebalanced strategy produces a significant
profit, even after limiting the universe to only the 30 largest
stocks and controlling for trading costs.
Comments:
1. Why important
This paper seems to find free-lunch in stock market! We

especially like the fact that the universe is limited largest stocks
where its generally harder to find profit.
2. Data
The data are from CRSP. At the beginning of each month, 300
largest market cap stocks are chosen to perform the strategy.
3. Discussions
Intuitively, the methodology presented is based on
pattern-recognition and adaptation. In the training phase,
different "predictor/stock return" patterns (prototypes) are
identified. In the forecasting phase, the return of each stock is
projected based on its pattern classification. A long-short portfolio
is then formed based on stocks forecast return.
In this case, we need to look carefully at what are the predictors
used. The paper uses three:
skip-day weekly return (lagged one week)
weekly return (lagged two weeks)
weekly growth in value (volume) (lagged one week)
Knowing that the devil is in details, at the first glance it still looks
like another volume-weighted short-term momentum and/or
mean-reversal strategy. A quant manager may already have been
using some variations.
Can this strategy really make money? We will need to look into
further details to make sure that profit is not driven by market
direction, market volatility, certain period, certain style or certain
sector/industries. Our guess is that this strategy will perform
worse when the market is very volatile, as its essence is that
recent patterns will repeat themselves next week.
Paper Type:
Working Papers
Date:
2006-06-15
Category:
Novel strategy, divergence of opinion, volatility
Title:
Divergence of Opinion and the Cross Section of Stock Returns
Authors:
Ginger Wu
Source:
Link:
http://www.terry.uga.edu/finance/research/seminars/papers/wu.pdf
Summary:
Long (short) stocks with low (high) divergence of opinion. It is

shown to yield an average annual alpha of 7%+. Here the
"divergence of opinion" is a measure developed in this paper based

on asset volume and volatility.
The story behind this strategy is that, since many stocks can not be
easily shorted, the higher the dispersion, the more likely that the
stock is held by fewer investors that favors more about this stock,
hence a higher likelihood of subsequent lower return.
Comments:
1. Why important
The beauty of this paper is that it proposes a generalized measure
of investors opinion divergence. The author claims that the new
measure is more reliable than existing proxies (eg. Analysts
dispersion and turnover), since it captures the divergence of opinion
among all investors, not just among analysts.
2. Data
Stock return and volume data are taken from the CRSP. The data on
analysts earnings estimates are from the I/B/E/S.
3. Discussions
This new measure, though certainly not the easiest to follow
mathematically, will intuitively move in tandem with price volatility
and trading volume. The power of this measure seems to come from
the statistic treatment, where the author uses simulated maximum
likelihood (SML) and thus isolates divergence of opinion from the
joint distribution of volume and volatility.
It is no secret that some quant managers are already using various
measure of divergence, most notably analysts estimates dispersion
and institution ownership breadth. The correlation between the new
and the old institution ownership breadth remains to be studied,
since the author is obviously trying to devise a measure of
all-encompassing all-investors ownership breadth".
A concern we have comes from data presented in Table I
(Regressions of Divergence of Opinion on Lagged Firm
Characteristic), which says to us that this "new" measure may be a
variant of short term turnover, and that this strategy may be merely
to long low volatility, high quality stocks.
Paper Type:
Working papers
Date:
2006-06-07
Category:
Title:
Authors:
Paul C. Tetlock
Source:
WFA 2009 program
Link:
Summary:
Less
reversal
by high volume
Volume matters
abnormal turnover
news
announcement days
Methodology
Data
from 1979 to 2007
Paper Type:
Working Papers
Date:
2006-06-02
Category:
Novel strategy, order flows
Title:
Lagged Order Flows and Returns: A Longer-Term Perspective
Authors:
Avanidhar Subrahmanyam
Source:
UCLA working paper
Link:
http://www.anderson.ucla.edu/documents/areas/fac/finance/07-0
6.pdf
Summary:
This paper shows that order imbalances (the aggregate net dollar
value of buy/sell orders for individual stocks) can forecast stock
returns up to two months: in mid-large cap universe, stocks with
negative order imbalances tend to outperform (but not so for
positive imbalance or small cap universe). This result is robust
after controlling for lagged returns and Fama-French factors
Comments:
1. Why important
We find this paper interesting because it develops, for the first
time, a weekly/monthly rebalanced strategy based on TAQ
database (which includes per trade information for individual
stocks such as bid/ask prices and sizes). We know that TAQ
previously was only used on very short-term (5-30 minute level)
strategies.
Again, we believe that the job of quant researchers/managers is
to detect statistic patterns using various databases. Its far easier
and more likely to develop a profitable strategy using a less used
database.
2. Data
Trades data for individual stocks are from the Institute for the
Study of Security Markets (1988 to 1992) and the Trades and
Automated Quotations database (1993 through 2002).
3. Discussions
One concern we have is why this should happen and why such
pattern will repeat itself next month. The rationale the author
uses is that the "inventory control effects span several weeks".
This certainly helps explain why the strategy would work better in
mid-large cap universe, but more data to support this assertion

will certainly help.
We note the author only used regression in this study, and did
not give a hedged excess return calculation for a back-testing
portfolio. A practitioner will certainly like to do such a study
before using such strategy.
Paper Type:
Working Papers
Date:
2006-05-19
Category:
Novel strategy, payout yield
Title:
On the Importance of Measuring Payout Yield: Implications for

Empirical Asset Pricing
Authors:
Jacob Boudoukh, Roni Michaely, Matthew Richardson, Michael R.

Roberts
Source:
NBER working paper
Link:
http://papers.nber.org/papers/w10651.pdf
Summary:
This paper tries to improve the traditional dividend payout yield

by using total payout ratio (dividends plus repurchases) and net
payout ratio (dividends plus repurchases minus issuances). It
shows that these two new ratios have significant predictability of
stock returns.
A portfolio of long(short) high(low) net payout ratio shows an
annual return of 4.4%, higher than the strategies based on
payout portfolio(3.3%), and dividend yield(2.1%).
Comments:
1. Why important
The total payout measure seems to be a logical candidate to
improve the dividend payout factor. After all, dividend and
repurchases are both ways to return cash to investors, and the
importance of repurchases has gone up dramatically these years.
Before the recent IRS (US tax authority) change on dividends
("Jobs and Growth Tax Relief Reconciliation Act of 2003"), from a
tax perspective, firms should prefer to use repurchases as
opposed to dividend, which are generally taxed at a higher rate.
2. Data
Data (84/07-03/12) are from CRSP and Compustat. Financial

stocks are excluded.
3. Discussion
How would the recent change on dividend tax rate change the
picture? A study of the recent performances of these two payout
ratios should be very interesting.
Can we make money based on this new factor? Whats the
correlation with a classic p/b value strategy? A look at figure 3 in
the paper tells us that the correlation is certainly not negligible.
The 4.4% annual profit seems not an entirely free lunch as its
just raw return without adjusting for Fama-French factors.
To incorporate this new factor in an existing quant model, we also
want to know when should we use this strategy? Studying the
correlation of its profit with macro factors (such as market return
and market volatility) will provide more insight.
Paper Type:
Working Papers
Date:
2006-05-19
Category:
Novel strategy, banking, sector-specific
Title:
The stock return predictability of the European banking sector
Authors:
George Leledakis, Christos Staikouras
Source:
2005 European Financial Management Association Meetings
Link:
http://www.efmaefm.org/efma2005/papers/49-christos_paper.pd
f
Summary:
This paper shows that certain accounting data (eg. non-interest

income to total operating income, loan-loss provisions to total
loans, loans to total assets) is predicative of European banks
cross section return. Most notably, a strategy to long (short)
European banks with small (large) loan-loss provisions to total
loans yield an annual return of over 8%.
Comments:
1. Why important
This paper is interesting for two reasons: first, it provides several
strategies that may be profitable when investing in European
banking stocks. Secondly, we believe that sector-level

quantitative models can be of great help to quant managers, and
this paper gives a perfect illustration.
2. Data
Yearly consolidated accounting data is from Bankscope database,
and the monthly stock return data is collected from DataStream.
The data spans from July 1997 to June 2004.
3. Discussion
We note that this paper echoes a similar study by Cooper (2003,
http://book-to-market.behaviouralfinance.net/CoJP03.pdf
),
where the authors claim that several factors (changes in noninterest income to net income, loan-loss reserves to total loans,
and standby letters of credit to total loans), can predict US bank
stock returns.
One thing we found interesting is that in US, non-interest income
to total operating income is negatively correlated with stock
returns. While this paper shows the opposite works in Europe.
The reason seems to be that recent years have seen an increase
in fee-based bank in European as a new and promising business
model.
We are concerned about the small data sample used in this study
(only 193 firms in past 8 years), and the fact that all excess
return reported are not adjusted for other known Fama-French
style factors (e.g., beta). Besides, all the stock returns reported
are equal-weighted.
Paper Type:
Working Papers
Date:
2006-05-05
Category:
Novel strategy, cash holdings
Title:
Impact Of Cash Holdings On Investment Value
Authors:
Zane L. Swanson
Source:
SSRN working paper
Link:
Summary:
Long stocks with high cash/assets, short otherwise.
Comments:
1. Why important
There are two reasons why we believe this paper is interesting:
a.) it may be a new strategy b.) it may provide more insights on
the classic value strategy, since one popular explanation of value
premium is that companies management tend to over-invest and
destroy shareholder value. If this is true, then obviously there will
be correlation between value strategy and this "cash holding"
strategy. Ceteris paribus, those value companies are more likely
to keep cash on their balance sheet or return cash to
shareholders.
2. Data source
Stocks prices and accounting data are from CRSP/Compustat.
3. Discussions
Three definitions of cash holdings are used to test the theory:
total cash, cash/assets, and residual cash holdings (calculated
after controlling for sector, change in receivables, inventory,
payable and accrued liabilities, P/B ratio and long term debt). To
address the issue of correlation with value strategy, the author
tested this strategy after controlling for P/E ratios. Its shown that
cash/assets can predict return over 1-year horizon except in the
high PE quintile.
In some sense, anyone interested in this strategy will have to
look into the returns in more detail, as the paper only gives
Sharpe ratio but not the returns by different cash holding deciles.
Paper Type:
Working Papers
Date:
2006-04-21
Category:
Novel strategy, Pension
Title:
Pension Plan Funding and Stock Market Efficiency
Authors:
Francesco Franzoni, Jose Marin
Source:
RePec
Link:
http://www.econ.upf.edu/docs/papers/downloads/871.pdf
Summary:
This paper documents that a portfolio that long companies with

over-funded pension plan and short under-funded companies
earn a significant profit during the period of 1981-2003.
Comments:

The impact of under-funded pension may yet to be fully realized
by investors. In our view, the pension gap (the difference
between the pension asset and liability) per se is not the direct
issue. What matters is that we are living in a time where most
pension assets are over-estimated and most pension liability are
under- estimated, and we know that under-funded pension will
have a direct, negative impact on a companys earning as well as
stock return. As an illustration, across the S&P 500, the assumed
pension asset return is 8.2%, which seems fairly high given the
-0.3% return for the past 5 years.
2. Data sources
Data items are from Compustat. (item 287, 296, 286, 294)
3. Next steps
From an equity investors point of view, an ideal pension plan
should be:
a.) the defined pension plan is currently not under-funded.
b.) the pension plan is estimated based on realistic, conservative
assumptions.
The paper does not address the second issue. Intuitively, the less
conservative companies would generate worse returns. It would
be interesting to study the impact of pension liability discount
rate (Compustat item 246) and pension asset return rate
(Compustat item 336) on stock returns.
Paper Type:
Working Papers
Date:
2006-04-21
Category:
Novel strategy, Corporate governance
Title:
Corporate governance and equity prices
Authors:
Gompers, Paul A., Joy L. Ishii, Andrew Metrick
Source:
Wharton School working paper
Link:
http://fic.wharton.upen.edu/fic/papers/02/0232.pdf
Summary:
The strategy: long companies with low corporate governance

index (G-index) and short companies with high G-index.
Comments:

This is one of those relatively new factors. Corporate governance
does have an impact on stock price, although only empirical study
can tell whether the net impact is positive or not. On one hand,
loose corporate governance may enhance company stock return
because it allows companys management to make timely
decisions. On the other hand, it may also reduce stock return
because it leads to higher agency cost (eg. management
over-investment)
2. Data source
The G-index is based on the data provided by IRRC (Investor
Responsibility Research Center).
3. Next steps
Check the correlation with other factors, and also look into the
stock performance recently given the increasing awareness of
shareholders impact on corporate governance.
Paper Type:
Working Papers
Date:
2006-04-07
Category:
Novel strategy, annual reports, risk, wording analysis
Title:
The Implications of Annual Report Risk Sentiment for Future

Earnings and Stock Returns
Authors:
Feng Li
Source:
2006 American Finance Association (AFA) paper
Link:
Summary:
Long stocks with least increase in risk sentiment (measured by

the number of risk-related key words in companies 10-k reports),
and short stocks with a large increase in risk sentiment. The
alpha is claimed to be 10%+ after controlling for Fama-French
factors and momentum.
Comments:
1. Why important
We believe that quant equity investment is all about extracting
information (i.e., finding statistic patterns) from various
databases. In this perspective, studying databases less used by
quant managers (10-k reports in this case) are more promising
and that is also what makes this paper interesting.
2. Data
Study scope is defined using CRSP/COMPUSTAT non-financial
firms (as risk-related key words in financial stocks reports have
different implications). 10-K filings are from Edgar.
3. Discussions
Will this pattern, if it does exist, repeat itself next year? In our
view, there are two key assumptions behind this strategy:
1.) 10-k reports are a fair depiction of risks that company faces
(i.e., company management are willing to use MD&A to disclose
their estimate of business risks, and their views are correct as
measured by risk- related key words)
2.) The change in risk estimation, as indicated in companies10-k
report, is not reflected in stock prices in a timely fashion.
Though the second assumption seems much more likely as most
investors are overwhelmed with information these days, the first
one is questionable. A cross-section study should provide more
insights - if these assumptions do hold, then intuitively stocks
with higher risk sentiment, in addition to risk sentiment change,
should under perform.
Paper Type:
Working Papers
Date:
2006-04-07
Category:
Novel strategy, down-side risk
Title:
Downside Correlation and Expected Stock Returns
Authors:
Andrew Ang, Joseph Chen, Yuhang Xing
Source:
Columbia University working paper
Link:
http://www.gsb.columbia.edu/faculty/aang/papers/corrfac.pdf
Summary:
Long stocks with greatest downside correlation with the market

(stocks that highly correlate with the aggregate market when
market is going down), short the opposite. Annual risk-adjusted
profit is 6.5%.
Comments:
1. Why important
This paper offers a brand-new strategy based on investors
risk-averseness. A typical investor hates loss more than she loves

gain. So collectively people demand higher return for stocks that
are more likely to drop when market drops.
2. Data
Data are from the Center for Research in Security Prices (CRSP)
3. Discussions
One potential issue we think is that this strategy will be, by
definition, correlated with market condition, perhaps to a great
extent. When market goes up (down), the strategy will make
(lose) money. This is not a desirable trait for practitioners.
Also as stated in the paper, this strategy is correlated with the
classic momentum strategy. A two-way sort (by momentum and
down-side risk) will provide more insights.
Paper Type:
Working Papers
Date:
2006-03-22
Category:
Novel strategy, analyst, target prices
Title:
The Value of Equity Analysts Target Prices
Authors:
Zhi Da, Ernst Schaumburg
Source:
Link:
http://www.kellogg.northwestern.edu/faculty/da/TargetPrice.pdf
Summary:
Long stocks with higharget-price implied return (percentage

difference between the analysts target price and traded stock
price), and short stocks with low target-price implied return. The
annualized profit is shown to be 22%.
Comments:
1. Why important
This paper makes innovative uses of the "target price" item from
FirstCall database. The story is intuitively appealing, i.e.,
collectively analysts can discern the relative mis-pricing of stocks
within sectors (albeit not on sector level). The higher the target
price implied return, the higher the expected return.
2. Data
Target price, recommendation, and earning announcement data

are from First Call. Prices and returns from CRSP/COMPUSTAT
and TAQ.
3. Next steps
When looking into the correlation with other existing factor, we
found it difficult to reconcile the two tests that compare
performances within value and growth segments (table 21 and
table 23). Table 21 shows similar profits for value and growth
stocks, while table 23 indicates that the strategy does better in
the former. This is important for practitioners that focus on
different styles. Another caveat is that this looks to be a
high-turnover strategy that needs monthly rebalance.
The authors did a solid empirical study, but we found their theory
framework not as convincing. It claims that the abnormal return
can be explained by liquidity. A high r-square with measures of
liquidity (the bid- ask spread, price impact) does not necessarily
prove a causal relationship. In our view, this finding shows that
analysts can tell the difference between individual firms but not
relative value between at sector level.
Paper Type:
Working Papers
Date:
2006-03-22
Category:
Novel strategy, momentum, innovation index
Title:
Corporate Innovation, Price Momentum, and Equity Returns
Authors:
Maria Vassalou, Kodjo Apedjinou
Source:
Link:
http://www2.gsb.columbia.edu/faculty/mvassalou/CI7.pdf
Summary:
Long stocks with high corporate in ovation index (CI, defined as

the proportion of a firms change in gross profit margin not
explained by the change in the capital and labor), short
otherwise. The profit is shown to be over 10% annually.
Comments:
1. Why important
In theory stock prices are driven by earnings, which in turn are
(at least partially) driven by firms product margin and how in
ovative the companys products are. This paper is interesting
because its one of the first to directly test the impact of

innovativeness on stocks returns, and the empirical test results
certainly look encouraging.
2. Data
Prices, returns and accounting data are from CRSP/COMPUSTAT.
3. Next steps
The correlation with momentum strategy is a concern in
implementation. We do notice that however, within CI-sorted
quintiles, price momentum is still profitable if performed using
high CI stocks. The authors also show that that this strategy has
low correlation with earnings-based strategies.
We would like to see a test at the performance within and cross
value/growth stocks. Growing companies tend to be more
innovative (ie, higher CI), and we know that value has
outperformed for a long time. A two-way sort should offer more
insight.
Paper Type:
Working Papers
Date:
2006-03-22
Category:
Novel strategy, retail investors, small trades
Title:
Small trades and the cross-section of stock returns
Authors:
Soeren Hvidkjaer
Source:
Link:
erPaper.pdf
Summary:
Long stocks with high sell-initiated small-sized trade volume,

short stocks with highbuy-initiated small trade volume. The profit
is shown to be 8% annually.
Comments:
1. Why important
This paper presents a brand-new strategy based on an appealing
story: retail investors have been losing and will continue to lose
money to institution investors. Those stocks favored by retail
investors would not perform as well as those less favored
2. Data
Return data and unsigned share volume data are from CRSP.
Accounting data are from Compustat. Transactions data are from
ISSM and TAQ.
3. Next steps
If the story is based on retail investors behavior and sentiment,
then it would make sense to study the correlation with other
similar strategy, e.g., the strategy covered in "Dumb Money:
Mutual Fund Flows and the Cross-Section of Stock Returns".
We also notice that this strategy has relatively low
implementation cost, as the authors show that stocks in
long/short portfolio are relatively liquid.
Paper Type:
Working Papers
Date:
2006-03-22
Category:
Novel strategy, retail investors, small trades
Title:
Small trades and the cross-section of stock returns
Authors:
Soeren Hvidkjaer
Source:
Link:
erPaper.pdf
Summary:
Long stocks with high sell-initiated small-sized trade volume,

short stocks with highbuy-initiated small trade volume. The profit
is shown to be 8% annually.
Comments:
1. Why important
This paper presents a brand-new strategy based on an appealing
story: retail investors have been losing and will continue to lose
money to institution investors. Those stocks favored by retail
investors would not perform as well as those less favored
2. Data
Return data and unsigned share volume data are from CRSP.
Accounting data are from Compustat. Transactions data are from
ISSM and TAQ.

3. Next steps
If the story is based on retail investors behavior and sentiment,
then it would make sense to study the correlation with other
similar strategy, e.g., the strategy covered in "Dumb Money:
Mutual Fund Flows and the Cross-Section of Stock Returns".
We also notice that this strategy has relatively low
implementation cost, as the authors show that stocks in
long/short portfolio are relatively liquid.
aper
Type:
Working Papers
Date:
2006-03-22
Category
:
Novel strategy, disposition effect
Title:
The Disposition Effect and Underreaction to News
Authors:
Andrea Frazzini
Source:
Chicago working paper
Link:
http://gsbwww.uchicago.edu/fac/john.cochrane/teaching/xanedu/frazzini_dis
position_effect.pdf
Summar
y:
Long stocks with positive (negative) news and capital gain(defined as the
difference between reference purchasing prices and current traded prices),
and short otherwise. The author shows a 24% annual profit.
Commen
ts:
1. Why important
Stock market is evolving everyday, but human beings certain psychological
traits wont change and certainly will impact stock prices. This paper presents
a new strategy that captures one such trait, i.e., the reluctance to sell losing
stocks and willingness to sell winning stocks.
This paper makes clever use of the mutual fund data to proxy for the average
purchasing price (the reference price). We are impressed by the solid
robustness check (controlling other known suspects, e.g., analysts
recommendation, trading cost, etc) conducted in the paper.
2. Data source
Mutual fund holdings data are from the Thomson Financial CDA/Spectrum
Mutual Funds database. Stock pricing/analyst recommendation data are

CRSP/COMPUSTAT and I/B/E/S.
3. Next steps
It would make sense to examine the correlation between this strategy and the
traditional earning surprise strategy. Moreover, The Disposition Effect and
Momentum (http://dido.econ.yale.edu/behfin/2002-04- 11/grinblatt-han.pdf)
shows that there may be correlation with momentum strategy as well.
Another issue is the length of period that this strategy will work. The author
looks only into future 3 months. This may be a concern for some investors.
Paper Type:
Working Papers
Date:
2006-03-09
Category:
Novel strategy, Consumer-supplier correlation
Title:
Economic Links and Predictable Returns
Authors:
Lauren Cohen, Andrea Frazzini
Source:
Link:
http://www.econ.yale.edu/~af227/pdf/cofraz.pdf
Summary:
Long stocks with high recent customer stocks return (customer

defined as those to which this company is supplying
goods/services), short otherwise.
Comments:
1. Why important
This paper is based on a simple, convincing idea that good/bad
news on a customer company should be reflected in the stock
price of its supplier company. If the stock prices of customer
companies suffer, so should those of supplier companies since
their businesses are fundamentally interconnected. The authors
found that in reality such news are not impounded into stocks
prices timely, and the reasons may be investors collectively
limited capability to digest new information.
This is another great example that more alpha can come from
data items/data sources thats not yet widely studied.
2. Data source
The supplier-customer relationship information is from the
Compustat segment files, and one needs to program to identify
the cusip or ticker of customer companies. Other stock-related
information is from standard Compustat/CRSP

3. Next steps
The industry profile of the long-short portfolio is yet to be
studied, and it may potentially be a big issue for some investment
managers to use this strategy. For example, retail industry
companies would not have customer companies, so the
long-short portfolio should presumably contain no or few retail
stocks.
The authors claim that the abnormal excess return is not from
stock momentum and industry momentum. A closer look at the
correlation with other existing signals will be interesting.

Paper Type:
Working Papers
Date:
2014-03-10
Category:
Post-Earnings Announcement Drift, Growth Options
Title:
Effects of Growth Options on Post-Earnings Announcement Drift
Authors:
Aaron Lin
Source:
SWFA conference paper
Link:
https://mediacast.blob.core.windows.net/production/Faculty/StoweConf/
submissions/swfa2014_submission_63.pdf
Summary:
A firms grow options can be proxied by its ratio of market-to-book

assets (MABA). Higher MABA predicts lower post-earnings
announcement returns. A long-short portfolio yields a monthly abnormal
return of 5.48%
Intuition
A firm with low growth options has high risk because its high
percentage of assets-in-place, which results in an upward drift
after the earnings announcement (EA)
Such upward drift is regardless of the direction (positive or
negative) of the earnings surprise
On the other hand, a firm with high growth options is more likely
to have a downward drift after the EA
Post-earnings announcement drift (PEAD) can be a result of the
failure to capture the real risks when calculating subsequent
cumulative abnormal returns after EAs
Definitions
Growth options = market value / book value of assets (MABA)
MABA measures investment opportunities
Earnings surprises are proxied by analyst forecasts (SUE3):
(actual earnings analysts consensus earnings) / price
MABA better predicts PEAD than SUE3
During earnings announcement period, both MABA and SUE3
explains the abnormal returns (Table 3)
After the announcement, MABA still predicts significant at the 1%
level for 60 days, while SUE3 is insignificant beyond 20 days
(Table 4)
Lower MABA, significantly higher return during the period of (+2,+22)
after EA
Buy(sell) firms with low(high) MABA ratios
On average the 20day return spread is 5.48% with a standard
deviation 4.96%
Robust to alternative measures for PEAD
Consistent return over time
Source: The Paper

Data
U.S stock data from Center for Research on Security Prices

(CRSP)
U.S. firms data from Compustat database
Analysts forecasts from Institutional-Brokers-Estimate-System
(I/B/E/S)
Sample size: 81,805 firm-quarter observations
Data range: June 1998 December 2011
Paper Type:
Working papers
Date:
2011-03-29
Category:
Variance risk premium (VRP), forecast index returns, options,

selling volatility
Title:
Stock Return Predictability and Variance Risk Premia: Statistical

Inference and International Evidence
Authors:
Tim Bollerslev, James Marrone, Lai Xu and Hao Zhou
Source:
SSRN working paper
Link:
Summary:
Variance risk premium (VRP, defined as the difference between

options-implied and actual market volatility) can predict stock
index returns in future 2-4 months, not just for US index, but
also for French CAC 40, the German DAX 30, the Japanese Nikkei
225, the Swiss SMI and the UK FTSE 100 indices
VRP is defined as difference between the options-implied
and actual market volatility
The implied volatility is based on VIX levels, the
actual market volatility is based on S&P 500 Index
daily returns
VRP is calculated by subtracting past 20-day S&P
500 daily return variance from the square of VIX
So the VRP is a measure of disagreements across equity
market investors
Likely between the stock investors and option
investors
It may also be interpreted as a measure of aggregate risk
aversion in financial markets
Higher VRP, higher future market returns
Methodology: regress future months returns on VRP in
individual countries
Significant predictive power in different countries (table
4)
Results for France, Germany, Japan, Switzerland
and the UK all show a significant predictability,
with t-stat ranges from 3.86 (UK) and 1.80(Japan)
Highest predict power at a 4-month horizon
US has the strongest predictive power (table 4)
By comparison, regression on SP500 indices show
a t-stat of 8.80
Suggesting that selling volatility has been profitable on
average over the last decade
A Global VRP works better than individual VRPs
Defined as a market capitalization weighted VRP of
U.S. accounts for more than half of the weight,
with Japan a distant second
Methodology: regress future months returns on the global
VRP (instead of individual VRPs)
Global VRP can predict returns in all countries, better than
individual VRPs
With a t-stat over 5.0 (compared with 1.80-3.86
when using individual VRPs) (table 5)
Again the highest predictability is at 4-months
horizon
Global VRP can better predict returns than 1) implied

volatility, 2) realized volatility and 3) other traditional
predictor variables, including the P/E ratio, dividend yields
and consumption-wealth ratios
Discussions
A related study,
The variance risk premium around the
World
, studies VRP in 8 countries from 2000 - 2009. It
shows that VRP is positive for all counties, but do not
predict local equity returns in countries other than in the
US
Data
February 1996 - December 2007 S&P 500 Index returns
and volatilities are from CRSP. VIX data are from CBOE
January 2000 - December 2010 data for France (CAC 40)
are from Euronext, the German DAX 30 are from
Deutsche Borse, the Japanese Nikkei 225, the Swiss SMI
and the U.K. FTSE 100 are from Datastream)
Paper Type:
Working papers
Date:
2010-09-24
Category:
Title:
Authors:
Source:
SSRN
Link:
Summary:

next month
underlying
volatilities
PVOL
Other time-series and cross-sectional measure

considered, and results are similar
statistically significant raw monthly return of
0.97%
returns (Table 8)
characteristics
CVOL increases
month
measure of skewness
horizon
Data
OptionMetrics
and calls
This paper uses at-the-money call and put options
implied volatilities with a delta of 0.5 and an expiration of
30 days
CRSP/COMPUSTAT
Paper Type:
Working papers
Date:
2009-12-30
Category:
S&P 500 index options
Title:
The Puzzle of Index Option Returns
Authors:
George Constantinides, Jens Jackwerth, Alexi Savov
Source:
University of Chicago Working Paper
Link:
http://faculty.chicagobooth.edu/george.constantinides/documents/The
_Puzzle_of_Index_Option_Returns_October_12_09.pdf
Summary:
Contrary to two influential theories, the returns of S&P 500 options are
dependent on options strike-to-price ratio (moneyness), and options
leverage-unadjusted returns decreases with their moneyness
Definitions
Moneyness: strike-to-price ratio
Leverage-adjusted rate of return: the expected return on a

portfolio of an option, where the portfolio weight of the option
is equal to the inverse elasticity of the option price with respect
to the price of the underlying security
Two influential option pricing theories
Leverage-adjusted returns on options should be independent of
moneyness (Black and Scholes (1973) and Merton (1973),
BSM)
Leverage-unadjusted returns on options should be increasing
with their moneyness (Coval and Shumway (2001))
The implication: the return of an option is equal to the
expected return of the underlying security plus a
premium, which is the product of the risk premium of
the underlying security and the option elasticity (or
beta with respect to the underlying security)
Empirical results contradict both theories above
Constructing the portfolio: every day, 10 option portfolios are
created by their moneyness
5 discrete values for moneyness (0.95, 0.98, 1, 1.02,
1.05)
5 portfolios are created for call options and 5 for put
options
Option maturity is at least 45 days away
Unadjusted returns of S&P 500 call option are decreasing with

strike prices (contrary to the Coval and Shumway theory, per
Table I)
0.95 moneyness portfolio has an expected return of
2.50
1.05 moneyness portfolio has an expected return of
-19.36
The leverage-adjusted returns for both call and put option
portfolios have returns that decrease with moneyness (contrary
to BSM theory, per Table II)
Factors to explain the option returns
The authors tested 15 models
OTM (the percentage change in the monthly OTM put option
volume) can significantly explain option returns
OTM is a proxy for unusual demand for downside risk
protection or market sentiment
VIX also have some explanatory power of option returns
By contrast, the three Fama-French factors have little
explanatory power and leave large alphas un-explained
Data
The study uses two sets of options databases: (1) Berkeley
options database which has the intraday quotes on individual
S&P 500 options for the time period 1995-2007 (2)
OptionMetrics covers the time period for 1986-2007 and is
used to test consistency with Berkeley database
This study exclude options with fewer than 14 or more than
180 days to expiration. Also exclude all quotes with zero
volume during the trading day because their quoted prices are
not reliable. Exclude all options with implied volatility lower
than 5% or higher than 100%, as well as options with
moneyness below 0.8 or above 1.2
Discussions
Sensitivity to data sources: the choice of the data base used in
the study (Berkeley or OptionMetrics) affects the results
substantially (Table 1)
One assumption in the paper seems questionable: we buy and
sell options at their bid-ask midpoints. (page 12) Given the
large bid-ask spread of options, a safer assumption is to buy at
ask price and sell at bid price
It would be interesting to discuss the implications on building
an arbitrage strategy
In a related paper, Are Options on Index Futures Profitable for
Risk Averse Investors? Empirical Evidence
(
), it is shown that portfolios which incorporate S&P 500 index
futures options indeed produce out-of-sample returns, net of
trading costs and bid-ask spreads

Paper Type:
Journal papers
Date:
2009-10-14
Category:
novel strategy, index change effect, options
Title:
Capturing the Index Effect via Options
Authors:
Srikant Dash, Berlinda Liu
Source:
Link:
Summary:
This article analyzes a less-known but profound impact of

additions to the S&P 500: the impact on publicly traded options
of the added company. The analysis shows that, in general, the
changes in at-the-money option prices are profoundly higher
than changes in the corresponding stock price.
Comparison
between the inter-index transfers and outside additions finds a
far greater index effect on option prices if the underlying stocks
are introduced out of the S&P 1500 index family. While it is not
possible to capture most of these price changes because they
happen very shortly after the announcement,
the article
identifies replicable trading strategies with large, statistically
significant returns.
Paper
Type:
Working papers
Date:
2009-08-03
Catego
ry:
Novel Strategies, volatility, Options
Title:
Asymmetric Volatility and the Cross-Section of Returns: Is Implied Market

Volatility a Risk Factor?
Author
s:
Jared Delisle, James Doran and David Peterson
Source
:
FMA Meetings 2009
Link:
http://www.fma.org/Reno/Papers/Is_Firm_Sensitivity_to_Implied_Market_Volat
ility_Really_a_Risk_Factor.pdf
Summ
ary:
The paper develops a trading strategy based on stocks different sensitivity to

positive/negative changes of the VIX.
Such strategy works well when VIX is increasing and generates a risk-adjusted
return of 6% for the period of 1986-2007
Intuition:
When volatility increases, investors expects higher risk and are willing to
pay a higher premium for stocks that do well historical in similar
situations
Calculating the sensitivity to VIX changes
To allow for sensitivity asymmetries, the paper adds a dummy variable
POS to the regression (POS is 1 for when VIX is increasing)
R(i) = a + beta(VIX) *change in VIX + theta(VIX) *POS*change
in VIX
54 months prior to current month are used to estimate the coefficients
The total exposure to changes in VIX is: Adjusted factor loadings ( AFL)
= beta(VIX) + theta (VIX) *POS
Sensitivity to changes in VIX negatively predict returns
Sorting stocks by their monthly exposures to changes in VIX in decile
portfolios
The portfolios show a monotonic decrease in future value-weighted
returns
Stocks show asymmetric responses to VIX changes
Each month, stocks are sorted by their Adjusted Factor Loading(ALF, see
definition above)
Only when VIX increases, sensitivity to VIX changes is a significant
return predictor
The findings are robust to liquidity, momentum, price, volume, and
leverage
Data
The monthly VIX index values are taken from Chicago Board Options
Exchange for 1986-2007
Stock returns and price data are from CRSP and COMPUSTAT data
Paper Type:
Working Papers
Date:
2008-09-03
Category:
Stock index return distribution, VIX, index options
Title:
Is the Distribution of Stock Returns Predictable?
Authors:
Tolga Cenesizoglu and Allan Timmermann
Source:
HEC-Montreal working paper
Link:
http://neumann.hec.ca/pages/tolga.cenesizoglu/Cenesizoglu-Tim
mermann-2008.pdf
Summary:
This paper studies which parts of the stock index return

distribution are predictable and how they depend on economic
state variables, and
finds that many economic state variables are
helpful in predicting different quintiles of stock return
distributions.
Predictors include macro-economic and firm-level factors
Economic state variables: three-month T-bill rate,
yield on long term government bonds, term
spread, default spread and net equity expansion.
Firm-level characteristics: dividend-price,
earnings-price, book-to-market ratios and dividend
yield, stock variance.
Mostly useful in explaining the upper/lower quintiles but
not central quintiles
The only two variables that predict the center of
the distribution significantly are T-bill rate and
dividends-earnings ratio.
Asymmetrical affect on the return distributions (Table 3):
Dividend-price, book-to-market ratios and default
yield spread affect lower quintiles negatively and
upper quintiles positively.
Three-month T-bill rate and long term government
bond yield affect lower quintiles positively and
upper quintiles negatively.
Reason why this is important: investors loss aversion
determines asset pricing
Under the theory of loss or disappointment
aversion, investors use the entire distribution of
future stock returns instead of mean and variance
Standard OLS estimates gives information about
the mean of the return distribution
Net Equity Expansion has asymmetric effect on return
distribution.
Increased net equity expansion tends to precede
large negative returns
But it has little ability to anticipate periods with
large positive stock returns.
VIX and option based trading strategy yields significant
profits
If (after adjusting for a volatility risk premium)
quantile forecasts suggest a higher chance of large
positive (negative) returns than indicated by VIX

implies, we buy call (put) options.
Otherwise, sell call (put) options.
Comments:
1. Discussions
The paper provides insight into return distribution and is useful
in terms of documenting the importance of time-varying quintiles
of return distributions and asymmetric effects of economic
predictors on different quintiles. The result should be helpful for
asset pricing, portfolio construction and asset allocation.
2. Data
For the long time series between 1871-2005 predictor variables
are obtained from Ivo Welch. S&P 500 index returns are obtained
from CRSP.
Paper Type:
Working Papers
Date:
2008-03-16
Category:
Options prices, implied volatility
Title:
Deviations from Put-Call Parity and Stock Return Predictability
Authors:
Martijn Cremers and David Weinbaum
Source:
SSRN Working Paper
Link:
Summary:
This paper shows that stocks with relatively expensive calls

outperform stocks with relatively expensive puts by 51 bps per
week.
The main intuition is that if informed investors choose to
trade in options, the expensive call (put) option prices can
indicate positive (negative) information of future returns.
The expensive-call (put) stocks show positive (negative)
abnormal returns, after adjusting for the market, size,
value and momentum factors.
The deviation from the put-call parity is measured as the
average difference in implied volatility (volatility spread)
between call and put options with the same strike price
and expiration date.
Comments:
Between 1986 2006, a portfolio that is

long in stocks with relatively expensive calls and
high volatility spread
short in stocks with relatively expensive puts and
low volatility spread
earns a value-weighted, four-factor adjusted
abnormal return of 113 bps per week (61 bps on
the long side and -52 bps on the short side).
Under the assumption that portfolio is formed on
the day after the option signal is observed, the
return spread drops to 51 bps a week.
The results are not driven by short sale constraints using
rebate rates from the stock short lending market.
The degree of predictability decreases over the sample
period (150 bps per week in 1996-2000 to 83 bps in
2001-2005), this may be due to decrease in trading costs
and growth of hedge fund capital.
1. Discussions
Some quant fund use put-call ratio as an alpha factor in their
quant models. There may be correlation between the put-call
ratio factor and the option volatility spread factor discussed here,
because informed investors may bid up call(put) option prices
and drastically change put-call ratio in the mean time. This is
confirmed in the table 7 in the paper.
The other main concern may be high turnover: the paper
portfolio was rebalanced on weekly basis.
The options market closes at 4:02pm EST everyday whereas the
stock exchanges close at 4:00pm EST. The two minutes
difference can create the non-synchronicity bias since the new
information can be reflected into stock prices one day later,
especially given that some companies choose to make
announcements by 4pm EST.
The lower predictability found in the second half of the sample
might cast some doubts on the economic significance of this
effect for the next few years.
2. Data
1996/01 2005/12 option data is taken from OptionMetrics and
merged with the daily stock prices from CRSP. Microstructure
related robustness checks are conducted using the TAQ
database.
Paper Type:
Working Papers
Date:
2007-09-23
Category:
VIX(Chicago Board Options Exchange Volatility Index, which

measures the market's
Title:
Fear and the Fama French Factors
Authors:
Robert Durand, Dominic Lim, Kenton Zumwalt
Source:
Asia Finance Association conference paper
Link:
http://asianfa.org/Paper/Fear%20and%20the%20Fama%20Frenc
h%20factors_Durand.pdf
Summary:
VIX is a measure of investors collective expectations for market

volatility (hence a "fear factor"). This paper studies whether
change of VIX (VIX) can be used forecast stock returns just like
the four Fama French risk factors: market premium, value
premium, size and momentum Key findings:
As a stand
alone factor,
VIX
can not
explain
(daily) stock
returns
When combined
with the other four factors (equity
premium, value, size,

momentum), VIX
can help explain
stock returns at daily level.

How does fear flows through other risk factors? Applying
Granger causality framework over a period of 5 days, the authors
finds that
a sudden increase in VIX is associated with
Decrease in the equity risk premium. This means when
expected volatility goes up, market will likely go down.
I
ncrease in the value premium. This indicates that when
expected volatility goes up, investors
will
likely
favor value
over growth stocks.

A weaker impact on size premium and momentum.
Comments:
1. Why important
This paper presents an intuitive strategy for managers with a daily
level investment horizon.
It is also an interesting extension to one other paper VIX
Signaled Switching for Style Differential and Differential Short
term Signal-Investing
(
http://www.fordham.edu/workingpapers/images/VIX%20Septem
ber26.pdf
)
where it is found that that VIX is a useful signal to
decide short term (1 5 days) switching between small cap and
large cap stocks, though it doesnt help choose value/growth
stocks. The strategy: when VIX is above (below) its 75 day
moving average by 20%, long (short) large cap and short (long)
small cap for 1 5 days. This strategy works over 60% trades, with
a 5 day profit of 40bps.
2. Data
2003/12 data for VIX are from Chicago Board Options Exchange.
Paper Type:
Working Papers
Date:
2006-11-03
Category:
Value, growth, options
Title:
Risk Aversion and Clientele Effects
Authors:
Douglas Blackburn, William Goetzmann, Andrey Ukhov
Source:
London School of Economics working paper
Link:
http://fmg.lse.ac.uk/upload_file/758_w_goetzmann.pdf
Summary:
This paper documents that the strategy to buy risk from value
investors (i.e. buy near-term options in value indexes), and sell it to
growth investors (i.e. sell near term options in growth indexes) is
profitable. This is because
Growth investors are more risk loving than value investors.
So growth investors are willing to pay more for risk (proxied
by option volatility premium)
Comments:
1. Why important
Lets first look at two things:
(from this paper) value investors are on average less risk
loving (which arguably is true)
(from Is Value Riskier Than Growth,
http://www.simon.rochester.edu/fac/zhang/ValRisk05JFE.pdf
), where value stocks are fundamentally riskier than growth
stocks.
If both claims are true, then does it mean that value investors are
not getting the stocks they want? They want less risky stocks, but
they get the contrary. They in general do not expect higher return
than growth, but they do get better returns. Why will there be such
systematic gap? Can this pattern be used to generate stock
strategies?
This said, we think the clientele theory makes sense, and hope that
this option strategy can help some quant managers enhancing their
portfolio.
2. Data
Standard & Poors Barra Growth/Value Indices; Russell Midcap
Growth/Value Indices; Russell 1000/3000Growth/Value Indices are
used
3. Discussions
We are not sure of the way option trading strategy profit is
calculated (The paper "...uses the midpoint of the bid ask spread and
use this to calculate payoffs for our trading strategies"). The bid ask
spread can easily be 5 10% even for a liquid index options like
SP500.
The figures in the appendix give us a nice picture of the behavior of
investor clientele. For example, figure2 shows that growth investors
are more likely to be momentum investors (the higher the returns,
the lower the risk aversion).
Paper Type:
Working Papers
Date:
2006-10-20
Category:
Options, Option early exercise premium
Title:
Does the Early Exercise Premium Contain Information about

Future Underlying Returns?
Authors:
Rossen Valkanov, Pradeep Yadav, Yuzhao Zhang
Source:
UCLA working paper
Link:
http://personal.anderson.ucla.edu/yuzhao.zhang/returneep34.pdf
Summary:
Early Exercise Premium (EEP) is defined as the difference

between otherwise comparable American andEuropean call (put)
options. Using data of FTSE 100 index, it is shown that EEP has
stock return predicting power at daily horizons.
Paper Type:
Working Papers
Date:
2006-09-22
Category:
Strategy, volatility, VIX (Chicago Board Options Exchange

Volatility Index, which shows the
Title:
VIX Signaled Switching for Style-Differential and Size-Differential

Short-term Stock Investing
Authors:
Dean Leistikow and Susana Yu
Source:
Fordham University working paper
Link:
ber26.pdf
Summary:
This paper finds that VIX is a useful signal to decide short-term

(1-5 days) switching between small cap and large cap valueds,
though it doesnt help chose value/growth stocks.
The strategy: when VIX is above (below) its 75-day moving
average by 20%, long (short) large cap and short (long) small
cap for 1-5 days. This strategy works over 60% trades, with a
5-day profit of 40bps when tested on SP500/SP600 indices.
Comments:
1. Why important
VIX levels were used to forecast stock market returns: a VIX
over 20 is believed to be a bad sign, while a lower VIX bodes
well. This strategy seems no longer working in recent years, as
VIX has been staying at fairly low levels. This paper is interesting
since it shows VIX may still be useful to decide the relative
strength of style/size indices.
2. Data
1994-2004 VIX data are from the Chicago Board Options
Exchange. Daily return data on three S&P indexes (large cap,
mid cap, small cap), and S&P/Barra Growth/Value sub indexes
are from S&P Index Services. Russell Indices
3. Discussions
In essence, this strategy is built on two assumptions:
1.) VIX will reverse to its mean in short term
2.) When VIX goes down, small cap underperforms large cap (in
more general terms, riskier assets underperform less risky
assets)
The first assumption should not be taken for granted. Since
2003, VIX has been trending down and has stayed at fairly low
level. Testing this strategy using recent years data will provide
more insights.
The second assumption suggests that, in more general terms,
investors risk-averseness goes up after VIX reaches a high level.
This leads to "flight to quality" where1.) Small cap should
underperform large cap, 2.) Stocks should underperform bonds.
Its interesting to note that 1) still holds while 2) does not.

Paper Type:
Working papers
Date:
2010-03-31
Category:

momentum
Title:
Authors:
Source:
SSRN working paper
Link:
Summary:

Definitions
earnings, SUE)
price momentum

Small cap bias
other (Table 6)
8)
0.63%)
(R1-R5)
Data

each metric
Strong seasonality
January (Table 9)
"23% to 40%" (Table 10)
date)
Paper Type:
Working Papers
Date:
2013-08-02
Category:
Novel strategy, reversal around earning announcements
Title:
News-Driven Return Reversals: Liquidity Provision Ahead of

Earnings News
Authors:
Eric C. So and Sean Wang
Source:
UMN Empirical Conference paper
Link:
http://www.csom.umn.edu/accounting/empirical-conference-201
3/documents/EricSoPaper.pdf
Summary:
Profit of short-term reversal strategy can be enhanced by

six-folds when concentrating in earnings announcements. Such
pattern holds for stocks within SP500 as well
Intuition
In essence, return reversal strategy is to provide liquidity
to other investors who wants to buy/sell stocks
Providing liquidity immediately before earnings
announcements takes increased risks and hence requires
higher returns
So the short-term return before announcements can be a
proxy of cost of providing liquidity, which can be harvested
right after the announcements
Define pre-announcement return (PAR) : the cumulative

market-adjusted return during [t-4, t-2], where t is the
firms earnings announcement date
Calculate portfolio returns over [t-1, t+1], as well as over
[t+2, t+5] and [t+6, t+8]
Six times higher reversals over [t-1, t+1]
Sort stocks by PAR
The [t-1, t+1] 3-day market-adjusted hedged return is
1.44% and significant at the 1% level (Panel A, Table 3)
Low PAR stocks earn a significant 81 basis points
High PAR stocks lose an insignificant 63 basis
points
Six times higher profits than that over non-announcement
dates 0.24% (Panel B, Table 3)
No such effect after the [t-1, t+1] window
Become insignificant during [t+6, t+8] (Panel A of
Table 3 )
Similar magnitude for S&P500 stocks (Table 4)
Stronger reversals for higher volatility stocks
Define volatility using option implied volatilities
Double-sorting stocks observations by PAR and volatility
For high volatility stocks, the average reversal is 219 basis
points (Panel A, Table 7)
For low volatility stocks, the average reversal is 90 basis
points
Return reversals are highly correlated with VIX
The higher the VIX, the higher the reversal returns (Table
8)
Suggesting that when near-term volatility is high, liquidity
provision is more highly priced
Data
1996 - 2011 stock data are from CRSP, Compustat, and
OptionMetrics
Paper Type:
Working Papers
Date:
2013-06-02
Category:
Novel strategy, earning surprises, earnings announcement day

returns
Title:
Consistent Earnings Surprises
Authors:
Byoung-Hyoun Hwang and Dong Lou
Source:
London School of Economics Working Paper
Link:
http://personal.lse.ac.uk/loud/Analysts.pdf
Summary:
Bullish (bearish) analysts tend to report downward(upward)

biased forecasts, because they do not want to be contradicted by
coming earning announcements. Stock recommendations
positively predict announcement period returns. A long-short
portfolio earns monthly abnormal returns of 1.6%
Intuition
Analysts are evaluated by their forecast accuracy
Bullish (bearish) analysts are more likely to report
downward (upward) biased earnings estimates, as they do
not want to be contradicted by negative firm-specific news
Hence firms with more optimistic (pessimistic) average
recommendations may experience more positive
(negative) surprises and announcement day returns
Define consensus forecast: the average annual EPS
forecast across all forecasts issued in 3 months prior to
the earnings announcement
Define SUE: (actual EPS analysts consensus forecast
) / lagged stock price
Buy-rated stocks are more likely to have narrow beats
Within Buy stocks, 28% more stocks have Narrow Beat
than Narrow Miss
Within Hold/Sell stocks, only 19% more stocks have
Narrow Beat than Narrow Miss (Table5, Panel B)
Significant portfolios returns
Assign each recommendation a score: 5 (strong
buy), 4 (buy), 3 (hold), 2 (under-perform) and 1
(sell)
Each day long (short) stocks in the top (bottom)
recommendation tercile that are announcing
earnings in 3 trading days
Hold stocks for 7 trading days
Hold Treasury bill if no more than 10 stocks on
either the long or short side (happened on less
than 5% of the trading days)
Such portfolio generates monthly DGTW-adjusted return of
1.57% (t = 2.5) (Table 7)
The monthly Carhart four-factor alpha is 1.56% with t =
2.3 (Table 7)
Similar findings in regression: recommendation levels and
subsequent earnings-announcement-day returns are
positively correlated with coefficient of 0.245 (t = 3.76)
(Table 7)
Worked in the two groups of most optimistic/pessimistic
recommendation stocks(Table 4)

Data
Worked in recent (post-2003) periods (Table 9)

1993 2012 analyst stock recommendations and forecasts
are from IBES
Financial-statement and financial-market data are from
COMPUSTAT and the Center for Research in Security Prices
(CRSP), respectively
Paper Type:
Working Papers
Date:
2013-03-31
Category:
Earnings announcement returns, reversals, earning surprises
Title:
Overreacting to a History of Underreaction?
Authors:
Jonathan A. Milian
Source:
SSRN Working Paper
Link:
Summary:
In recent years, the autocorrelation in firms

earnings surprises
is
still significantly positive, however a firms prior
earnings
announcement return
is now negatively predict firms
announcement returns
For firms with active options tradings, those with the highest
decile of prior announcement return
underperform
those with the
lowest decile returns by 1.29% at next announcements
Intuitions and defintions
Firms with active exchange-traded options are
easy-to-arbitrage
Firms with active options are larger (mean size of
$13 billion), have high growth opportunities (mean
M/B of 5.6) (Table 2 Panel A)
Seems that due to the well-documented post earning
surprise drift, investors are now overreacting to earnings
surprises
Return-based earning surprise (EARet) = firms two-day
[0, 1] return market index
Earnings-based measure (ESurp) = firms current earnings
- consensus analyst forecast
The autocorrelation in ESurp is still significantly positive
But after controlling for a firms prior earnings surprise, a

firms prior CAR is negatively associated with next
announcement CAR
Higher prior announcement CAR, lower next CAR
Short(long) stocks with the lowest (highest) decile of the
previous quarters EARet (or ESurp)
From 1996 - 2010, firms with the highest decile of CAR
significantly underperform those with lowest decile CAR by
1.29% over the next two-day announcement window
(table 4, Panels A)
Most returns due to the Low (Past Losers) decile
Consistent in recent period: for stocks with active options,
the pattern holds in 44 out of the 60 quarters during the
1996 2010
Source: the paper

During 2003 to 2010, LagEARet is next only to
PreEA5DayRet in predicting CAR
A hedge portfolio based on LagEARet
(PreEA5DayRet) generates an average return of
-1.12% (-1.87%)
Similar though weaker relationship between prior LagEsurp
and current CAR (panel C)
No such pattern for stocks without active option tradings
(Table 4, panel B)
Data
1996 2010 quarterly earnings announcement dates and
unadjusted quarterly EPS are from I/B/E/S
Firms accounting and stock price data are from CRSP
Option data are from OptionMetrics
Total 23,684 earnings announcements with active options

Paper Type:
Working Papers
Date:
2013-02-28
Category:
Option strategy, straddle, earning announcements
Title:
Anticipating Uncertainty: Straddles Around Earnings

Announcements
Authors:
Yuhang Xing and Xiaoyan Zhang
Source:
SSRN Working Paper
Link:
Summary:
Investors underestimate stock volatilities around earnings

announcements. A short-term straddle strategy (buy call and put
options with matched strike and expiration) yield significant
returns
Constructing the option straddles
Buy call and put options with matched strike and
expiration
Short-term: no more than 60 days to expiration
Works even better when using only very short-term
straddles (4 to 10 days to expiration) and holding
to expiration
Near-the-money: moneyness in the range 0.95 to 1.05
Option returns is calculated using the mid-point of the
daily closing bid/ask prices
Strategies does not work on all days: from 1996-2011,
such straddles generates gross daily/weekly/monthly
returns of -0.19%/-2.09%/-17.1% (Table 2, panel A)
Significant profit around earnings announcements dates
Hold the straddle from 5-, 3-, 1-trading days before to
1-day after announcement
Significantly profits of 0.31% to 2.30% (Table 2, panel B)
Consistent through time: returns are positive except for 7
out of 60 quarters
Works in 10 out of 12 industries (exceptions are energy
and utilities)
Source: the paper
Higher return when lagged VIX is relatively low

Higher return for stocks with relatively high realized
volatilities and relatively low implied volatilities
Works better for small stocks and stocks with low analyst
coverage, high past jump frequency, high return kurtosis
and large past earnings surprises.
Works better when using very short-term straddles (4 to
10 days to expiration) and hold to expiration
Daily net straddle return of 1.64%, assuming
trading friction is half the bid-ask spread (Panel A
of Table 6)
Robustness
Robust when assuming trading friction equal to the full
bid-ask spread, with an average daily net return of 1.16%
(Panel B of Table 6)
Robust to equal weighting, volume weighting and open
interest weighting
Data
Robust to straddle holding periods: starting at 5-, 3-, or

1-trading day before earnings announcement, ending on
or 1-day after the announcement
January 1996 through December 2010 daily stock data are
from CRSP, COMPUSTAT, and IBES
Options data are from Option Metrics
Paper
Type:
Working Papers
Date:
2012-03-30
Categor
y:
Novel strategy, analysts forecast error, short-term trading during earning

announcements
Title:
The short term prediction of analysts forecast error
Authors
:
Kris Boudt, Peter de Goeij, James Thewissen, and Geert Van Campenhou
Source:
SSRN Working Paper
Link:
Summa
ry:
A trading strategy around earnings announcements that longs (shorts) stocks

with the most pessimistic (optimistic) consensus forecast generates an annual
risk-adjusted return of 16.56% during 1998-2010
Background
In essence, earnings surprises is the result of analysts forecast error
Define analysts forecast error = (analysts consensus forecast
actual earnings) / closing price on the day before the forecast date
A positive (negative) forecast error thus points to an optimistic
(pessimistic) consensus
Such forecast errors can lead to strong stock price reactions on earning
announcement days
This study proposes robust estimation techniques to forecast such
prediction errors, especially for those outliers
While the traditional OLS yields a poor out-of-sample prediction
performance
Such technique focuses on stocks with the most extreme
predicted forecast errors
Variables Used to Predict Analysts Forecast Error
Categor
y
Reason
Forecast variables
Analysts
forecast
variable
s
Prior
stock
perform
ance
variable
s
Two
control
There exists positive

autocorrelation in
analysts forecast error
over time
Prior forecast error,

include positive and
negative ones
Analysts become more

optimistic in more
uncertain information
environment
Earnings forecasts
dispersion
Higher analyst coverage

should increase the
predictability of the model
Analyst coverage,
measured as the
logarithm of the
number of analysts
Prior stock returns are

associated with analysts
forecast error
Two measures: (1)

the cumulative
market-adjusted
return for the
2quarters preceding
the quarter under
investigation, (2) for
quarter -4 to quarter
-2
Information uncertainty
decreases with size, so
size may be negatively
correlated with forecast
error
Firm size, measured

as the logarithm of a
firms market value
A high (low)
points to value (growth)
stocks, which tend to have
low (high) earnings
volatility
The lagged
Analysts forecasts for Q4t

earnings might differ
systematically from other
quarters, because
negative extraordinary
items and losses are more
prevalent
A dummy variable for

forecasts made for
fourth quarter (Q4t)
earnings
Analysts behavior has

been significantly
A regulatory dummy
related to the
variable
s
influenced by the
introduction of the
Regulation Fair Disclosure
in fall 2000
Expect analysts
consensus forecasts to be
more pessimistic after the
enforcement of the
Regulation
Regulation Fair
Disclosure introduced
in fall 2000
Prediction Models
Regress the forecast error on the variables above with a linear fixed
effects model
Robust regression approach: this is important for higher prediction
accuracy as outliers (extreme values) heavily affect the precision of
prediction models
Winsorizing helps: particularly in the case of the random walk model
Derive trading strategies for each of the four comparing models
1. Random walk; 2. Random walk with conditional filtering; 3.
Robust fixed effects models; 4. Robust fixed effects models after
winsorizing
Using OLS model before and after winsorizing as benchmark
model
Sort stocks by the predicted forecast errors: long (short) stocks with
negative (positive) forecast errors
Hold stocks for 7 days, starting 5 trading days before the earnings
announcements
Compare two trading strategies:
(1) Magnitude strategy: Long (short) stocks whose predicted
forecast error is below (above) the 10% (90%) decile of the
realized forecast error in quarter t-1
(2) Sign strategy: Long (short) stocks for which the forecast
error is predicted to be negative (positive)
Construct equally weighted portfolios with daily rebalancing
Because months of January, May, July and September typically
observe a high concentration of earnings reports on a daily basis
Calculate the profitability of perfect foresight strategies (assuming a
perfect prediction of analysts forecast error) as benchmark
Transaction cost assumptions: 0.24% for the largest stocks (5th

quintile), 1.39% for the second smallest stocks (2nd quintile)
Magnitude strategy generates significant returns
With perfect foresight, magnitude strategy earn a monthly 4-factor (net
of transaction cost) abnormal return of a 4.6% over a trading horizon of
7 trading days
Suggesting that predicting analysts forecast error can be a

source of alpha (Panel A of Table 5 and Figure 4)
Magnitude strategy without winsorizing (Panel A of Table 5)
Robust fixed effects Model (2) yields the largest gross returns of
1.4%
The 4-factor alpha is a significant 1.257%, with a Sharpe ratio is
0.5%
Winsorizing helps slightly (Panel B of Table 5)
The gross abnormal return of the robust fixed effects Model (2)
increases to 1.4%
The sign strategy significantly underperforms a magnitude strategy
(Figure 4)
Discussions
We think the proposed systematic approach may help researchers to
forecast analyst errors, and build longer-term strategies
However the transaction cost treatment is not conservative enough,
hence it may be flawed as a short-term strategy. As the authors say,
With a level transaction cost of 0.100%, the robust Model (2) would
still earn a significant net abnormal return of 1.018%. If the level of
transaction costs is increased to 0.353%, the net abnormal return of
Model (2) is reduced to an insignificant abnormal return of 0.110%
(table 5)
Data
Analysts quarterly earnings forecasts and actual earnings are from the
Institutional Broker Estimate System (I/B/E/S) database from 1995 to
2010
Keep the quarterly earnings announcement if the report date does not
exceed the SEC filing deadline, set at 45 days following the end of the
quarter
Stock prices, returns and market capitalization data are from CRSP
Paper Type:
Working papers
Date:
2010-03-31
Category:

momentum
Title:
Authors:
Source:
SSRN working paper
Link:
Summary:

Definitions
earnings, SUE)
price momentum
Small cap bias
other (Table 6)

8)
0.63%)
(R1-R5)
each metric
Strong seasonality
January (Table 9)
"23% to 40%" (Table 10)
Data
date)
Paper
Type:
Working papers
Date:
2009-11-23
Category: Novel strategies, bond, earning surprises

Title:
The Asymmetric Magnitude and Timeliness of the Bond Market Reaction to

Earnings Surprises
Authors:
Mark DeFond, Jieying Zhang
Source:
Waterloo University working paper
Link:
http://accounting.uwaterloo.ca/seminars/DeFond_Zhang_042809_6.pdf
Summary
:
Bond prices lead stock prices before negative earning announcements. This
may be because bond prices are more sensitive to bad news, and bond
investors expend more resources to discover bad news
Intuition
Bondholders have limited upside potential since bond prices react
mostly to bad news
This contrasts sharply with stock prices, which can react to both good
and bad news
Consequently, bondholders care more about bad news and expend
more resources to discover bad news than the stock investors
Bond prices impounding bad news more quickly than good news
Meanwhile, compared with stock investors, bond investors are also
more sensitive to negative changes in financial statement (which is
usually linked with debt covenant)
Event study result
Bond
Stocks
Before the
announcements
(-20,-2)
For bad news, the

magnitude of (-20,-2)
period bond reaction is
twice as large as than
(-1,+1) reaction
For good news, no
significant reaction
For both good and

bad news
, (-20,-2)
reaction is less than
half than during
(-1,+1) period
During the three-day

earning
announcement
Bond prices react

similarly significantly
to
both good and bad
Stock prices react

similarly significantly
to
both good and bad
(-1,+1)
news
news
Longer horizon
(-10,+1) and
(-20,+1)
Bond prices react

significantly
only to
bad news
, but not
good news
Stock prices react

significantly
only to
goof news
, but not
bad news.
Source: the paper

Speculative grade bonds more sensitive
Compared with investment grade bonds, to both good and bad news
Bond prices react to changes in the some financial ratios that are most
commonly used in debt covenants
For example, the most frequently used covenant in private debt
agreements is the change in the ratio of (debt/EBITDA)
Bond market reacts significantly to bad news changes in two of the
covenant ratios: Interest coverage ratio and Leverage
But stock prices does not react to bad news changes in any of the
ratios
Discussions
This paper suggests that one can profit by selling short stocks with
negative bond price reaction before an earning announcement. It
would be more directly useful if the author can include discussions on
the profitability of such strategies
Data
1994 2006 11,641 quarterly earnings announcements (representing
710 distinct bond issuers) are from IBES
Actual daily price quotes from bond market makers are from
Datastream
Bond characteristics, including current ratings, are from the Mergent
Fixed Income Securities Database (FISD)
Paper
Type:
Working papers
Date:
2009-11-23
Category
:
Earning surprise, value, growth
Title:
When Two Anomalies meet: Post-Earnings Announcement Drift and

Value-Glamour Anomaly
Authors:
Zhipeng Yan and Yan Zhao
Source:
SSRN Working Paper
Link:
Summar
y:
Value and growth stocks display very different drift pattern after
positive/negative earnings surprises. A double sorting strategy can generate
abnormal returns
Definitions:
Earnings announcement abnormal returns (EAR) is the three-day [-1,
+1] abnormal returns
EAR does not equal earnings surprises
For 53.1% of observations, EARs and earnings surprises move
in the same direction
in the opposite direction
For the rest observations, the earnings surprises are equal or
close to zero (0 or less than 0.001)
Segmenting stocks
First sort stocks into value and growth stocks
Next sort value/growth stocks into six categories according to sign of
the most recent quarterly earnings surprise (+/-/0) and the direction
of the most recent earnings announcement EAR (+/-).
Value stocks are less volatile than growth stocks around earnings
announcement dates
When EARs are positive, growth stocks have larger positive EARs than
value stocks
When EARs are negative, growth stocks have larger negative EARs
than value stock
Stocks with
positive
earnings surprises
and
positive
EAR
Stocks with n
egative
earnings surprises
and
negative
EAR
Value stocks
(Segment I): much

larger
drift
(Segment II): much

smaller drift
Growth stocks
(Segment III): much

smaller drift
(Segment IV): much

larger
drift
Different sensitivities to positive/negative earning surprises and EAR

A strategy that is long stocks in Segment I (value stocks with both
positive earnings surprises and positive EAR) and short stocks in
Segment IV (growth stocks with both negative earnings surprises and
negative EAR) generates annualized size-adjusted returns of 18% with
an annualized Sharpe ratio of 0.97
High hit ratio: about 80% of quarters produce a positive return
Most of the return comes from the long side
Robustness:
Data
The finding is robust when different value measures are used:

book-to-market ratio (BM), earnings-to-price ratio (EP), cash
flow-to-price ratio (CP) and past growth in sales (SG)
The finding holds for stocks from different exchanges
The correlation of strategy returns with quarterly S&P 500 Index
returns is -0.06
June 1984 through December 2008 stock price and accounting data
Earning related data (The mean analyst forecasts, quarterly earnings
per share (EPS), earnings announcement dates and actual realized
EPS) are taken from I/B/E/S
Paper
Type:
Working papers
Date:
2009-10-14
Categor
y:
Novel strategies, earning announcements, 10-K
Title:
Limited Attention and Stock Price Drift Following Earnings Announcements and
10-K Filings
Authors
:
Haifeng You, Xiao-Jun Zhang
Source:
SSRN working paper
Link:
Summar
y:
Investorsunderreacttoinformationcontainedin10Kfilings,as10Kfilingsgetfarless
investorattentionthanearningsannouncements,thoughbothcontainvaluableinformation.
Amountofinformationinreleasesismeasuredastheexcessstockreturnaroundearnings
announcementdatesand10Kfilingdates
Background:Companiesreportfinancialresultsintwosteps:
Step1:atearningsannouncementdate,managementreportskeyperformance
measures(suchasearningspershare,salesgrowth,andoperatingprofit)
Step2:lateron,the10KreportisfiledwithSECwhichcontainsotherdetailed
information(suchasfootnotes,managementdiscussionsandanalysis,anda
statementofcashflows)
Earningonaverageareannounced41daysafterfiscalyearendtoearnings
announcement
10kfilingisreleased88daysafterfiscalyearend(whichalmostequalsthe
mandatorydeadlineof90days)
Amountofinformationinreleasesismeasuredastheexcessstockreturnaround
earningsannouncementdatesand10Kfilingdatestomeasurethe
10Kfilingdatesreturn(FDR)isthe3day(starting10Kreleasedate)
accumulativesizeadjustedreturns
Earningsannouncementreturn(EAR)isthe3dayaccumulative
sizeadjustedreturnsstartingwithdate1(thedaybeforetheearnings
announcementdate)
Intuition
Step1(Earningsannouncements)getfarmoreinvestorandanalystattention
Incontrast,step2(10Kfilings)usuallyattractingmuchlessinvestorattention,
thoughitcontainsvaluableinformationtoo
Suchinvestorslackofattentionto10Kleadstounderreaction
Compareunderreactionto10Kandearningannouncements
ThisisdonethroughconstructingportfoliobasedonFDRandEARseparately
Amonglargefirms,investorsunderreactmoretotheinformationcontainedin10K
filingsthanearningsannouncements
Underreactto
earning
announcemen
ts
Underreactto
10Kfilings
Largevs.
smallstocks,
measuredin
pricedrift
Strongerfor
smallfirms
thanlarge
firms
forsmallcap
stocks,the
12month
pricedriftis
11.42%
forlarge
firms,the
12month
pricedriftis
2.54%
Strongerfor
smallfirmsthan
largefirms
forsmallcap
stocks,the
12monthprice
driftis11.42%
forlargefirms,
the12month
pricedriftis
2.54%
Forevery1%
ofimmediate
market
reactionto
earning
release,the
magnitudeof
delayed
responseto
Delayed
responseto
every1%
immediate
market
reactionto
information
release(by
conducting
Forevery1%of
immediate
marketreaction
toearning
release,the
magnitudeof
delayed
responseto
releaseisabout
0.07%
multivariate
regression)
releaseis
about0.07%
ConstructingportfoliobasedonFDR+EAR
SortsockseachyearintoquintilesbasedonthemagnitudeofEAFDR(=sumof
EARandFDR),startingthemonthafterthe3day10Kfilingwindow(since10K
filingislaterthanearningannouncements)
FirmswithhigherEAFDRoutperformthosewithlowerEAFDR:sizeadjusted
12monthreturnforthehighestEAFDRquintileis4.40%,stockswithlowestEAFDR
is4.39%(perFigure2)
Robustness:asshowninregressionanalysis,suchfindingisrobusttousual
suspectssuchasvalue,momentum,size,accruals
Timelinessmatters,clusteringmattersless
Usethenumberofdaysbetweenfiscalyearendandthe10Kfilingdate/earnings
announcementtomeasurethefiling/announcementtimeliness
Themoretimelythereleases,thelessunderreactionthisisbecauseinvestorspay
moreattendtiontotimely(early)release
Investorsunderreactmorewhenmorefilingsoccuronthesameday:thestock
pricedriftis12.28%forclustered10Kfilings,and3.80%forunclustered10K
filings
However,aftercontrollingfortheeffectoffilingtimeliness,thenumberofconcurrent
filingsnolongerhassignificantimpact
Data
123,449electronic10KfilingsinformationfromJanuary1,1995toDecember31,
2005arefromprovidedbyXigniteInc,CompustatandCRSP
Quarterlyannouncementsand10Qfilingsareexcludedbecause(1)less
informationinthesefilingsasindicatedbythemuchsmallernumberofwords(2)
mandatorydeadlinesfor10Qfilingsaresignificantlyshorterthanthatfor10Ks
Paper
Type:
Working Papers
Date:
2009-04-14
Category: Earning levels, earnings announcement, novel strategy

Title:
Post Loss/Profit Announcement Drift
Authors:
Karthik Balakrishnan, Eli Bartov, Lucile Faurel
Source:
NYU working paper
Link:
http://archive.nyu.edu/bitstream/2451/27762/2/Post+Losses+Announcemen
t+Drift+10-2008.pdf
Summary
:
Stocks with highest earnings outperform those with lowest earnings.

Specifically, stocks with highest profits (highest loss) generate a 120-day
Carhart-factor adjusted return (following the quarterly earnings
announcement) of -0.52%(-8.49%)
Earning levels are measured as the earnings before extraordinary
items/total assets
announcements:
Portfolio
Abnormal
return (per
quarter)
All loss
firms
Size-Adjusted
Cahart 4 factor
alpha
All Profit
firms
[-2,0]
days
[1,60]
days
[1,120]
days
-0.91
%
-2.80%
-5.07%
-0.96
%
-4.34%
-8.49%
Size-Adjusted
0.64
%
0.08%
1.50%
Cahart 4 factor
alpha
0.59
%
-0.01%
-0.52%
Robustness:
This earnings level phenomenon is not subsumed by other know
anomalies, such as earnings surprise and accruals
This finding is robust to alternative risk adjustments, distress risk,
short sales constraints, transaction costs, and sample periods.
Comment
s:
Discussions:
It is easier to understand why high loss firms are mispriced: investors
do not have a formula for those firms as common valuation measures
(P/E) do not apply on such stocks.
Intuitively stocks with highest earnings can be more easily valued.
Indeed, these high earning stocks generate abnormal returns much
closer to 0 compared with high loss firms.
Earnings level is a less studied area: most other papers studies
earning surprises, measured as the deviation from analysts consensus
(as opposed to earning levels)
Regarding earnings level, we covered The Pricing of Accruals for
Profit and Loss Firms
(
)
before, where it shows that the accrual strategy is related to the
companies profitability: the accruals for profit firms are overpriced,
with a hedged return ~15%; while the accruals for loss firms are
slightly underpriced, with an insignificant hedged return ~6%
Data:
1976-2005 earnings data are from Compustat quarterly database.
Stock daily returns are from the CRSP
Stocks with stock prices below $5 are eliminated
Paper
Type:
Working Papers
Date:
2008-12-20
Categ
ory:
earnings, analyst, Earning profit and loss, earning surprise
Title:
Post loss/profit announcement drift
Autho
rs:
Karthik Balakrishnan, Eli Bartov and Lucile Faurel
Sourc
e:
SSRN working paper
Link:
Sum
The paper documents a profitable investment strategy that goes long on
mary: high-profit firms and short on high-loss firms 120 days following earnings
announcements. Such earnings level factor adds value to the conventional
earning surprise strategy.
Definitions and portfolio constructions:
Every quarter firms are ranked by their earnings before
extraordinary items/total assets into quintiles.
Highest (lowest) quintile firms defined as high profit (high loss)
firms.
The buy-hold returns of each profit-loss quintile are reported for
120 days following the earnings announcement (Figure 2)
announcements:
Results strongest for the highest profit and loss quintiles (quintiles 1 and
5).
Not subsumed by the conventional earning surprise strategy
SUE is defined as the standardized unexpected earnings, and is a
measure of earning surprise
The profit (loss) level factor not subsumed by SUE, BM and
Accruals
Data
358,634 firm-quarters and 11,667 distinct firms are used over the
sample period 1976-2005.
Accounting variables are taken from COMPUSTAT
Returns are taken from CRSP.
Fama-French Factors are from Kenneth Frenchs webpage
Paper
Type:
Working Papers
Date:
2008-10-15
Category:
Earning surprise, earnings whisper
Title:
Information Content of Whispers Relative to Firm Size
Authors:
Maretno (Augus) Harjoto, Janis K. Zaima, Jian Zhang
Source:
FMA Conference 2008
Link:
http://www.fma2.org/Texas/Papers/WhisperForecastandFirmSize_FMA2008
.pdf
Summary:
Whispers (unofficial earnings forecasts) provide greater information on

small firms than they do on large firms.
Definitions
Whispers earnings: the unofficial earnings forecasts
submitted by individual investors on WhisperNumber.com
Per WhisperNumber.com: "The whisper number is derived
from an average of individual investors expectations
regarding earnings for the most recent quarter"
Cumulative average abnormal return (CAAR): the sum of the
3-day (from the day before the announcement to the day
after the announcement) abnormal returns for a firm, where
abnormal return is actual return minus the market return
(value-weighted CRSP portfolio return)
Higher abnormal returns for whisper-based earnings surprises for
small firms
For positive whisper-based surprise, CAAR is 1.68% for the
quartile of smallest firms versus 0.84% for the quartile of
largest firms
For negative news, CAAR equals -2.54% for small firms and
-1.2% for large firms
Higher average relative trading volume for small firms than large
firms
Comments
:
Relative trading volume defined as shares traded over a day

divided by shares outstanding during non-event period
Likely reason:
Whispers provide more information on small stocks (where
information is limited)
1. Discussions
It is interesting to see that individual investor estimates have some
forecasting power. The study follows other analysis of whispers, for
example "Zaima and Harjoto (2005) provide evidence that the market
reaction to whispers is stronger than the market reaction to analysts".
Unfortunately, there is no direct discussion on whether whisper-based
earning surprise strategy gives higher profit than the commonly used
earning surprise strategies. The authors are more interested in presenting
the phenomena where people on the street seem to know better than the
professionals.
2. Data
13,795 firm-quarter observations for the First Call Analyst forecasts and the
whisper forecasts from WhisperNumber.com that covers the period January
1997 to December 2006. Additional data from CRSP and Compustat.
Paper Type:
Working Papers
Date:
2008-05-20
Category:
Earning announcement, momentum
Title:
Limited Attention and the Earnings Announcement Returns of Past

Stock Market Winners
Authors:
Source:
UCI working paper
Link:
http://catalyst.merage.uci.edu/tools/dl_public.cat?year=2007&file_id
=320&type=cal&name=5-11-07%20Trueman-Earnings%20Announce
ments.pdf
Summary:
This paper finds that it is profitable to buy stocks with very high
momentum stocks 5 days before earning announcements, and then
sell short these stocks until 5 days after earning announcements. The
10-day average profit is 3-6%.

5 trading days
before
earnings
announcements
5 trading days
after
earnings
announcements
1. All stocks
+0.30%
-0.10%
1. stocks with 1%
highest prior year
returns
+1.58%
-1.86%
1. Same condition
as (2), plus:
earning
announcements
occur outside of
normal trading
hours
+3.09%
-3.05%
1. Same condition
as (3), and
assuming buy
stock at ask
prices, and sell at
bid prices.
+1.66%
-1.34%
Comments:
Robustness: The finding is robust to contemporaneous

pre-release/post-release analyst earnings forecast revisions,
and negative earnings surprises.
May be drive by small investors: Before announcements, there
exists an order imbalance for small and medium investors, but
such imbalance disappears after announcement
Likely reason: Stocks with extremely high returns attract
individual investors attention (particularly before their
earnings announcements), to an extent that their stock prices
over-shoot due to mass enthusiasm.
1. Discussions
Some interesting additional tests:
Should we avoid the stocks with 1% highest momentum?
How about combining momentum with earning surprises?
Our concerns:
Are there longer term recovery? The paper only shows that
the prices for high-fliers are likely to go down 5-days after
announcements.
Valid in recent years? Performance of earning based strategies

changed a lot after 2003, arguably due to the hedge fund
booming.
Small-cap bias: perhaps it makes sense to adjust the
short-term return by only substracting return relative to the
market, but these high momentum stocks are likely to be
smaller stocks. (Table 2 panel A only reports the average
market size of highest 10% momentum, not 1% momentum).
To us, this paper partially highlights the risk of momentum investing:
it works when it works. It is always hard to detect when stock
prices will reverses. This is important since although earning surprise
strategies are less popular nowadays, momentum is still a must-have
ingredient for many quant models.
2. Data
1971 2005 daily stock return data are from COMPUSTAT, and
earnings release/forecast returns are from Factiva.
Paper Type:
Working Papers
Date:
2008-05-20
Category:
Earning announcement period volume, earning surprises
Title:
The High-Volume Return Premium and Post-Earnings

Announcement Drift
Authors:
Alina Lerman, Joshua Livnat and Richard Mendenhall
Source:
SSRN Working Paper
Link:
Summary:

combining two predictive factors (1-5 day
trading volume around earnings announcements and standardized
unexpected earnings, SUE) results in higher returns.
The reason why trading volume can predict returns: stocks
with greater trading volume around the earnings
announcements attract more analysts and investors
attention, which leads to greater post-earnings drift.
Two-way sort works:
When stocks are sorted by volume, the return
spread is 2.71% per quarter
When stocks are sorted by SUE, the return spread
is 4.31% per quarter
When stocks are two-way sorted by volume and SUE, the

return spread is 7.64% per quarter,
Direction matters: High volume + negative earning
surprise events exhibit a stronger immediate price
response, but a weaker drift; while high volume + good
news events exhibit stronger immediate and subsequent
price responses.
Volume effect only exist in small stocks: return spread
between high-to-low volume quintile is 4.08% per quarter
for small firms, and 0.78% for large firms.
Volume effect exists in both value and growth: the
high-to-low volume quintile is 2.92% per quarter for
growth stocks, and 2.44% for value stocks.
Comments:
1. Discussions
Our concerns:
Volume effect not effective within large-cap stocks: will
the volume effect survive the higher transaction cost and
volatility of small cap stocks?
Recent performances: earning surprise strategies have
been much weaker since 2003.
2. Data:
I/B/E/S for analyst forecasts data, COMPUSTAT for earnings and
market-to-book data and CRSP for stock return and volume data
for the time period 1987-2006.
Paper Type:
Working Papers
Date:
2008-05-20
Category:
Earning surprises, earnings announcements returns
Title:
Earnings Announcements are full of surprises
Authors:
Michael Brandt, Runeet Kishore, Pedro Santa-Clara and Mohan

Venkatachalam
Source:
UCLA working paper
Link:
http://www.personal.anderson.ucla.edu/pedro.santa-clara/ear.pd
f
Summary:
The earnings announcements returns (EAR) (defined as the

stock price return around the earnings announcements, i.e., t-1
to t+1) can be a better measure to forecast post-announcement
drift than earning surprises.

A strategy that buys high EAR stocks and sell low EAR
stocks earns abnormal returns of 7.55% per year, which is
1.3% more than a strategy based on the traditional
measure of earnings surprises.
EAR strategy returns doesnt show a reversal after three
quarters
Low correlation between EAR and the earnings surprises
variable
Two-way sort works best: their simultaneous use brings
an annual abnormal return of 12.5%.
Paper Type:
Working Papers
Date:
2007-10-29
Category:
Accruals, earning surprises
Title:
Reconciling the Markets Overreaction to (Abnormal) Accruals and

Under reaction to Earnings
Authors:
Henock Louis, Amy X. Sun
Source:
London Business School working paper
Link:
http://www.london.edu/assets/documents/PDF/HLouis_paper.pdf
Summary:
This paper finds that the negative (positive) earning surprise drift
effect is stronger for stocks with high income-increasing
(decreasing) accruals.
The authors first make a general observation
- investors seem to overreact to (abnormal)
accruals
- but they under-react to earnings surprises
- and under-react to earnings-to-price ratios (E/P)
This may be due to investors failure to detect earning
management:
to mitigate shocks to investors, companies
with large negative unexpected earnings surprises
(standardized unexpected earnings, SUE) may have used
income increasing accruals, while companies with large
positive (SUE) may have used large income decreasing
accruals
Hence the negative (positive) earning surprise effect
should be stronger for stocks with high income- increasing
(decreasing) accruals. A strategy that is
- long stocks with positive surprise (ie, high SUE) / low

abnormal accrual / value (ie high E/P) firms- short stocks with negative surprise (ie, low SUE) / high
abnormal accrual / moderate E/P firms
earns an abnormal return of 46% annually (23% over the
two quarters after earning announcement). In
fact, there is virtually no earning surprise drift when
such stocks are removed.
Moderate E/P firms are used instead of low E/P firms to
select stocks for short, because investors are less likely to
be mistaken by the upward earnings management
activities of the negative SUE, low(or negative) E/P firms,
which tend to risky stocks.
This strategy is consistent across time, generating positive
abnormal returns in every quarter in the sample period.
Comments:
1. Discussions
This paper gives a great example of factor interaction:
conditioning stock ranking of one factor on otherfactor(s) may
give improved results. 1 + 1 > 2.
The profit of the strategy sounds real big and rather consistent
(profitable very quarter during 1988- 2004). The problem is
whether this is strategy is outdated given the bad
performance of earning-based strategies since 2003
whether this strategy works in different universes. The
authors, like many others, throw all the stocks in all
exchanges in this study. The out-sized profit may be due
some small and illiquid stocks.
2. Data
1987 - 2004 stock data are from Compustat quarterly files.
Paper Type:
Working Papers
Date:
2007-10-16
Category:
Analysts hold recommendations, earning increases
Title:
Hold em? Using Financial Statement Information to Pick Winners

and Losers when Consensus Analysts Recommendations are
Neutral
Authors:
James Michael Wahlen, Matthew M. Wieland
Source:
SSRN working paper
Link:
Summary:
This paper finds that for stocks with hold (neutral) analyst
ratings, higher future earnings growth predicts higher stock
returns.
Key findings:
An earnings increase score (EIS) measure (made up of
6 equally weighted financial statement can predict the
likelihood that a firm will generate higher earnings in the
coming year. EIS is a function of:
RNOA (return on net operating assets operating
income / average net operating assets)
GM(gross margin growth rate sales growth rate)
SG&A(cost item = SGA (t) / sales(t) SGA (t-1) /
sales(t-1))
ATO (asset turnover ratio =
Sales(t)/TotalAssets(t-1)
Sales(t-1)/TotalAssets(t-2))
GNOA(growth in net operating assets, (NOA(t)NOA (t-1)) / NOA(t-1))
ACC (accruals, (operating income cash from
operations/ average net operating assets))
For stocks with hold those with highest EIS generate
significantly higher returns. During the period of the
hedged annual size -adjusted return is 16.4%
For all stocks (i.e., without considering analysts ratings),
an equally-weight strategy that long (short) stocks in the
highest (lowest) EIS yields 9.2% size-adjusted returns.
Comments:
1. Discussions
For most quant managers, "Hold" stocks account for a significant
portion of investment universe(30% in this paper) This paper
may help us to differentiate winners from losers in this subset.
Questions we have:
The six factors do not look very new, so why this strategy
can yield extra alpha
It may have something to do with the universes that the
authors choose (only stocks with "hold" ecommendations).
But this invites the question as to why the EIS measure
works better in this subset of stocks? We would love to see
more discussion on this topic to assure that this is not a
result of data mining.
Another interesting finding, which is also in line with general
observation, is that a strategy that blindly follow analyst buy/sell
recommendations yields insignificant abnormal returns ( 3.1
percent) on average.
2. Data
2005 all stocks with stocks individual analyst recommendations
from the Institutional Broker Estimate System (I/B/E/S). Stock
pricing and accounting data are from CRSP/Compustat.

I/B/E/S assigns a numeric value to each analysts
recommendation: Strong Buy (1), Buy (2), Hold (3),
Underperform (4), Sell (5). In this paper, "hold" refers with
stocks with mean recommendation values from 2.51 to 3.50.
Total number of stock is 4,235 for the 12 years.
Excess return is measured as the difference between a firms raw
return and the return on the CRSP size based decile portfolio.
Paper Type:
Working Papers
Date:
2007-09-23
Category:
Dividend Reductions and Omissions, earning surprise
Title:
Underreaction to Dividend Reductions and Omissions?
Authors:
Yi Liu, Samuel H. Szewczyk, Zaher Zantout
Source:
Journal of Finance forthcoming paper
Link:
Summary:
Using rather old (1927 1999) and scarce data (total 2,337 cash
dividend reduction or omission announcements, ~30/year), this
paper finds that
companies that announced
dividend reductions and
omissions
suffer negative post announcement
abnormal
returns
which last one year
Ouch abnormal under

performance is driven by the
post-earnings
announcement drift.
Paper Type:
Journal papers
Date:
2007-09-05
Category:
Earning surprise, analysts forecast
Title:
Double Surprise into Higher Future Returns
Authors:
Alina Lerman, Joshua Livnat, and Richard R. Mendenhall
Source:
Financial Analysts Journal, July/August 2007, Vol. 63, No. 4:

63-71
Link:
http://www.cfapubs.org/doi/abs/10.2469/faj.v63.n4.4750
Summary:
Post-earnings-announcement drift is the well-documented ability

of earnings surprises to predict future stock returns. Despite
nearly four decades of research, little has been written about the
importance of how earnings surprise is actually measured. We
compare the magnitude of the drift when historical time -series
data are used to estimate earnings surprise with the magnitude
when analyst forecasts are used. We show that the drift is
significantly larger when analyst forecasts are used.
Furthermore,
we show that
using the two models together does a better job of
predicting future stock returns than using either model alone.
Paper Type:
Working Papers
Date:
2007-08-23
Category:
Repurchase, earning management
Title:
Earnings Management and Firm Performance Following Open

Market Repurchases
Authors:
Guojin Gong, Henock Louis, Amy X. Sun
Source:
SSRN working paper
Link:
Summary:

company management tend to artificially
drive earnings downward (using earning
management tools)
before stock repurchase

. Both post repurchase abnormal returns
and reported improvement in operating performance therefore do
not reflect genuine earning growth.
Paper Type:
Working Papers
Date:
2007-06-05
Category:
Earning press release sentiment analysis
Title:
Beyond the Numbers: An Analysis of Optimistic and Pessimistic

Language in Earnings : Press Releases
Authors:
Angela K. Davis, Jeremy M. Piger, Lisa M. Sedor
Source:
Link:
Summary:
Using textual analysis software to measure levels of optimism and

pessimism in earnings press releases from 1998 2003, this paper
finds that optimistic (pessimistic) level reliably predict future
positive (negative) firm operating performance, measured as the
average of ROA in following four quarters following optimistic
(pessimistic) level are priced in 3 day stock returns during
earning announcement period, in addition to earning surprises
and other factors.
Paper Type:
Working Papers
Date:
2007-04-17
Category:
Earning surprises, momentum
Title:
Authors:
Source:
University of California Irvin working paper
Link:
nnouncements.pdf
Summary:
We mentioned this paper in earlier issue, now the ful text paper is
available. Key findings
Prior 12
month
momentum winners enjoy
a significant risk
adjusted return of 1.58% during the five
trading
days before
earnings announcements, and a significant risk
adjusted return of
1.86% in the five
trading days after the
announcements.
Paper Type:
Working Papers
Date:
2007-04-01
Category:
New earning surprise measure
Title:
A New Measure of Earnings Surprises and Post Earnings

Announcement Drift
Authors:
Zhipeng Yan, Yan Zhao
Source:
Brandeis University working paper
Link:
http://people.brandeis.edu/~yanzp/My%20papers/PEAD.pdf
Summary:
This paper develops a new measure of earnings surprises, ie,

earnings surprises
elasticity (ESE):
ESE =
(earnings announcement abnormal returns (EARs)) / earnings
surprises (ES, in %))
Earning surprise strategy works
best
for low ESE stocks
a
strategy that is long low ESE stocks with positive ES and EARs,
and short low ESE stocks with negative ES and EARS, generates
~5% quarterly (20% annually) abnormal return.
Comments:
1. Why important
The conventional earning strategies in US has lost part (if not all)
of its power in recent years. Thats whywe are encouraged by the
year results pres ented in the paper (figure 3-5), which shows
that theESE strategy works fine on quarterly basis even in the
period of 2003 2005.
2. Data
1985 2005 analyst forecast, earnings announcement dates and
actual realized EPS are from I/B/E/S. Stockprices are from
CRSP/Compustat.
3. Discussions
Why would this strategy work (if it does)? The intuition is that if
stock prices do not move much when surprise is large, then the
likelihood of under reaction is higher.
Two concerns we have:
When abnormal returns are calculated, only size is adjusted and
that leaves room for further robust check.
The classical SUE based strategy is shown (in Table 3) to have
similar hedged return as this "new" strategy during the past 20
years. One would expect higher returns if ESE is indeed better.
Paper Type:
Working Papers
Date:
2007-03-18
Category:
Earnings surprise, number of earning announcement, investors

limited attention
Title:
Driven to Distraction: Extraneous Events and Under-reaction to

Earnings News
Authors:
David A. Hirshleifer, Sonya S. Lim, Siew Hong Teoh
Source:
Yale workshop in behavior finance paper
Link:
http://www.econ.yale.edu/~shiller/behfin/2006-11/hirshleifer.pdf
Summary:
Isn't surprising to find that in 2005 there are on average 115

earning announcement per day in US?
This paper is built on a theory that human being has limited
attention, and could not process multiple information
events(earning announcements) as effectively as when there are
fewer information event
For earnings
announcements made
on days with many
earnings
announcements by
other firms
For announcements
made on days with
fewer
announcements by
other firms
Profitability of
Most profitable
earnings surprise
Not profitable
Stock
price/volume
reaction to
earning surprise
Strong
Weak
Unrelated news
(announcements from firms in same industry)
distracts investors while related news does

not.
Comments:
1. Why important
This is very interesting paper and hopefully can improve the
conventional earning strategies.
2. Data
1995 2004 quarterly earnings announcement data are from CRSP
Compustat merged database and IBES.
3. Discussion
The impact of market capitalization is a concern for
implementation. From Table 7 in the paper, we can see that this
strategy generates significant 30 day risk adjusted profits in

smaller companies (when equally weighted!), but not in larger
companies.
Another very interesting yet puzzling finding is that
unrelated
news distracts investors while related news does not
, as shown
Table 8. Here a related announcement is defined as earnings
announcements by stocks in the same industry firms, and
unrelated announcements is announcements by firms in other
industries.
A detailed year study will shed more insights, as the classic
earning strategy has not performing well in recent years.
A related paper we covered before is Overreaction to Intra
Industry Information Transfers?
),
where it is found that the higher the return of a stock during peer
stocks' earnings announcements, the lower return this stock will
generate during its own earnings announcements.
Paper Type:
Working Papers
Date:
2007-03-18
Category:
Earning surprise, short selling cost
Title:
Short Sale Constraints, Heterogeneous Interpretations, and

Asymmetric Price Reactions to Earnings Surprises
Authors:
Jianguo Xu, Liu Zheng
Source:
SSRN working paper
Link:
Summary:
Since short selling is costly, stock prices generally reflect more

optimistic opinions. This paper confirms this theory empirically:
Price reactions are stronger to positive than to negative
earnings surprises; Such asymmetry increases with the
dispersion of post announcement analyst revisions; and
short selling costs.

Paper
Type:
Working Papers
Date:
2015-05-03
Category
:
Hedge funds, investment manager skill, price impact
Title:
Hedge Fund Trading and Fundamental Value
Authors:
Jonathan Rhinesmith
Source:
SSRN Papers
Link:
Summar
y:
The quarterly hedge fund trading volume indicates the strength of private
information. Portfolios of stocks with high volume consumed by hedge funds
generate significant monthly outperformance of 0.4%-0.6% in the following
quarte
r
Intuition
Hedge funds trading can be used as a proxy for informed trading
Higher volume of informed trading on a stock suggests stronger
private information, leading to higher future returns
A manager who expects information to decay more slowly will build
their position over several quarters, yielding higher future returns
For each stock, the volume consumed by a given hedge fund,
volconsumed, is calculated as the ratio of hedge fund volume to the
lagged normal level of volume
The dynamics of how fund managers typically build their positions
over time, buildratio, is calculated as the ratio of positions build over
more than one quarter to the total number of positions initiated to
date
Portfolio formation
Each quarter, sort stocks into deciles based on volconsumed or
buildratio
Go long into stocks in the top decile
Top deciles of volconsumed and buildratio outperform in the following quarter
Source: The Paper
The cumulative buy and hold performance of the top decile
volconsumed and buildratio portfolios remains significantly positive for
roughly two years (Figures 1, 3)
Prices show no signs of reverting, even over multi-year time horizons
(Figures 1, 3)
The results are robust to testing a number of alternative

interpretations, such as hedge fund activism, capturing only best ideas
or hetergenous beliefs (Table 13)
Both strategies show relatively stable performance over time, apart
from the internet bubble of the late 1990s:
Source: The Paper

Data
Hedge funds trading data from Thompson Reuters 13F database
(CRSP)

Date:
2015-02-17
Category:
Novels strategy, short selling, hedge funds holdings
Title:
Short Selling Meets Hedge Fund 13F: An Anatomy of Informed Demand
Authors:
Yawen Jiao, Massimo Massa, Hong Zhang
Source:
SSRN Papers
Link:
Summary:
Opposite changes in short interest and hedge fund holdings are likely
driven by information rather than hedging (unwinding) incentives. Stocks
with informed long demand can outperform stocks with informed short
demand by 10% per year
Opposite changes in short interest and hedge fund holdings are

likely driven by information rather than hedging (unwinding)
incentives
Informed long (short) demand, Dlong (DShort), occurs when hedge
fund ownership increases (decreases) from quarter t-1 to quarter t
and when short interest decreases (increases) over the same
period
Portfolio formation
Double sort stocks into terciles (quartiles) based on hedge fund
holding changes and short interest changes
Long (short) stocks that have most substantial informed long
(short) demand
Strategy generates significant abnormal returns
Stocks with quartile-based informed long demand outperform those
with quartile-based informed short demand by 2.53% per quarter,
or 10.5% per year
Source: The Paper

Abnormal returns decrease but are still present for up to four
quarters (Table 3)
Results are similar for tercile-based informed demand (Table 3)
Robust to a range of controls (Table 2)
Return predictability is more significant for stocks with high market
capitalization, high turnover ratio, high analyst coverage, and high
analyst dispersion (Table 4)
Informed demand can predict firm fundamentals (proxied by ROA,
SUE, earnings announcement CARs) beyond the ability of the
general public (Table 5)
Data
Hedge funds holding data from the Securities and Exchange
Commission (13F filings)
Hedge funds identities from the Thomson Reuters Institutional
Holdings (13F) database
(CRSP)
U.S. firm accounting data from Compustat
Paper Type:
Working Papers
Date:
2012-09-30
Category:
Mutual fund holdings, mutual funds managed by buy-side

analysts
Title:
The Investment Abilities of Mutual Fund Buy-Side Analysts
Authors:
Gjergji Cici and Claire Rosenfeld
Source:
SSRN Working Paper
Link:
Summary:
Buy-side analysts demonstrate better stock selection skill

through the mutual funds they manage. Stocks that are held by
such Research funds (i.e., funds that are exclusively managed
by in-house analysts) yield significantly higher return that stocks
that are held by other managers
Buy-side analysts are tasked with researching and
recommending stocks for their affiliated fund managers in
the same fund family
Some buy side analysts are also responsible for managing
their funds
E.g., MFS Research funds are run by a team of
about 30 analysts
Note that analyst-run funds are usually smaller than
affiliated manager-run funds
Roughly one-half the size of affiliated manager-run
funds when comparing medians
Managers only use some of analysts recommendations
On average analyst ideas constitute 44% of the
portfolios of affiliated manager-run portfolios
The utilization ratio ranges from 3% to 93% in
affiliated portfolio managers (Table 5 )
Commonly-held stocks are those held in analyst-run
funds and also in affiliated fund managers
Uniquely-held stocks are those appear only in the
analyst-run portfolios and not in any affiliated portfolios
Note that in analyst funds, uniquely- stocks make
up only 9% of the total portfolio value
Methodologies to identify analyst run funds
Step1: Search funds with the word research or analyst
in the fund names
E.g., MFS Research Fund
Step2: Verifying by reviewing its prospectus,
accompanying statement of additional information filed
with the SEC, and its management profile on Morningstar

Direct
The final sample includes 68 analyst-run funds from 14
mutual fund families
Analyst-held "unique stocks outperform the manager-held
unique stocks
Each month, construct portfolio by including uniquely or
commonly-held stocks and equally-weighted portfolio
Hold stocks until the next fund holdings reports
Analysts uniquely-held stocks outperform uniquely-held
stocks of affiliated managers by 52 basis points per
month, or 6% per year (Panel B, table 4)
Analyst funds outperform manager funds
Analyst-run funds outperform both manager-run funds
from other fund families ( nonaffiliated funds) and
manager-run funds from the same families (affiliated
funds)
Analyst funds outperform those of affiliated and
nonaffiliated manager-run funds by 2% to 4% annually,
respectively
Similar out-performance relative to funds that follow a
similar investment style (table 2)
Data
2000-2010 data for 68 analyst-run funds are from CRSP
SurvivorBias Free US Mutual Fund (CRSP MF) Database,
Morningstar Direct Mutual Fund Database, Thomson
Reuters Mutual Fund Holdings Database, and CRSP
Monthly Stock Data Series
All fund data are from the CRSP MF Database
Mutual fund stock holdings data are from Thomson
Reuters
Paper Type:
Working papers
Date:
2011-03-29
Category:
Novel strategies, mutual funds holdings, deviation from benchmark

(DFB)
Title:
Information Content when Mutual Funds Deviate from Benchmarks
Authors:
Hao Jiang, Marno Verbeek, and Yu Wang
Source:
Utah Winter Finance Conference paper
Link:
http://www.utahwfc.org/2011_papers/deviate.pdf
Summary:
Stocks heavily over-weighted by active mutual funds perform better

than those underweighted by more than 6% per year, after adjusting
for common risk factors. Most of the outperformance occurs around
corporate earnings announcements
A typical mutual fund will invest mostly in stocks within a
specified benchmark, and fund managers performance are
measured against such benchmark
So deviation from benchmark (DFB) reflects managers
private research and information
For each fund, this paper identifies its benchmark as the one
index that minimizes the average distance between the fund
portfolio weights and the benchmark index weights
Total 19 benchmarks: the S&P 500, S&P 400, S&P 600,
S&P 500/Barra Value, S&P 500/Barra Growth, 12
Russell indexes, Wilshire 5000, and Wilshire 4500
High DFB stocks usually smaller, out of benchmark, and least
popular
High DFB stocks
Low DFB stocks
Size bias
Smaller: with an
average NYSE size
decile rank of 3.3
Larger: with an
average NYSE size
decile rank of 6.8
Benchmark
membership bias
Likely to be outside
benchmark: Average
portfolio weight of
only 3 basis points in
its benchmark index
(table II)
Likely to be inside
benchmark:
Average portfolio
weight of 29 basis
points in its
benchmark index
(table II)
Popularity bias
Least popular among

mutual funds: on
average only held by
16 funds
More popular
among mutual
funds: on average
held by 36 funds
High returns for high DFB stocks does not contradict with
the finding that mutual funds on average under-perform
benchmarks
Mutual funds invest less than 10% of their assets in
high DFB stocks but 34% in low DFB stocks
Hence a large alpha of 6-7% per year on high DFB
stocks translates into a small mutual fund alpha of less
than 1%
Methodology
Step1 (select benchmarks): For each fund in each quarter,

select from the 19 indexes that minimizes the average
distance between the fund portfolio weights and the
benchmark index weights
Step2 (calculate deviations): for each stock in each fund,
compute the difference between the stocks weight and its
weight in the benchmark index
Step3 (aggregate DFB): for each stock, average this
difference in portfolio weights across mutual funds whose
investment universe includes this stock to get DFBs
DFB strongly predicts future returns
In terms of raw return spread: long(short) stocks in the decile
portfolio with the highest(lowest) DFB generates an average
return of 0.56% per month from 1980- 2008 when equal
cap-weighted, with a t-statistic of 4.38 (table III)
In terms of risk-adjusted returns: the return spread are
0.61% per month after adjusting for market beta, size, value,
momentum, and liquidity factors
The findings are also robust for different weighting schemes,
and across various sub-periods
Most return comes from earning announcement period
Even after adjusting for earnings momentum, the
3-day abnormal return spread between top and bottom
quintile DFB stocks is 0.24% and statistically
significant
Better predictive power for higher-alpha funds
For funds with
high
past two-year alphas, long(short)
high(low) DFB stocks generates monthly four-factor alpha of
0.71% (t=6.59)
For funds with
low
past two-year alphas, long(short)
high(low) DFB stocks generates monthly four-factor alpha of
0.31% (t=2.90)
Higher alpha of DFB not driven by mutual funds herding or buying
pressure
If driven by mutual funds buying herding or buying pressure,
then a increase in DFB in one period should lead to a further
increase in DFB
But in reality, an increase in DFB in one quarter
reliably predicts a decline in DFB in the subsequent
quarter (table V)
Suggesting that informed managers unwinding their
profitable positions, not herding
No return reversal after DFB increase, hence not drive by
buying pressure
Discussions
Data
A related study,
Best ideas
finds that the stock that active
managers display the most conviction outperforms the market
by approximately 1.6-2.1% per quarter
1980-2008 mutual fund data are from the CRSP
Survivor-Bias-Free U.S. Mutual Fund Database (MFDB) and
the CDA/Spectrum Mutual Fund Holdings Database from
Thomson Financial
Eliminate balanced, bond, money market,
international, index funds, and sector funds
Russell indexes data are from the Frank Russell Company,
S&P 500, S&P 400, and S&P 600 index holdings since
December 1994 are from the Compustat
Data on the monthly returns, prices, and market values of
common stocks are from CRSP
Eliminate stocks with prices below $5
Paper Type:
Working papers
Date:
2011-01-23
Category:
Quant meltdown in 2007, quant herding, quant hedge funds,

fund-of-fu
Title:
Quantitative Hedge Fund Strategies: An Investor Perspective
Authors:
Brian T. Hayes
Source:
Columbia quant trading seminar
Link:
http://www.cap.columbia.edu/pdf-files/Hayes_CAP_2010.pdf
Summary:
This presentation suggests that herding did not cause Aug 07

crisis. Rather it is the small-cap bias and overlap in small-cap
names of quant hedge funds that may have exacerbate fund
drawdowns
An fund-of-fund investor only has limited Information to select
quant funds
Rarely have access to model signals
Discussion with manager is mostly on research capability,
manager pedigree, staffing (e.g., # of PhDs), technology,
service providers. Not on signals
Helpful info include track record and fund holdings
snapshots
Most hedge funds are concentrated
This study covers 657 hedge funds

Total $632bn market value, holdings based on their 13F
data
Less than 20 effective stocks (as defined by (1/Herfindahl
Index))
Only ~20% funds have effective number of stocks >80
(page12)
Two types of quant hedge funds
Quant fundamental (slow turnover (months/quarters)
Positions not concentrated: Portfolios of 100s of
stocks long and short
Neutral to equity market
Quant technical
Three categories: statistical arbitrage, directional
equities and high frequency
Short holding periods (< 1 week)
Quant funds have highest overlap among all hedge funds
Measure funds overlap as the sum over universe of
minimum weight in each asset for the two portfolios
Most hedge fund holdings overlaps are modest
Median <2% for L/S Equity and Event Driven
(page 16)
For Quantitative strategies, the medians are 8% and 12%
for EMN and Quant Technical
Quant Fundamental (EMN) see largest overlap in
small- cap names
So could exacerbate risks in liquidation
For quant technical, largest overlap are in large +
mid cap names
Given actual distribution of overlap stocks, simulation results
suggest that quant funds fit independent selection assumption
better
4 models employed, all assuming funds select stocks
independently
2 models use actual number of stocks, 2 use
effective number
2 models assume equally-likely over universe, 2
assume equally-likely over each of 5 market-cap
bins
Then run simulations to compare the simulated vs actual
distribution of overlap stocks (page 18)
EMN & Quant Technical simulation results consistent with
independent stock selection assumption
Both strategies cannot reject that sample and
model from same distribution
Event Driven & Multi-Strategy overlaps results not
consistent with any of four models
For the past 10 years, EMN Quant funds has been on a

downward trend and may get worse
HFRI EMN Index struggled since Nov 07 and also at
previous inflection points (eg, spring/summer 2003 junk
rally)
Key quant factors much less effective than before as
measured by Fama-French-Carhart 4-Factors
Recent policy and regulation changes (eg, short-sale
bans, major regulatory changes in Financials and
Healthcare) partially cause bad performance
Future performance may be worse given regulatory
uncertainties and low short-term rate
Paper Type:
Working papers
Date:
2010-08-15
Category:
Hedge funds, confidential holdings, SEC 13F reporting
Title:
Uncovering Hedge Fund Skill from the Portfolio Holdings They

Hide
Authors:
Vikas Agarwal, Wei Jiang, Yuehua Tang, Baozhong Yang
Source:
SSRN working paper
Link:
Summary:
Some institutional investors, especially hedge funds, try to hide

their quarter-end holdings through significant delayed (up to one
year) amendments to their Form 13F filings. Such confidential
holdings (i.e., those holdings excluded from the original filing or
show different positions from the originally filed position) exhibit
superior performance up to 12 months
Note that the abnormal returns may not be captured due to the
availability of confidential holdings
SEC reporting requirements and exceptions
SEC requires that all institutions with investment
discretion over $100 million disclose their quarter-end
holdings with a maximum lag of 45 calendar days
Exceptions: SEC allows for the confidential treatment of
certain holdings, and allows the institutions to delay the
disclosure of their holdings
up to one year
Hedge funds need to apply for confidential reporting by

providing SEC with a sufficient factual basis
for each
confidential holding
90%+ of the confidential holdings covered in this study
are not covered by the Thomson Reuters Ownership Data
Reasons used by hedge funds to apply for confidential reporting
Holdings may relate to information-sensitive events, e.g.,
for risk arbitrage funds, their positions may disclose their
knowledge about potential mergers and acquisitions
Preventing copycats and front-runners: on 2007/08/14
during quant melt-down, D.E. Shaw, a large quant hedge
fund, filed an entirely blank Form 13F and seek a
confidential treatment of its entire portfolio to avoid
investors mimicking its strategies or front-running on its
large positions
Factor characteristics of confidential holdings
They are more likely associated with information-sensitive
events such as mergers and acquisitions
They tend to have smaller market capitalization, lower
trading liquidity, fewer analysts following, and higher
probability of financial distress
Significantly higher abnormal returns from confidential holdings
The difference over the twelve-month horizon is 7.5%
over the benchmark-adjusted returns (Panel A and B of
Table V)
When using the Carhart four factor alphas, the return
difference is 5.2% on a value-weighted basis
Such abnormal returns remain significant up to one year
after the portfolio quarter-end date
The abnormal returns may not be captured due to the availability
of confidential holdings
This study evaluates the abnormal performance at seven
horizons from two months up to one year
Each horizon includes all confidential filings whose
confidential periods are at least as long as that horizon
but shorter than the next horizon
E.g., all confidential filings that are filed at a delay of
three months or longer but less than four months from
the portfolio quarter-end are grouped to assess the
abnormal returns for the three-month horizon
Data
March 1999 - June 2007 original 13F filings and
amendments to these filings by all institutions are from
the SECs EDGAR database. The sample consists of 1,857
confidential filings and 53,296 original 13F filings
About 7.4% of all 13F filing institutions have resorted to
confidential treatment at least once during our sample
period. Hedge funds, which constitute about 30% of all

institutions, account for 56% of all the confidential filings
Paper
Type:
Working papers
Date:
2010-07-19
Category
:
High yield bonds index return, mutual funds, ETF
Title:
Evidence and Implications of the Predictability of High Yield Bond Returns
Authors:
David P. Simon
Source:
FMA conference paper
Link:
http://www.fma.org/NY/Papers/ThePredictabilityofHighYieldBondReturns.pdf
Summary
:
During 1995-2009, about 1/4-1/3 of the returns of the Merrill Lynch High
Yield Bond Indexes can be explained by a 4 factor model. The paper proposes
an investment strategy that allocates to high yield bonds only when favorable
Sharpe ratio is forecast by model. Such strategy may be implemented by the
recently introduced ETF
Lower Sharpe ratios of high yield bond index than treasury bills
During September 1988 - June 2009, the mean returns of BB, B and C
rated bond indexes are 0.67, 0.64 and 0.60%, respectively, while the
return volatilities are at 1.98%, 2.56% and 3.99%
The monthly risk-free returns (proxied by the 3-month Treasury bill
rate) is 0.35% with volatilities of 1.42% and Sharpe ratio of 0.25%
The Sharpe ratio of high yield indexes, (0.16, 0.11 to 0.06 for BB, B
and C rated bonds) is lower than 3-month Treasury bill rate index
Construction the forecast model
Model high yield bond returns as a function of
1. lagged own excess returns
2. lagged equity excess returns
3. lagged government bond excess returns
4. lagged VIX changes that are orthogonal to lagged S&P 500 index
returns
The R-square of the model is roughly 23%, 29% and 31% for BB, B
and C
So about 1/4-1/3 of the returns of the Merrill Lynch High Yield Bond
Indexes can be explained
Investment strategy construction and performance

Construct out-of-sample conditional Sharpe ratios: estimate the
GARCH models from September 1988 - December 1994. Then for
each additional year re-estimate with another year of data. Repeat
this process to obtain out of sample monthly conditional Sharpe ratios
from January 1995 through June 2009
If forecast conditional Sharpe ratios are above 0.59 and 0.48 for B
and C rated high yield bond indexes, then it is considered favorable
If forecast conditional Sharpe ratios are below .05 and -0.10 for the B
and C rated indexes, then it is considered unfavorable
Performance of the forecast model: during 1995-2009, subsequent
monthly excess returns
B rated high yield bond
indexes
C rated high yield bond

indexes
when the model

forecast Sharpe
ratios are in
their
highest
quartile
Subsequent monthly
excess returns 1.14%
Subsequent monthly
excess returns 1.61%
when the model

forecast Sharpe
ratios are in
their
lowest
quartile
Subsequent monthly
excess returns -0.95%
Subsequent monthly
excess returns -1.65%
The subsequent return volatility is reduced by ~50% when out of

sample conditional Sharpe ratios are in their highest quartiles
Reality check: the model forecast returns of two mutual funds
The returns of the Vanguard and Fidelity High Yield Bond Mutual
Funds are examined
Vanguard mean monthly excess returns 0.95 percent vs -0.81 percent
when out of sample conditional Sharpe ratios for the B rated index are
in highest vs lowest quartile
For the Fidelity high yield fund, the returns are 1.09% versus -1.07%
Data
September 1988 - June 2009 BB, B and C rated Merrill Lynch High
Yield Bond Index are from Merrill Lynch
Such indexes track the performance of US dollar denominated, below
investment grade corporate bonds with 1+ year maturity date and
$100 million+ outstanding value
The bond price quotes are taken from the high yield bond pricing
Interactive Data, Pricing and Reference Data service of Financial
Times Interactive Data (FTID)
Paper Type:
Journal Papers
Date:
2009-04-20
Category:
mutual funds, industry concentration
Title:
Industry Concentration and Mutual Fund Performance
Authors:
Marcin Kacperczyk, Clemens Sialm and Lu Zheng
Source:
Journal of Investment Management, First Quarter 2007
Link:
222
Summary:
We study the relation between the industry concentration and

the performance of actively managed U.S. mutual funds from
1984 to 2003. O
ur results indicate that the most concentrated
funds perform better after controlling for risk and style
differences using factor-based performance measures.
This
finding suggests that investment ability is more evident among
managers who hold portfolios concentrated in a few industries.
Comments:
Paper
Type:
Journal Papers
Date:
2009-04-20
Catego
ry:
funds, performance
Title:
Portfolio Performance Manipulation and Manipulation-proof Performance

Measures
Author
s:
Ivo Welch, William Goetzmann, Jonathan Ingersoll and Matthew Spiegel
Source
:
Link:
http://rfs.oxfordjournals.org/cgi/gca?gca=20/5/1461&gca=20/5/1503&gca=20/
5/1547&gca=20/5/1583&gca=20/5/1647&sendit=Get+All+Checked+Abstract(s
)
Summ
ary:
Numerousmeasureshavebeenproposedtogaugetheperformance
ofactivemanagement.
U
nfortunately,thesemeasurescanbegamed.
Ourarticleshowsthatgamingcanhavea
substantialimpact
onpopularmeasureseveninthepresenceofhightransactions
costs.Our
articleshowsthereareconditionsunderwhicha
manipulationproofmeasureexistsandfully
characterizesit.
Thismeasurelooksliketheaverageofapowerutilityfunction,
calculatedover
thereturnhistory.Thecaseforusingouralternative
rankingmetricisparticularlycompelling
forhedgefundswhose
useofderivativesisunconstrainedandwhosemanagers
compensation
itselfinducesanonlinearpayoff.
Comm
ents:
Paper Type:
Working Papers
Date:
2008-11-30
Category:
novel strategy, funds, Stock return model, mutual funds

performance evaluation
Title:
Should Benchmark Indices Have Alpha? Revisiting Performance

Evaluation
Authors:
Martijn Cremers, Antti Petajisto, Eric Zitzewitz
Source:
University of Texas Working paper
Link:
http://www.mccombs.utexas.edu/dept/Finance/fea/papers/f2-sh
ould-benchmark-indices.pdf
Summary:
This paper proposes a simple method that can better explain

stock returns and better evaluate mutual fund returns.
Challenges to existing asset pricing models:
Factor models (e.g., Fama-French three-factor
model and Carhart four-factor model) generate
very low R2 in stock return regression
I.e., these models have very low explaining power
for stock returns
Challenges to existing mutual fund evaluation methods:
Practitioners typically compare the fund
performance to its self-declared benchmark
performance. This is sub-optimal because there is
no explicit adjustment for risk
Academia typically uses a factor model (e.g.
Fama-French three-factor model and Carhart
four-factor model), this is problematic because

major market indices have alphas
Major indices do generate alphas in factor-model
framework
There exist significant annual alphas for both
S&P500 Index (0.82%) and Russell 2000
(2.41%) for 1980 to 2005 period. (Table 2)
Hence, even index fund managers would appear to
have significant positive or negative skills
The new method: adding several index-based factors
Adding 3 index-based size factors (to replace the
size factor in conventional models)
S&P 500
The difference between the Russell Midcap
index and S&P 500 (RM-S5)
The difference between the Russell 2000
and Russell Midcap index (R2-RM).
Adding 4 index-based value-growth factors (to
replace the book-to-market factor)
The return spread difference between the
value and growth components of the S&P
500 (S5VS5G), Russell Midcap index
(RMVRMG), Russell 2000 index
(R2VR2G), Russell 3000 index (R3VR3G)
In other words, the new asset pricing regression is
stock return = alpha + S&P 500

return

Midcap and S&P 500 (RM-S5)

small-cap and S&P 500 return (RM-S5)
+ return difference between S&P

large-cap value/growth indices

Midcap value/growth indices

2000 value/growth indices
+ momentum
A simplified version (four new factor plus a
momentum factor) still perform much better than
the Carhart model.
The new model greatly better predict stock returns and
better evaluate mutual funds performance
Improve R2 to 48%-64% from the 29% R2 of the
four-factor Carhart model
The biggest impact comes from a midcap factor
For mutual fund evaluations, the new model shows

5% per year impact on Fama-French and Carhart
alphas when comparing small and large-cap funds,
big enough to fully reversing the old conclusions
Data
1996 - 2005 US indices are from Standard and
Poors, Frank Russell, and Dow Jones Wilshire.
Stock data are from CRSP.
Paper
Type:
Working Papers
Date:
2008-11-30
Category:
novel strategy, funds, Change of institutional ownership, independent

Title:
Independent Institutional Investors and Equity Returns
Authors:
Yawen Jiao and Mark H. Liu
Source:
Link:
http://www.fma2.org/Texas/Papers/IndepInstandEquityReturnsJan2008.pdf
Summary: This paper improves the institutional ownership factor. It shows that the
predictive power of institutional ownership is mainly driven by independent
institutional investors, as opposed to gray institutional investors.
Definitions:
Independent institutional investors: those that have no
existing or potential business relationships with the firms in
which they invest. These are mainly investment advisers and
investment companies
Grey institutional investors: mainly bank trust departments
and insurance companies, which have various business
relationship with the companies they invest in.
Intuition: why independent institutions holdings are more
informative
Without other business connections with the companies they
invest in, independent institutions have stronger incentives to
monitor management than grey institutions do
Change of independent investor ownership can predict stocks
returns (Table 3, 4, 6)
Zero-investment strategy that buy (sell) the portfolio that
shows the highest (lowest) increase in ownership.
Statistically significant positive returns (~4% per annum,

~0.9% per quarter)
Similar portfolios based on grey institutional trading not
profitable
Most of the predictability is in firms where a high level of information
asymmetry exists
Measured by book-to-market ratios (growth versus value)
and analyst forecast error
Data:
Institutional holding data from Thomson Financials
CDA/Spectrum 13F filings for all common stocks traded on
New York Stock Exchange (NYSE), American Stock Exchange
(AMEX), and NASDAQ
From the first quarter of 1980 to the third quarter of 2006.
Stock-related data from CRSP and Compustat, and analyst
earnings forecasts from I/B/E/S
Paper Type:
Working Papers
Date:
2008-11-30
Category:
funds, Quantitative vs Fundamental, investment strategy
Title:
Quantitative vs. Fundamental Analysis in Institutional Money

Management: Wheres the Beef?
Authors:
Russell B. Gregory-Allen, Hany A. Shawky, Jeffrey Stangl
Source:
SSRN working paper
Link:
Summary:
Do traditional managers (fundamental managers) or quant

managers generate higher returns? Using the Plan Sponsor
Network Database (PSN), this paper finds that:
One can allow a manager uses a primary and secondary
process ( instead of categorize a managers to be
exclusively either Quantitative or Fundamental)
No process adds value when both primary and secondary
process are considered
Only the Fundamental approach is shown to significantly
add value, when only primary method was used as
indicator

Paper Type:
Working Papers
Date:
2008-09-03
Category:
Mutual funds
Title:
Mutual Fund Performance
Authors:
Source:
SSRN working paper
Link:
Summary:

the mutual fund on average do not yield
returns that would cover the costs of active management,
neither does there exist persistence in performance for top or
bottom performers.
Before-fee return close to 0, after-fee return significantly
negative
i.e., mutual funds do not perform better than the
average passive fund, even before fees
For value-weighted (performance of the aggregate
investment by fund investors) portfolios,
before-fee annual risk-adjusted return just 0.11%,
after-fee return is -0.86%
Not due to performance persistence for both top and
bottom performers
Performances of past winners/losers on average
continue for up to a 9-month horizon, but do not
persist in the long run (1 to 3 years)
Results based on initial 12 month and 60 month
performances (weaker momentum in the
60-month cases)
Study based on Fama-French style regression
Adjust raw return with the Fama-French style
factors (excess market returns, size, value,
momentum)
Based on 1962-2006 monthly data of US equity
funds
Findings conflict with the influential Kosowski,
Timmermann, Wermers, and White (2006) which use
bootstrap to show that some fund managers consistently
outperform their peers
The proposed reason: the authors jointly sample
fund (and explanatory) returns, whereas Kosowski
et al (2006) do simulations independently for each
fund, and thus factor in the correlation in effects

of correlated movement in the volatilities of
four-factor explanatory returns and residuals.
The authors also find that Kosowski et al findings
are dependent on the time period studied.
Comments:
Paper
Type:
Working Papers
Date:
2008-08-13

Strategies
Title:
Authors:
Langdon B. Wheeler
Source:
Link:
.pdf
Summary
:
This paper
now
.
drive the price up
management
Paper Type:
Working Papers
Date:
2008-06-27
Category:
funds, novel strategy, Institutional Herding, institution entry and

exit
Title:
Institutional Herding: Destabilizing Buys, Stabilizing Sells
Authors:
Source:
SSRN working paper
Link:
Summary:
This paper finds that when institutions herd to buy (sell) a stock,
returns show reversals (continuations) in future two years, and
the extreme entry herding (both buy and sell) forecast future
negative returns.
Herding is measured as
Herding measure = (total number of net institution buyers) /
(total number of net institution buyers and net sellers.
Both institution entry (when institutions first establish a
position in a stock) and exit (when they sell the entire
holdings of a stock) herding by institutions result in
negative
returns in the next two year window.
Stocks that experience extreme entry buy herding decline
by about 5% over two years; those that experience
extreme exit sell decline by about 6% over the same
horizon
Return reversals following buy herds are the result of the
temporary price impact of institutional trading.
Institutions with good stock-picking skills exploit reversals
following buy herds, mostly at the expense of individual
investors. This reversal phenomenon is not observed
following sell herds possibly since institutions face short
selling constraints.
Comments:
1. Discussions
As in many study, the results are stronger for small stocks. This
is where transaction costs would play a bigger role in
establishing and closing positions due to relative illiquidity of
these stocks.
One somewhat puzzling result that we cant explain is that both

entry buy and exit sells have negative abnormal returns; -5%
and -6% respectively over the two years following herding.
2. Data
13F filings of institutional investors from Thomson Financial
covering the period 1980 - 2005.
Additional data comes from CRSP and Compustat.
Paper
Type:
Working Papers
Date:
2008-05-20
Category:
Mutual funds performance forecast, monthly/quarterly mutual funds

holdings
Title:
Monthly Holdings Data and the Selection of Superior Mutual Funds
Authors:
Edwin Elton, Martin Gruber and Christopher Blake
Source:
NYU working paper
Link:
http://pages.stern.nyu.edu/~eelton/working_papers/monthly_holdings_dat
a.pdf
Summary:
Using monthly mutual holding data, this paper shows that

one can better
predict mutual fund alpha by estimating its stocks (Fama-French 3 factor
and Carhart 4 factor) alpha, rather than by regressing past fund returns on
a set of factors.
The reason: mutual funds rebalance their portfolios frequently and
therefore the fund factor loadings vary in time. Using a fixed
top-down factor beta will inevitably miss out information. In the
latter methodology, changes in the portfolio always distorts fund
beta.
Bottom-up factor beta is estimated as the weighted average of
constituent stocks factor beta.
Top-down betas are estimated by regressing funds historical
returns on factors like market, size, P/B.
During 1994-2004, an average mutual fund has a market beta of
close to 1, and holds relatively more small stocks, and prefers
growth stocks
Monthly estimation is better than quarterly because
betas are not stable and there is a large change of fund beta
from month to month (Table 1).
and bottom-up techniques are more effective at forecast the
mutual funds than top-down, as ranking funds using
bottom-up techniques generated higher return spread
Comments
:
1. Discussions
One application of this paper is for people to better select mutual funds, and
extract the information in the portfolio of the best (fundamental) managers.
This is one of the few papers we read which uses MorningStar data. Though
it is less used, MorningStar seems to have its advantages. For one,
Thomson fund database is shown to be less complete (Morningstar data
include holdings of equity, and bonds, options, futures, preferred stock,
non-traded equity and cash).
2. Data
Data on the monthly holdings of mutual funds were obtained from
Morningstar for 1994-2004. CRSP is used for weekly stock returns.
Paper Type:
Working Papers
Date:
2008-02-04
Category:
Emerging Market, Bond Funds, Global markets
Title:
Emerging Market Bond Funds: A Comprehensive Analysis
Authors:
Sirapat Polwitoon, Oranee Tawatnuntachai
Source:
The Financial Review
Link:
http://www.thefinancialreview.org/PDF/Polwitoon-Tawatnuntach
ai-Emerging-Market-Bond-Funds.pdf
Summary:
This paper presents an analysis of emerging market bond funds

and shows that
On average emerging bond funds u
nder-perform
benchmark index
in terms of both total returns and risk
adjusted returns.
This underperformance is greater than expense
ratio.
On average emerging bond funds o

utperform
domestic and global bond funds
in terms of both
total return and risk adjusted returns
Emerging bond funds provide incremental diversification
benefits to all existing bond and equity portfolios and
these benefits are statistically and economically
significant.
Holding the portfolio risk constant, the US
investors can enhance return by 0.97% to 1.5%
per year by adding 20% emerging bond funds into
their existing portfolios.
Comments:
1. Discussions
The author presents a comprehensive analysis of the emerging
market bond funds with special attention to statistical analysis
problems that may rise due to limitation of data such as short
time series and survivorship bias). The presented results are
interesting especially as the considered time period includes
events such as Asian, Russian, Brazilian and Argentinean crises.
On a technical note, the authors try to explain the return
differences between emerging and domestic bond funds and
global bond funds by considering a number of factors such as
exchange rates and "differences in market characteristics".
However, the majority of the emerging bonds that they are
analyzing are denominated in US dollar, so exchange rate is not
a good factor to be considered.
For "market characteristics difference" the authors use the
difference in returns between Citigroup Global Emerging Market
SovereignCapped Bond Index (ESBI) and the emerging bond
funds as explanatory variable and show the substantial increase
in R square. However, this is not an appropriate measure of
difference in market characteristics (such as liquidity) and the
increase in R squared is mechanical.
2. Data
1996-2005 emerging bond fund data are from Morningstar
Principia. The final sample of emerging bond funds consists of 50
funds.
Paper Type:
Working Papers
Date:
2007-12-26
Category:
Title:
Authors:
Source:
Link:
Summary:

lowest alphas
higher.
Comments:
Paper Type:
Working Papers
Date:
2007-11-18
Category:
News, quant funds
Title:
Hedge fund AQR denies big trading setbacks
Authors:
Dane Hamilton
Source:
Reuters News
Link:
http://today.reuters.com/news/articleinvesting.aspx?type=etfNe
ws&storyID=2007-11-12T174634Z_01_N12470246_RTRIDST_0
_AQR-HEDGE.XML
Summary:
Recently (first two weeks of some traders find evidences

suggesting that there may be a multibillion dollar market
neutral fund that is conducting an orderly liquidation
AQR denied that they suffered from large loss after the
August meltdown,
..but suspended their IPO plans in August citing

increased market volatility
Paper Type:
Working Papers
Date:
2007-11-18
Category:
News, quant funds
Title:
The quant accident
Authors:
John Authers
Source:
standard columnist paper
Link:
http://www.business-standard.com/ft/storypage_test.php?&auto
no=304179
Summary:
This short comment suggests that in the past week, quants may
had another accident
There are some bizarre moves in US equities that
reminds people of the meltdown in August when the
largest names in the sector dropped by a third.
A case in point is last weeks sudden fall in tech stocks
without major news, dropped 1.8% in the last 38 minutes
of trading on Friday
This may be due to several quant funds move at the same
time.
Comments:
Paper Type:
Working Papers
Date:
2007-11-18
Category:
News, quant funds
Title:
AQRs Absolute Return Fund Down Even Further Than

Reported
Authors:
John Carney
Source:
dealbreaker.com blog
Link:
http://www.dealbreaker.com/aqr/
Summary:
AQRs $4 billion flagship quant fund, called Absolute

Return, was down 2.99% in October, according to AQR's
letter to investors.
But AQR claims that most of its hedge funds are doing
well. "In our long only funds, all funds are up, in the
single digits or double"
Comments:
Paper Type:
Working Papers
Date:
2007-09-23
Category:
Quant meltdown, quant funds, hedge funds
Title:
What Happened to the Quants in August 2007?
Authors:
Amir Khandani, Andrew W. Lo
Source:
SSRN working paper
Link:
Summary:
This paper studies the great quant meltdown during the week
of 08/06/2007-08/10/2007,
when many influential large quant
funds (both long/short and long only) suffered unprecedented
(10+ standard deviation) losses , yet the market index were
fairly quiet for most of the time. Key findings:
The event is likely first caused by liquidation of some
large quant portfolios (maybe to raise cash to meet
margin calls on their funds prime related investments)
The initial losses triggered further stop loss selling by
more quant funds, which leads to further losses from
08/06-08/09. On 08/10, most quant portfolios
experienced significant performance rebound.
This view is supported by the performance of a
representative quant strategy (day price as well as hedge
fund performance data
Quant strategies these years are experiencing lower expected
returns and growing correlations:
More money chasing few quant strategies:
Much higher number of long/short equity funds,

much higher average assets (AUM) per fund, and
the fast growth of related strategies like 130/30.
Even non quantitative funds are using certain level
of quant screens (value/growth, earnings quality,
etc)
A more crowded market leads to lower expected return
and thus higher leverage so that hedge fund managers
can maintain the level of expected returns).
A leverage
ratio of almost 9:1 was needed in 2007 to yield an
expected return comparable to 1998 level
As an the correlations between fund indexes grows
rapidly these years, and the multi-Strategy index is now
more highly correlated with almost every other index
Compared with the 1998 Long Term Capital Management crisis:
Similarity:
Both events were caused by sudden widening
of credit spreads, which leads to the vicious circle of
unwinding portfolios, causing further losses, unwinding
more portfolios and eventually some funds collapse.
Difference:
In 1998, sudden drop o f fixed income
security prices did not spread to market neutral equity
strategies. In 2007, trouble in fixed income area (sub
prime) quickly spread to equity strategies.
Hedge funds are becoming more like banks:
in the sense that they are now active providers of
liquidity and credit . Just like banks, they may need more
regulation because the significant impact of their failures.

Date:
2007-09-23
Category:
Sector rotation, US Fed funds rate, monetary policy
Title:
Sector Rotation and Monetary Conditions
Authors:
C. Mitchell Conover, Gerald R. Jensen, Robert R. Johnson, Jeffrey M.

Mercer
Source:
CFA Institute paper
Link:
http://www.cfainstitute.org/aboutus/press/pdf/sector_rotation_study.pdf
Summary:
This paper presents a sector rotation strategy based on monetary
conditions (Fed rates) and claims that such strategy enjoys consistent
significant excess returns (3.4% out performance) with very low
turnover. The strategy:
Overweight cyclical stocks (six cyclical sectors) during periods of
Fed easing,
Overweight defensive stocks (four non cyclical sectors) during
periods of Fed tightening.
Such strategy works better during restrictive markets, when the return
of this strategy almost doubles market return (10.2% vs 5.3%) with less
volatility (15.4% vs 16.2%). By contrast, during expansionary markets,
the rotation strategy yields a smaller excess return (20.2% vs 18.0%)
but has higher volatility(16.6% vs 14.9%).
Comments:
1. Why important
This is a fairly common sense strategy, yet it is interesting to see a
rigorous study.
Two reasons why we think managers interested in longer term style
allocation (large/small cap, growth/value) may want to read this paper
This is a low turnover strategy with reasonably good
performance: During the 33 year period covered in this study,
there were 14 Fed rates direction changes (ie, from expansionary
to though there were many more times o f fed rate change)
Business cycle information is less relevant since such information
is determined ex post, while Fed rate always observable without
look ahead bias.
2. Data
1973/01 2005/12 daily returns for 10 U.S. stock sectors are from
DataStream. The 10 sectors are defined as Resources, Noncyclical
Consumer Goods, Noncyclical Services, Utilities, Cyclical Consumer
Goods, Cyclical Services, General Industrials, Information Technology,
Financials, and Basic Industries.
DataStream value-weighted market index is used as benchmark
Paper Type:
Working Papers
Date:
2007-02-01
Category:
Mutual funds holdings, mutual funds in/out flows
Title:
Does Motivation Matter When Assessing Trade Performance? An

Analysis of Mutual
Authors:
Gordon J. Alexander; Gjergji Cici; Scott Gibson
Source:
College of William and Mary working paper
Link:
http://mason.wm.edu/NR/rdonlyres/4E58CD0F-F270-49D1-BF1E-A2
EA96161DEB/0/MF_Trade_Motivation.pdf
Summary:
This paper categories mutual funds buy/sells into 4 groups:

Mutual fund experiences Mutual fund experiences
in flow
out flow
Stocks are
bought
Segment 1 (liquidity
buy)
Stocks are sold Segment 3

(valuation-motivated
sell)
Segment 2
(valuation-motivated buy
Segment 4 (liquidity

Stocks that are bought in the presence of fund out
flow(segment 2)
outperform market
Stocks that are

sold
in the presence of fund
in flow
segment
3) weakly underperform
Spread between such buys and sells is
a significant
~3.5%/year.
motivated buys underperformed by an insignificant
0.41%/year
motivated sells outperform by 1.55%/year
Comments:
1. Why important
Mutual fund managers are movers and shakers in stock market. It
makes sense to try to extract alpha based on the behavior of fund
managers.
This paper tells a simple story here may be two reasons why a fund
manager buys (sells) a stock: either he believes that the stock is
significantly under (over) valued, or he is forced to do because of
fund in (out) flow. This study may be refined when combined with
other related strategies that forecast mutual funds performances.
2. Data
2003 portfolio holdings data for US equity funds are fro m
Thomson/CDA.
3. Discussions
One key assumption of this paper is that mutual fund managers are
indeed better stock pickers. This is of course debatable. One
potential improvement is to follow the buy/sell of

better
managers
when there is an out (in) flow. Strategies covered in other papers
may help , e.g., The Investment Value of Mutual Fund Portfolio
Disclosure
http://www.rhsmith.umd.edu/faculty/rwermers/holding_200610.pdf.
Alpha of this strategy does not sound very exciting even on paper
Also we doubt that there may be a size bias in the study Are the
motivation based buy/sells more likely to be smaller stocks? We do
not know. Although the paper does adjust returns for size, beta, p/b,
etc., we know that this can not replace a study in the universe that
you invest in.
Paper Type:
Working Papers
Date:
2007-01-16
Category:
Regime switching, mutual funds
Title:
Investing in Mutual Funds with Regime Switching
Authors:
Ashish Tiwari
Source:
University of Iowa working paper
Link:
www.biz.uiowa.edu/faculty/atiwari/InvestinginMFunds.pdf
Summary:

adding market regimes (e.g. bull market vs
bear market) detection to a CAPM
style mutual fund investing
process can create 8%+ extra return annually.

It developed a
Baysian model to effectively detect regime change.
A very relevant paper ("Analyzing Regime Switching in Stock
Returns: An Investment Perspective",
)
uses similar approach and shows that for the period of 1963
2006,
value effect is just 3.5% during bull markets and 9.6%
during bear markets
size premium is 6.1% in bull markets and
3.5% in bear
markets
Comments:
1. Why important
Almost all the quant signals behave differently in different
market situation, some are better in bull market, while others do
better in market downturn. These two papers paper look

interesting to us because it illustrates the importance of market
status (bull vs bear) on quant strategy returns. They also show
that it impossible to effectively detect such status change by
proposing a Baysian framework.
2. Data
2004 December data from 500+ mutual funds data are from the
CRSP survivor bias free US mutual funds database.
3. Discussions
Two big issues for this methodology are how to estimate the
regime switching model, and how to identify the market state.
For someone who has to make rebalance decisions on monthly
basis, the Gibbs sampling technique used in the paper may be
criticized as too data mining and less intuitive. We would like to
see more solid, more straightforward regime modeling in this
sense. On a separate note, may be one can build switching
models for other variables, for example market volatility as it
determines partially the performance of some quant signals
(such as momentum).
A concern we have is that the conclusion of this paper is built on
a fairly limited dataset for a limited period of time.
Paper Type:
Working Papers
Date:
2006-11-18
Category:
Value, Growth, funds
Title:
Do Investors Capture the Value Premium?
Authors:
Todd Houge, Tim Loughran
Source:
Link:
www.biz.uiowa.edu/faculty/thouge/Style_Benchmarking_Paper.pdf
Summary:
This paper juxtaposes 4 facts:

In back testing
value stocks significantly outperform
growth stocks, as shown in various researches
yet value
mutual funds
dont outperform growth funds:
from value and growth fund return are 11.4% vs 11.3%(for
large cap funds); 14.1% vs 14.5%(for small cap funds
yet value
index
doesnt outperform growth index: from
1975 large cap value index (S&P outperform growth index
~1%, same for all cap index (Russell 3K)
In regression, value premium only shows up in small cap
universe, not in large cap.
Conclusion: over long horizon, value premium is hard to capture
due to
transaction costs
in
small-cap universe
(though value
does
perform better in the

2000s so far
Comments:
1. Why important
To us, these findings serve as a reminder that our back testing
results may be distorted Past back testing result does not
guarantee (even) past realized The question is: what is a robust
back testing methodology? What is a robust anomaly?
By providing three interesting (yet somewhat surprising) results,
this paper makes us think about the nature of the value premium.
It is true that in the 2000s value performs far better, but in a
longer time horizon its returns are comparable to growth for
practitioners
2. Data
2001 mutual funds data are form CRSP Survivor Bias Free U.S.
Mutual Fund Database, stock data are from CRSP/Compustat.
3. Discussions
Table IV is a great example of how a lump sum regression can be
misleading. The author shows that although (in all stock universe)
value factor is significant after controlling for size, this impact is
gone when we limit the regression within large cap stocks. This is
true for size effect as well. In our view, the key is that the stock
market data we have are far from being normal/random. A robust
back testing system should go beyond and look into patterns
within different segments.
Paper
Type:
Working Papers
Date:
2006-11-18
Title:
Authors:
Source:
Link:
Summary
:
The strategy:
Comment
s:
1. Why important
2. Data
3. Discussions
Performance"
funds.pdf

Stock Returns
which claims that
Paper
Type:
Working Papers
Date:
2006-11-18

Title:
Authors:
Source:
Link:
Summary
:
The strategy:
Comment
s:
1. Why important
2. Data
3. Discussions
Performance"
funds.pdf

Stock Returns
which claims that
Paper Type:
Working Papers
Date:
2006-10-06
Category:
Mutual fund performance, funds
Title:
How Active Is Your Fund Manager? A New Measure That Predicts

Performance
Authors:
Martijn Cremers, Antti Petajistoy
Source:
Link:
http://www.som.yale.edu/Faculty/petajisto/active50.pdf
Summary:
The authors first define "Active Share" as the share of portfolio

holdings that differ from a mutual funds benchmark index.
Intuitively, the measure equals to the exposure of a portfolio
relative to benchmark index.
Funds with the highest Active Share significantly outperform
benchmark (both before and after expenses), while the funds
with the lowest Active Share underperforms.
The result suggests that statistically the active stock pickers

perform better than fund managers relying on factor bets (whose
Active Share is lower).
Comments:
1. Why important
We think its very creative to define the style of fund managers
(stock picking or factor betting) using the Active Share measure.
Conceptually, the author grouped all mutual funds by
2-dimensions:
High Active
Share
Low Active Share
Low tracking error
High tracking
error
Diversified stock
picks:
high exposure
many small bets on
different stocks
Concentrated
stock picks
high exposure
large bets on
few stocks
Closet indexing
no bets
factor Bets
low exposure
high tracking
error
often industries
bets
2. Data
1980 to 2003 stock holdings of mutual funds are from the
CDA/Spectrum mutual fund holdings database of Thomson
Financial. The index member data (S&P500, Russell 2000,
Wilshire 5000) are directly from vendors.
Monthly returns for mutual funds are from the CRSP mutual fund
database. Daily returns for mutual funds are from Standard and
Poors "Worths" package.
3. Discussions
Is the result surprising? If we recall that
Breadth * IR = IC
Where, BR = Number of Independent Bets per year
IR = Information Ratio = manager skills.
IC = Information Coefficient.
Assuming that managers are equally good at industry bets and
stock bets (a big assumption) and rebalance their portfolios
similar times each year (another big assumption), then the funds
with high Active Share should outperform because they are
making more bets (the number of stocks is of course larger than
the number of industries), i.e., they have higher breadth.
Readers may recall that we reviewed a paper on the relationship
between fund ownership (of fund managers) and the fund
performance. Hopefully we can add one more layer to that
methodology and identify winning stocks.
Paper Type:
Working Papers
Date:
2006-10-06
Category:
Behavioral Finance, funds, mutual fund performance
Title:
Behavioral Finance: Are the Disciples Profiting from the Doctrine?
Authors:
Colby Wright, Prithviraj Banerjee and Vaneesha Boney
Source:
SSRN working paper
Link:
Summary:
No, behavioral funds only deliver similar results compared with

active, non-behavioral funds. They are essentially value
investors. Caveats: only 16 behavioral funds covered in study.
Comments:
Paper Type:
Working Papers
Date:
2006-09-08
Category:
Portfolio management, rebalancing Strategy, funds
Title:
Optimal Rebalancing Strategy for Institutional Portfolios
Authors:
Walter Sun, Ayres Fan, Li-Wei Chen, Tom Schouwenaars, Marius

A. Albota
Source:
QWAFAFEW discussion paper
Link:
http://www.qwafafew.org/?q=filestore/download/235
Summary:
This paper proposes an optimal rebalancing strategy to minimize

the rebalancing cost, which is measured in terms of risk-adjusted
returns adjusted for transaction costs. This strategy is relevant
to index fund or quasi- index fund.
Comments:
1. Why important
For most index or enhanced index managers, various "rules of
thumb" are used for rebalancing. "Tolerance band" is perhaps
most widely used (i.e., rebalance when tracking error is out of
certain limit). Others may choose to trade on specific dates in
each month. We think the systematic methodology proposed
here may offer a tool to optimize this important yet less studied
process.
2. Discussions
Computation complexity may prevent people from using the
process on a portfolio of several hundred stocks. The authors
only give an example of 5 assets. A simplified version of utility
function (perhaps a linear version) may help.
A Monte Carlo simulation is provided in the paper. A back testing
based on actually stock prices will shed more light.
Paper
Type:
Working Papers
Date:
2006-09-08
Category:
General stock selection activities, funds
Title:
Is Stock Picking Declining Around The World?
Authors:
Utpal Bhattacharya, Neal Galpin
Source:
Stanford seminar paper
Link:
http://www.gsb.stanford.edu/FACSEMINARS/events/finance/Papers/StockPic
king.pdf
Summary: Yes, the general stock selection activity is declining worldwide as more
money move into index funds. A model shows that stock picking should
ideally be11% of trading volume.
Comment
s:
Paper Type:
Working Papers
Date:
2006-08-24
Category:
Strategy, funds, mutual fund in/outflow
Title:
Asset Fire Sales (and Purchases) in Equity Markets
Authors:
Joshua Coval, Erik Stafford
Source:
University of Texas working paper
Link:
http://www.mccombs.utexas.edu/dept/finance/seminars/2006/Asset%
20Fire%20Sales- noappend.pdf
Summary:
Short stocks that are likely to be involved in fire sales (i.e., stocks
whose institution owners are selling and are experiencing large
outflow), and buys stocks likely to be in forced purchases. The authors
claim that the average annual abnormal return is 15%+.
Comments:
1. Why important
The trading patterns of fund managers certainly can impact stocks
price. Here the authors tell a clear story based on the momentum of
capital flow: funds that were experiencing capital outflow may
continue tosuffer from outflow, thus would be forced to further reduce
their portfolio holdings. This assumption is supported by previous
research, which documents a strong relation between mutual fund
flows and past performance.
2. Data
1990-2003 mutual fund data are from Spectrum mutual fund holdings
database and the CRSP mutual fund monthly net returns database.
3. Discussions
We have covered quite some mutual-fund related strategies before, so
a natural concern is the correlation between this one and other similar
strategies: mutual-fund ownership breadth, institution trading volume
and mutual-fund trader composition, etc.
We believe this strategy will be strongly correlated with market
condition: when market goes down like the 2000-2002 period,
investors will pull out money from funds. A year-by-year result would
be very interesting. Also like the authors said, this strategy is very
similar to a momentum strategy. A simulated portfolio that explicitly
controls for momentum would shed more light.
We know that investors in general and mutual-fund managers in
particular, demonstrate a "disposition" effect: people are reluctant to
sell past losers. It is interesting to note that the same pattern is
detected here, though the authors believe that the reasons may be
that selling losers may incur higher price impact.
Paper
Type:
Working Papers
Date:
2006-08-24
Category: Funds, managerial ownership

Title:
Portfolio Manager Ownership and Fund Performance
Authors:
Ajay Khorana, Henri Servaes, Lei Wedge
Source:
Stanford seminar paper
Link:
funds.pdf
Summary
:
This paper documents the positive relationship between the level of

managerial ownership in mutual funds and the funds future performance.
Comment
s:
1. Why important
Many quant managers are using various forms of strategies based on
mutual-fund data. We think this paper may help them refine their strategies.
For example, trader composition strategy may be improved by measuring
the trading of better mutual funds (those with higher managerial ownership
in their funds), since they are more like
2. Data
In 2004 SEC (US financial market authority) started to require mutual funds
to disclose fund manager ownership annually. This study covers ~1,400
funds with ownership data (December 2004 - December 2005) period. Other
fund characteristics data are from Morningstar and the CRSP Mutual Fund
Database.
3. Discussions
Wouldnt it be great if we can identify which mutual fund managers will
outperform for sure? All we need to do then is just to follow their footprints
and buy what they buy (knowing that we buy later than they do given the
reporting time delay). In this sense, we are curious whether those stocks
favored by better managers (those with a higher ownership in their funds)
can outperform stocks favored by worse managers.
The short time span covered by this study (12 months) may make readers
cautious of the papers conclusion.
Paper Type:
Working Papers
Date:
2006-07-27
Category:
Momentum, funds
Title:
Inheriting Losers
Authors:
Li Jin and Anna Scherbina
Source:
Link:
http://www.people.hbs.edu/ascherbina/dispositionJune22006.pdf
Summary:
This paper is based on an appealing story that, when new mutual

fund managers take over portfolios, they tend to sell those
inherited stocks that have been underperforming. Consequently,
the strategy of "short inherited losers, long all momentum
losers" is shown to produce 2% risk-adjusted in 3 months
following fund manager change (8% annualized return).
Comments:
1. Why important
Mutual funds now account for 50%+ of total US stock market
value. The behavioral patterns of fund managers definitely have
an impact on stock prices. One of such patterns, the disposition
effect (unwillingness to admit ones wrong decisions and sell
losers), has been well documented. On the other hand, people
seem to have no problem in acknowledging other peoples
mistakes and sell the inherited losers. Anecdotal evidence: to
avoid such "self-pride" trap, some funds deliberately ask fund
managers to evaluate each others losing stocks.
This paper provides a study on these patterns, which in our view
may also improve momentum strategy.
2. Data
Managerial changes (1991-2004) are from Morningstar. Mutual
fund holdings data are from the Thomson Financial Spectrum
SP12 database. Stock-specific data are from CRSP.
3. Discussions
We note that the claimed profit (2% return in 3 months) is based
on equal-weighted portfolio, and the universe is all the publicly
traded stocks. Different quant managers care about different
stock universe, which could lead to a smaller profit.
For a practitioner, one concern may be that how many stocks
could be impacted by such management changes. The authors
document ~1450 such changes for the past 15 years. We could
not find the number and characteristics of stocks in the two
portfolios depicted in Figure 7 (inherited losers and all
momentum losers) - though the paper did say that a fund that
undergoes managerial change on average holds 71 stocks.
Paper Type:
Working Papers
Date:
2006-02-23
Category:
Strategy, mutual funds inflows
Title:
Dumb Money: Mutual Fund Flows and the Cross-Section of Stock

Returns
Authors:
Andrea Frazzini
Source:
Link:
http://mba.yale.edu/faculty/pdf/lamontdumb_money.pdf
Summary:
Long stocks with low recent retail investor sentiment (proxied by

individual stocks mutual fund inflow/outflow), and short
otherwise.
Comments:
1. Why important
This paper presents a new investment strategy built on the
mutual fund database. It uses the mutual fund inflow/outflow of
individual stocks as proxy for retail investor sentiment, and
shows that a high sentiment (i.e., higher inflow) leads to lower
stock return. The story behind is that retail investors are
constantly losing money other investors (institution investors,
corporates which issues equity).
2. Data source
Mutual fund holdings data are from the Thomson Financial
CDA/Spectrum Mutual Funds database. Flow data are from CRSP
US Mutual Fund Database. Stock data are CRSP/COMPUSTAT.
3. Next steps
We know that retail investors tend to chase hot stocks, where
hot can indicated by recent stock price returns, or analyst
recommendations, or news (earning surprises). It would be
interesting to examine the correlation between this strategy and
other known strategies. The paper shows that there exists a
positive correlation with signal-factors, and that the good news is
that neither effect dominates the other.
As 3-year flow is shown to be the most effective predicator, and
three years is a long period for most investors, we would
particularly want to know the yearly performance of this strategy
for the past 5 years when investors sentiment and thus 3-year
flow shifted dramatic

Paper
Type:
Working Papers
Date:
2013-12-04
Catego
ry:
Novel Strategy, Portfolio Spillover, Diversification
Title:
Portfolio Spillover and a Limit to Diversification
Author
s:
Bronson Argyle
Source
:
Columbia Business School
Link:
http://www8.gsb.columbia.edu/phd_profiles/sites/phd_profiles/files/publication
s/Spillovers_Argyle_jmp.pdf
Summ
ary:
Returns of stocks held by same mutual funds are connected when such funds
face in/outflows. A strategy based on flow-induce price pressure earns 6.8%
risk adjusted return. This study proposes also a methodology to estimate
mutual fund daily holdings
When facing redemption, managers are more likely to liquidate those
holdings that are more liquid
Such price pressure are temporary and may reverses in short
term
Hence membership to same mutual funds may be a source of stock
returns correlations
In other words, firms experience positive (negative) price
pressure when firms in common portfolios experience positive
(negative) returns
Assuming that managers only use liquidity and size measures to manage
flows, the daily portfolio holding changes can be estimated as
where main_effects is the effects of flow, illiquidity and size
Define FIPP (flow-induced price pressure) as the flow weighted average

of stock i in fund n. V is the value of stock i in fund n, MV is the market
cap of stock i
Define a stocks portfolio return as the weighted idiosyncratic returns

of funds that holds stock i
where TNA is the total net assets of fund n
Such portfolio return measures the impact of fund flows on stock i

return
It in essence measure the weighted cumulative return of other stocks
that belong to same mutual funds as the stock in question
Lagged idiosyncratic returns predict future flows
At daily level, flows determined by past 1-5 day portfolio returns (Table
2)
Holding changes are driven by flow, illiquidity and size (Table 3, 7)
More significant when there is a net outflow
Fully reverses over one week
Suggesting that the price pressure is caused by liquidating
holdings
A one standard deviation increase in FIPP leads to a 0.6% daily
abnormal returns (Table 5)
Stocks portfolio return predicts
Data
Sorting firms by
. Long the top decile and
short the bottom decile
The annualized return is 6.8% (Table 11)
Similar results when using risk-adjusted alphas
The 4 factor adjusted alpha is 6.7% (Table 11)
Suggesting that abnormal returns are significantly impacted by
the shocks to other firms in common portfolios
2003-2010 quarterly holdings for open-end mutual funds are from CRSP
Survivor-Bias-Free US Mutual Fund Database
Summary statistics in Table1
Daily stock data are from CRSP
Daily mutual fund flows are from TrimTabs
Paper Type:
Working Papers
Date:
2013-10-03
Category:
Novel Strategy, Portfolio Choice, Rank Effect
Title:
The Worst, the Best, Ignoring All the Rest: The Rank Effect and
Trading Behavior
Authors:
Samuel M. Hartzmark
Source:
http://www.usc.edu/schools/business/FBE/seminars/papers/F_9-613_HARTZMARK.pdf
Link:
USC FBE Finance Seminar
Summary:
Investors are much more likely to sell the extreme winning and
extreme losing positions in their portfolios. This leads to significant
price reversals of 40-160bps per month in such stocks
When faced with a large number of possibilities, individuals
typically do not pay equal attention to each, but spend
more time examining the most salient
In other words, investors pay more attention to the
extreme winners/losers in their portfolios
Investors are more likely to sell their best and worst
position, based on return from purchase price, i.e., rank
effect
All holdings reported in a month M are examined 10 trading
days into month M+3
All stocks that are ranked best and worst in at least
one fund are put into an equal weighted portfolio
Form two equal weighted portfolios: 1) long the worst
ranked stocks 2) long the best ranked stocks
Control for momentum (using UMD) and control for a short
term reversal (using ST_REV)
Rank effect leads to price reversals
Best ranked portfolio has a monthly alpha of 36bps
Worst ranked portfolio has a monthly alpha of 161bps
(Table 12)
Enhancing the loser portfolio profit by forecasting selling
pressure
Method1: weight stocks by the number of funds that
hold them
term reversal factor(Table 13)
Such weighting scheme does not work for
best-ranked stocks
Method2: weights stocks by the stocks market cap
that is extreme ranked
Data

term reversal factor (Table 13)
Significant coefficient in Fama-Macbeth regressions (Table
14)
Even after controlling for earnings announcement
premium, high-volume return premium and dividend
month premium
Similar patterns for both individual investors and mutual
funds (Figure 2)
Robust to the disposition effect (the tendency to sell gains
more than losses) (Table 4)
Robust to tax considerations: the effect is present every
month and empirically investor exhibit the opposite of their
optimal intra year tax motivated trades (Table 15)
1980-2011 mutual fund data are from Thompson-Reuters
January 1991 - November 1996 retail investors from a large
discount brokerage
Paper Type:
Working Papers
Date:
2012-12-02
Category:
Alternative indexing, inverting portfolio weights
Title:
The Surprising Alpha from Malkiels Monkey and Upside-down

Strategies
Authors:
Rob Arnott, Jason Hsu, Vitali Kalesnik, and Phil Tindall
Source:
SSRN Working Paper
Link:
Summary:
Portfolios that invert weights of some popular quant strategies

also outperform cap-weighted benchmarks, and so do random
portfolios. The reason is their value and size tilts
Intuition
When price does not drive stock weights, the resulting
portfolio will likely to have a value tilt
When market cap does not drive stock weights, the
resulting portfolio will likely have a small-cap tilt
Inverting weights of quant strategies bring almost
unavoidable value and small-cap tilts
Bottom line: the claimed investment thesis of many

investment strategies matters little. The resulting
(intended or unintended) value and size tilts are the
dominant reason of their excess returns
Methodologies
Two inversion schemes
1. Use the inversion of the weight(w) in the original
portfolio, i.e. 1/w
2. Use the complement weight: max weight - w
Evaluating inverting weights for three strategies:
Benchmark strategy is the cap-, equal-, and
diversity- (a blend of cap- and equal-) weighted
portfolio
Strategy1 (High risk strategy): weight stocks by
volatility, market beta and downside
semi-deviation
Strategy2 (Optimization based strategy): such as
minimum variance and maximum diversification
Strategy3 (Fundamental indexing strategy):
weight stocks by book value, earnings, etc.
Inverted portfolios outperform their original counterparts
Using the high risk strategy as an example: a portfolio
that tilts toward more risky stocks, or towards less risky
stocks, both beat the benchmark cap-weighted
benchmark
High risk strategy beats by 2.43% to 2.71% per
year in a 47-year span
Inverted high risk strategy beats by 2.90% to
3.84% per year (Second block of Table 1)
The key differences between the two is that the inverted
strategy has 2-3 times larger loading on the value factor,
and 40% lower loading on the market factor
After controlling for the value effect and other factor tilts,
the alphas is down to an insignificant 0.30% to 0.66% per
year
Randomly-picked 30-stock portfolios also outperform
Relative to the top 1,000 largest stocks by market
capitalization
The main reason is that such random portfolios have size
and value tilt
Such random portfolio matches or beats the cap-weighted
portfolio in 99 out of the 100 trials (Figure 1, Panel A)
Same pattern holds in the Global Developed World
Markets (using the current MSCI definition) from
19912010
Data
With only one exception, these global strategies all beat

benchmark
With only one exception, the inverted strategies all beat
benchmark
For 19 of the 26 inverted strategies, results are better
than their originals (Table 3)
1964-2010 largest 1,000 stocks by market capitalization
in the U.S. are from CRSP/CompuStat
1987-2010 global stock data are from Worldscope and
Datastr
Paper Type:
Working Papers
Date:
2012-08-26
Category:
Moving average, factor portfolio
Title:
Market Timing with Moving Averages
Authors:
Paskalis Glabadanidis
Source:
SSRN Working Paper
Link:
Summary:
A simple moving average (SMA) strategy can earn excess returns

across value-weighted portfolios formed by stock characteristics,
such as size, cash flow-to-price ratio, etc
Methodology
Step1: sort stocks by one of 9 factors: market value
(size), book-to-market ratio, cash flow-to-price ratio,
earnings-to-price ratio, dividend-price ratio, short-term
reversal, medium-term momentum, long-term price
reversal and industry
Step2: form 10 value-weighted portfolios
Step3: enter (exit) a portfolio whenever its monthly
closing level is above (below) the moving average
When not invested in stocks, assuming a
contemporaneous 30-day U.S. Treasury bill yield
Assuming a trading cost of 0.5% when entering and
exiting stocks
Use a baseline SMA length of 24 months
But the same pattern holds for 6, 12, 36, 48 and
60 months
SMA consistently dominates buy-and-hold

Higher returns:
E.g, when sort by size, on average return is higher
by 4 percentage points (table 1)
Overall, the annualized improvement in return
ranges from 2% to 10% (table 5)
Lower risks:
E.g, when sort by size, on average risk is lower by
5 percentage points (table 1)
Overall, the reduction in risk is between 3% to
14% (table 5)
Low turnover
The average holding period is between 10 and 25
months (table 5)
55% to 65% hit ratio
With the exception of three momentum deciles and
two industry portfolios, all other segments are
highly significant (table 5)
Hold up to 36 months: net performance (at 0.5% trading
friction) is lower as SMA measurement interval lengthens
Robustness
Robust to commonly used risk factors (market, size,
book-to-market, momentum): the annual four-factor
alphas in the range 3%-7% (table 2)
Robust in two half-period (1960 - 1986, and 1987-2011)
(Table 3)
Interestingly, the pattern is stronger in the 1987-2011
period in terms of four-factor Carhart alpha
Not driven by investor sentiment, liquidity risks, business
cycles, up and down markets, and the default spread
cannot fully account for its performance
Data
1960 2011 monthly value-weighted returns for
portfolios sorted by the nine factors are from the Ken
French Data Library
Paper Type:
Working papers
Date:
2011-01-23
Category:
Portfolio construction, optimization
Title:
Finding Better Securities while Holding Portfolios
Authors:
Haim Shalit
Source:
Ben-Gurion University working paper
Link:
http://www.bgu.ac.il/~shalit/Publications/FindingBetterSecurities.pdf
Summary:
When rebalancing an existing portfolio, Marginal Conditional

Stochastic Dominance (MCSD) works better than commonly used
Mean-variance (MV) optimization, as MCSD considers the
performance of a stock relative to the performance of the current
portfolio
Intuition and definitions of MCSD
Dominant securities for a portfolio are those when
adde
d to
the portfolio, investors benefit because of increasing expected
utility of returns
Dominated securities for a portfolio are those when
removed
from the portfolio, investors benefit
MCSD tries to find dominant securities and dominated
securities, and optimize the portfolio by adding weights to
former and reducing the latter
4 steps to calculate MCSD portfolio
Using an equally-weighted, four-stock (AA, BB, CC, and DD)
portfolio (P) as example(Exhibit 1 and 2)
step1: list daily performance of the stocks over a week
(Panel A)
step2: sort the returns (Panel B) over the week with
respect to portfolio returns
step3: starting at 0% for each stock, accumulate the
returns (Panel C)
step4: compute the absolute concentration curves
(ACC) (Panel D), by dividing each cumulative return
by the number of days
Finding the new optimal portfolio: Plot ACCs of the four
stocks. In Exhibit 2, BB lies above AA at all times, and others
intersect. So increasing the share of BB and reducing the
share of AA should benefit investors
Intuitively, ACC is a stocks accumulative return distribution.
Assuming two ACCs with same end point, stocks with higher
ACC curve have lower volatility and thus benefits portfolio
more
Essentially, MCSD assumes that the return distribution curve
of any stock is constant
When ACCs intersect, this decision cannot be made uniformly
An application of MSCD on SP100 in year 2000
Use ACCs to find dominant/dominated stocks
ACCs of CISCO and DELL are dominated by all 6
remaining stocks in the chart
Similarly MCD dominates AXP, and that KO dominates

DIS
Source: the paper
Repeating such pairwise analysis, each years for every stock
in the S&P 100 index, establish a list of dominating
securities (ie, whose ACC are un-dominated by any other
stocks) and list of dominated stocks (ie, whose ACC are
dominated by other stocks)
Then the portfolio performance can be improved by increasing
the weights of dominating securities and decreasing the
weights of dominated ones
Note the paper does not specify how exactly to adjust
portfolio weights
At portfolio level (instead of pair-wise), a two-parameter approach to
MCSD optimization
Sort securities X and Y (and the remainder of the portfolio
securities) based on (1) the mean return and (2) the
risk-adjusted mean
Risk-adjusted mean returns = (mean of asset X) - (mean-Gini
beta of asset X) * (Gini of the portfolio)
Intuitively Gini beta of asset X is the MCSD version of
stock beta (see Page 9)
For stock X to dominate Y, it should satisfy: (1) mean return
of X >= mean return of Y, and (2) the risk-adjusted mean
return of X >= the risk-adjusted mean return of Y
Ranks stocks based on their mean returns, and then see if
the ranking is preserved when ranked based on risk-adjusted
returns. If so, dominance exists (Exhibit 4, illustration of
SP100 in 2006)
Compared with MV, MCSD is more selective and provides a clear,
pairwise comparison
MV compares stock using return rank and standard deviation
rank (Exhibit 6, SP100 in 2006), favor high return low risk
(northwest quadrant) stocks
Comparing Exhibit 5 (MCSD) and 6 (MV) shows that there is
an overlap between the two methods, but MCSD is more
selective (results in a smaller subset) and provides a clear,
pairwise comparison among the selected stocks
Under MV, stocks with large standard deviations usually do
not dominate other stocks. However, under MCSD they may.
In MCSD, what matters is the risk-adjusted return where risk
is expressed relative to the portfolio
Data
Daily returns of S&P 100 index stocks in 1987, 2000, and
2006 are used

Paper Type:
Working papers
Date:
2010-08-15
Category:
Portfolio optimization, dark pool, portfolio tradings
Title:
Portfolio Considerations in Trading
Authors:
Andrew Brzezinski and Venk Kidambi
Source:
SSRN working paper
Link:
Summary:
Partitioning trade baskets by different dimensions (e.g., by

dividing trading baskets among a number of brokers, dark
markets, algorithms, and/or sectors) can add unnecessary risk to
the overall portfolio trading. This study is based on Monte Carlo
simulations
Intuition: a fund managers perspective is different from that of a
traders
A fund manager looks at the whole portfolio
Traders may be looking at a single stock, multiple orders
on a single stock from multiple managers, various
execution venues, timing etc
Background of dark markets
Dark markets (i.e., Alternative trading systems (ATS)),
have become a significant source of equity market
liquidity in recent years
Some estimate as much as 25% of overall trading are
done through dark markets
Trading via ATS is a random quantity of shares that
occurs at a random time
Ways that trading desk use to partition a trading basket
Divide a trading basket from a portfolio manager into
several sub-baskets by any of several dimensions
Sector
Division among brokers(DB): trading basket are
divided among various brokers, which use a
variety of tools to source liquidity
Implementation shortfall (IS): A decaying
trajectory that balances the trades price impact
against the risk of deviating from arrival price. This
is simulated by completing the trade within the
first 30 minutes.
TWAP: Uniform trade allocation over time,
Dark execution (Dark): Modeled as independent

random interval executions. This is because in ATS
each execution is a random quantity of shares that
occurs at a random time
TWAP+Dark: All shares trade according to TWAP
until the occurrence of a random interval execution
Each sub-basket is traded independently of other
sub-baskets
Strategies listed above are simulated by using 80,000
Monte Carlo runs on 4,000 randomly drawn (with
replacement) distinct portfolios of S&P 500 stocks over all
trading days in March 2009 and January 2010
Execution risk is defined as the variability of returns in
excess of arrival price
Source: the paper
Partitioning portfolio brings in higher risks
Sector, DB, Dark exhibit the greatest risk (Per the graph
above)
IS strategies show significantly lower risk due to a shorter
trading horizon (so explicitly avoiding and penalizing the
risk of slippage from the benchmark)
Even under IS, partitioning the portfolio may be
counter to achieving the desired balance between
risk and return at the portfolio level
The more stocks in the portfolio, the lower the risk
(comparing scenarion with Top 100 stocks versus Top 10
stocks)
The smaller the stocks, the higher the risk (comparing
Mid 100 versus Top 100)
The higher market volatility, the higher the risk
(comparing Mar 09 versus Jan 10)
Price impact
Illustration: suppose a portfolio manager attempts to buy
a large position of Apple Inc., such an increase in demand
for Apple will have an effect on the price of Google Inc.
shares.
Define the price impact as dollars impact per dollar traded
( instead of the conventional approach of dollars impact
per share traded)
This is simulated by adding a price impact of trading one
share of security i on each of the portfolio constituent
securities j (equation 3.3)
Paper Type:
Working papers
Date:
2009-12-30
Category:
Title:
The Importance of Accounting Information in Portfolio Optimization
Authors:
Source:
UNC working paper
Link:
http://public.kenan-flagler.unc.edu/Faculty/handj/JH%20website/Hand%
20Green%20Importance%20of%20Acctg%20Info%20for%20PFOPT%20
20091013.pdf
Summary:
This paper proposes a new stock optimization framework that may help
avoid quant crowd-ness. Weighting stocks as a linear function of certain
accounting measures (e.g., change in earnings, asset growth) can yield a
higher information ratio compared with price-based measures (e.g., size,
book-to-market, and momentum)
Such weighting scheme also perform better during (1) the Quant
Meltdown of August 2007 and (2) the bear market in 2008 (it earns 12%
compared during 2008 as compared to the -38% for the stock market
index)
An earlier paper, Parametric Portfolio Policies: Exploiting
Characteristics in the Cross Section of Equity Returns,
http://economics.ucr.edu/seminars/spring05/econometrics/Rosse
nValkanov.pdf
) proposes a simple parametric portfolio policy
(PPP) technique, where stocks weight is a linear function of firm
characteristics
For example, stock weight = weight in benchmark + coefficients *
rank of asset growth
In PPP, the accounting measure may lead to higher stock weight
in two ways: (1) through generating alpha (2) through reducing
portfolio risk
When weighting stocks using firm
size/book-to-market/momentum, PPP is shown to outperform
value-weighted market index by 5.4% per year
Definitions
Price based portfolio (PBC): a portfolio that is optimized by
weighting stocks as a function of market capitalization (MV),
book-to-market (BTM), and momentum (MOM)
weighting stocks as a function of accruals(ACC), change in
earnings(UE), and asset growth(AGR)
Step1: The portfolio weight of each stock is set to be a function of

the firms accounting measures. E.g., weight = weight in
benchmark + coefficient * rank of asset growth
Step2: Estimate the coefficients in step1 by maximizing a utility
function (equation 11 in the paper). The investor is assumed to
have constant relative risk aversion (CRRA) preferences
In both in-sample and out-of sample, weighting stocks using 4
factors are shown to generate significant excess returns (BTM,
MOM, UE and AGR)
Accruals is not significant, suggesting that hedge returns to
accruals have disappeared in recent years due to wider use of
such strategy
The PPP method yields reasonable mis-weights (maximum
misweight 3.1% and minimum misweight -1%)
ABC has twice as much short-selling than do price-based
characteristics
Out-of-sample PBC portfolio 106% turnover per month, while the
ABC portfolio generates more than double this at 216%
No significance when short-sale not allowed: The out-of-sample
Sharpe ratio of the ABC falls from a significant 1.71 to
in-significant 0.48
Change in earnings (UE) and asset growth (AGR) are still
significant
The Sharpe ratio for the PBC+ABC out-of-sample portfolio was
1.89 (before transactions costs), but only 1.12 in the presence of
variable transactions costs
ABC portfolio more sensitive to transaction cost (due to higher
turnover)
Suggesting that PPP is a less used strategy and avoided quant
crowding effect
Paper Type:
Working papers
Date:
2009-11-23
Category:
Portfolio optimization, asset allocation
Title:
Geometric Mean Maximization: An Overlooked Portfolio

Approach?
Authors:
Javier Estrada
Source:
IESE Business School Working Paper
Link:
https://editorialexpress.com/cgi-bin/conference/download.cgi?db
_name=finanzas2009&paper_id=149
Summary:
At a time when quant managers are trying to de-correlate with

peers, a new portfolio construction method may help. This paper
finds that Geometric mean maximization (GMM) is superior to
Mean-Variance optimization in certain aspects
Note that this study tests their theory on various national stock
indices and asset classes (instead of individual stocks)
Intuition
The traditional Mean-Variance optimization is not
intuitive to common investors, whom care less volatility
(or variance) of their investment
Instead investors on the growth rate of invested capital
grows
In this sense, a more plausible goal is to maximize the
geometric mean return, i.e., grow the invested capital
at the fastest possible rate
Difference between GMM and Mean-Variance optimization
Mean-variance optimization maximizes the expected
return for given volatility (risk)
It maximizes the Sharpe Ratio
(E(R)-R(f))/sqrt(Var(R))
Volatility is undesirable because it is synonymous
with risk
GMM maximize the terminal wealth by maximizing the
capital growth rate
The objective function is: max ((1+R-period1)
(1+R-period2)...(1+R-period-n)), which equals to:
max (E(R)- exp (var(R)/2(1+E(R))^2)) (per
Apendix A2)
Return variance is also a negative input, since it
lowers geometric mean return by lowering the rate
of growth of the capital invested
In-sample test: GMM has higher terminal wealth, though lower
Sharpe ratio
This paper compute optimal portfolio at there time points
(06/1998, 06/2003 and 06/2008)
GMM portfolios are less diversified, have a higher
expected return, and higher volatility
This is true for developed markets, emerging markets,

and different asset classes (US Stocks, EAFE Stocks, EM
Stocks, US Bonds, US Real Estate)
Out-of-sample test: GMM has higher Sharpe ratios and higher
terminal wealth
For out-of-sample results, the author look at the actual
performance of $100 invested in the optimal portfolios
formed in Jun/1998, passively held through Jun/2003 and
Jun/2008
This is true for stocks indices in developed and emerging
markets (Exhibit 6)
Data
MSCI database for 26 developing, 22 developed market
returns are used for the sample period of 1998-2008
Paper Type:
Journal papers
Date:
2009-10-14
Category:
portfolio construction, attributions
Title:
Risk-adjusted performance attribution and portfolio optimisations

under tracking-error constraints
Authors:
Philippe Bertrand
Source:
Link:
200837a.html
Summary:
This paper examines whether the risk-adjusted performance

attribution process is consistent with portfolio optimisation under
tracking-error constraints. Since Mina (2003), Bertrand (2005,
2008b) and Menchero and Hu (2006), risk attribution has been
widely used in the performance attribution process. This paper
analyses and discusses the information ratio decomposition
proposed by Menchero (2007) in the light of the analysis of
risk-adjusted performance attribution developed by Bertrand
(2005).
It is also shown that only optimisation under the
tracking-error constraint alone is consistent with the
risk-adjusted performance attribution process
. Indeed, as soon
as additional constraints (for example, on total risk) are
introduced, the component information ratios of the decisions are
no longer the same or equal to the information ratio of the whole
portfolio. This means that no equilibrium between expected

return and relative risk has been reached.
Paper Type:
Working papers
Date:
2009-06-07
Category:
Black-Litterman Model, expected factor returns, portfolio

optimization
Title:
The Augmented Black-Litterman Model: A ranking-free approach

to factor-based portfolio construction and beyond
Authors:
Wing Cheung
Source:
SSRN Working Paper
Link:
Summary:
The paper modifies the Black-Litterman Model so that quant

managers can express their views on factors performances. By
contrast, the conventional BL model only takes views on the
securities or their combinations
Two popular factor-based stock selection models
Ranking-based stock selection
Also widely known as the Fama-French(FF)
methodology
It sorts stocks by characteristics and forms
factor-mimicking portfolios by long top-bucket and
short bottom-bucket
Biggest problem: it assumes positive factor
returns, which is dangerous in practice
Factor-exposure based stock selection. 3 different
methods:
Method1: Rank stocks by the factor exposures,
and follow the FF method
Method2: Directly use the factor model to predict
stock returns based on factor views
Method3: Construct optimisation-based factor
mimicking portfolios which are only exposed to
their respective target factors
The downside: this method suffers from estimation
errors with inputs
The paper employs the augmented Black-Litterman (ABL) model
Black-Litterman (BL) uses a Bayesian updating framework

for expected returns and variance-covariance matrix in
portfolio optimization problem
BL accepts the private information of the portfolio
manager as well as the public information in the market
as inputs.
ABL is a unified Bayesian allocation model which enables
a factor-based approach without any ranking
ABL takes managers views on factor expected
performances
To do so, ABL adds to n securities-universe f (<=
n) relevant factors and the n idiosyncratic
components
So that expected factor returns can be expressed
as additional views of quant managers
ABL explicitly uses a linear factor risk model that uses
publicly available information in the market
The paper presents an example where ABL method is used on
the 104 stocks in FTSE Eurotop 100 Index
The factor model is chosen by the portfolio manager using
the prior private information
The model outputs are then used to check the correctness
of the prior information
The optimization is based on a variance minimization
method that constraints a unit beta and a minimum
target portfolio return
45 relevant factors are used in optimization and 2 of them
are actually used (banks and automobiles)
Note that factors here can also be sectors, as sectors
are risk factors in a risk model (see Appendix C)
Data
The paper uses the FTSE Eurotop 100 stock returns from
Lehman proprietary equity database
Paper Type:
Working Papers
Date:
2008-12-20
Category:
CAPM volations, efficient frontiers, optimal portfolio, risk, statistic

methodology
Title:
Impossible Frontiers
Authors:
Thomas Brennan, Andrew Lo
Source:
SSRN Working Paper
Link:
Summary:
The paper shows (in a

very
academic fashion) that the classic
mean-variance optimization in most cases results in impossible
efficient frontiers, because the resulting portfolios will include
negative stock weights.
The classic mean-variance optimization violates
assumptions of CAPM
The market portfolio by definition consists of
non-negative weights on individual stocks.
However the frontier portfolios are mean-variance
efficient, on which all the portfolios have at least
one negative asset weight.
Therefore the mean-variance efficient frontier
violates the CAPM assumption.
The claim is supported by empirical simulations
Daily data implies mean-variance efficient
portfolios with short positions between 50% and
300%.
Monthly data implies mean-variance efficient
500%.
In the case of mean-variance optimization with
short-selling constraint of 50%, the efficient
frontier becomes a straight line with constant 50%
short position.
The probability of having an impossible frontier increases
with the number of stocks
With 300 stocks the daily data implies an efficient
frontier with 350% short positions
With 300 stocks the monthly data implies an
efficient frontier with more than 1200% short
positions
This paper only talks about the impossibility, but not what
is a better alternative
Data
CRSP monthly stock returns for the period
1980-2005.
CRSP daily stock returns for the period 1995-2005.
Paper Type:
Working Papers
Date:
2008-11-30
Category:
Risk, Portfolio optimization, Markov Chain-Monte Carlo method
Title:
Using Economic Theory to Build Optimal Portfolios
Authors:
Thomas Chevrier and Robert E. McCulloch
Source:
SSRN Working paper
Link:
Summary:
The paper estimates mean-variance tangency portfolios for 27

different countries using recent advances in Bayesian techniques.
The new method estimates parameters (expected returns,
risks and correlations) of the mean-variance optimization
more efficiently using Markov Chain-Monte Carlo method.
The difference with traditional method is that this study
releases the normality assumption on the prior
distribution function of the Bayesian estimation method
Benefits of this new method:
The portfolio weights of the tangency portfolios make
sense economically: they are positive, stable and logical
in absolute value.
The estimated tangency portfolios are not costly to
maintain: they dont require high levels of inter-temporal
rebalancing or turnover
The tangency portfolios out-perform 1/N rule across
Fama-French industry, size and momentum portfolios in
terms of out-of-sample Sharpe Ratios
Paper Type:
Working papers
Date:
2007-07-06
Category:
Portfolio Theory, Investment Performance Measure
Title:
Where Do Alphas Come From? A New Measure of the Value of

Active Investment Management
Authors:
Andrew W. Lo
Source:
MIT Sloan working paper
Link:
http://web.mit.edu/alo/www/Papers/active3.pdf
Summary:
The author claims that traditional performance measures (alpha,
Sharpe ratio, information ratio, etc) are not optimal since

They are all functions of portfolio return distributions at
one single point of time (as opposed to
time series)
, just
think expected returns and variances.
They can not measure the predictive capability of fund
managers
The author proposes a novel measure, an active/passive (AP")
decomposition that decomposes the expected portfolio return
into two components:
An active component related to fund managers
forecasting skills: sum of co variances between returns
and portfolio weights
(intuitively,
this means that a good
fund manager should give more

weight
to a stock when
its
returns are higher)
A passive component: a static weighted average of

individual securities expected returns
The decomposition is based the more formal (yet simple
treatment below (from of the paper):
Implications of the AP measure:

When returns are assumed to be a linear factor model
(eg, CAPM style), a portfolios expected return can be
decomposed into
two active components (security selection and
factor-timing ability
one passive component (risk premia)
Mutual fundsonly constraint imposes a limit to the
amount of factor timing ability, and this limit is more
evident when factor risk premia change signs, i.e.,
periods of time varying expected returns.
Are funds paying high fee for just beta as opposed to
alpha? This framework shows that only when beta
exposure is time varying, then it is genuine source of
active value
Comments:
1. Why important
This paper provides a novel performance measure of active
investment management. This is useful for quant managers
performance attribution. For fund of fund managers, the AP
decomposition method provides a clear and simple framework for
resolving the question of whether hedge fund investors are
paying for alpha and getting beta from their investments.
2. Data
To illustrate the expected return decomposition, the paper
applies the contrarian strategy to the daily returns of the five

smallest size decile portfolios of all NASDAQ stocks from 1990
1995. The data is from CRSP.
3. Discussions
This paper is a big step in the direction of recognizing the
dynamic nature of a managers investment process.
Since the author finds that the AP measure only need average
portfolio weights (individual security weights are not necessary),
we are curious to know how one should apply this framework to
a portfolio where weights change from time to time and different
stocks have different holding period.
The measures proposed in the paper are perhaps more relevant
to managers of absolute return funds. A slightly modified
version, ie., use misweights relative to index benchmark, may be
interesting.
Paper Type:
Working papers
Date:
2007-07-06
Category:
Portfolio Theory, Investment Performance Measure
Title:
Where Do Alphas Come From? A New Measure of the Value of

Active Investment Management
Authors:
Andrew W. Lo
Source:
MIT Sloan working paper
Link:
http://web.mit.edu/alo/www/Papers/active3.pdf
Summary:
The author claims that traditional performance measures (alpha,

Sharpe ratio, information ratio, etc) are not optimal since
They are all functions of portfolio return distributions at
one single point of time (as opposed to
time series)
, just
think expected returns and variances.
They can not measure the predictive capability of fund
managers
The author proposes a novel measure, an active/passive (AP")
decomposition that decomposes the expected portfolio return
into two components:
An active component related to fund managers
forecasting skills: sum of co variances between returns
and portfolio weights
(intuitively,
this means that a good
fund manager should give more

weight
to a stock when
its
returns are higher)
A passive component: a static weighted average of

individual securities expected returns
The decomposition is based the more formal (yet simple
treatment below (from of the paper):
Implications of the AP measure:

When returns are assumed to be a linear factor model
(eg, CAPM style), a portfolios expected return can be
decomposed into
two active components (security selection and
factor-timing ability
one passive component (risk premia)
Mutual fundsonly constraint imposes a limit to the
amount of factor timing ability, and this limit is more
evident when factor risk premia change signs, i.e.,
periods of time varying expected returns.
Are funds paying high fee for just beta as opposed to
alpha? This framework shows that only when beta
exposure is time varying, then it is genuine source of
active value
Comments:
1. Why important
This paper provides a novel performance measure of active
investment management. This is useful for quant managers
performance attribution. For fund of fund managers, the AP
decomposition method provides a clear and simple framework for
resolving the question of whether hedge fund investors are
paying for alpha and getting beta from their investments.
2. Data
To illustrate the expected return decomposition, the paper
applies the contrarian strategy to the daily returns of the five
smallest size decile portfolios of all NASDAQ stocks from 1990
1995. The data is from CRSP.
3. Discussions
This paper is a big step in the direction of recognizing the
dynamic nature of a managers investment process.
Since the author finds that the AP measure only need average
portfolio weights (individual security weights are not necessary),
we are curious to know how one should apply this framework to
a portfolio where weights change from time to time and different
stocks have different holding period.
The measures proposed in the paper are perhaps more relevant
to managers of absolute return funds. A slightly modified

version, ie., use misweights relative to index benchmark, may be
interesting.
Paper Type:
Working Papers
Date:
2007-02-15
Category:
Portfolio restrictions, anomaly based quant strategies
Title:
Can Realistically Constrained Fund Managers Beat Their

Benchmark Index Using
Authors:
Ryan McKeon
Source:
Link:
http://rmckeon.myweb.uga.edu/McKeon_Anomalies.pdf
Summary:
For a fund manager facing realistic constraints (performance and

tracking error measured against a benchmark index, no short
position), the
anomaly based strategy (size, value and
momentum) do not produce Sharpe ratios significantly higher

than the index
, though without such constraints these strategies
can generate high returns. The period tested is 1968 to 2003.
Paper Type:
Working Papers
Date:
2006-12-17
Category:
Portfolio risk analysis, performance attribution
Title:
Markowitz was wrong
Authors:
Jason MacQueen
Source:
Northfield paper
Link:
http://www.northinfo.com/documents/220.pdf
Summary:
Managers use a relatively small number of risk factors to select

stocks, but a risk model needs to capture all common risk factors
and stock specific risks. Consequently,
the author argues that
some risks (those factors we take to capture premium) are good.

What one wants to do is to minimize those unwanted
risks.
He
then presents a simple method to decompose a fund return into
manager skills and noises.
Comments:
1. Why important
The authors may intend to show a new way of manager
evaluation (how to decompose a fund return into manager skills
and noises). For quant managers this is also thought provoking
and may have implication son performance attribution process:
Fund return = quant model effectiveness + noise
Where,
Quant model effectiveness = returns due to exposure to
deliberate factor bets + stock alpha
Noise = returns due to exposure to any other factors
For funds with higher tracking error, this framework should be
very helpful for factor performance attribution. Those factor bets
we take do not deserve all the alpha, and as the author shows
noise factors may have contributed to your fund than assumed.
The author observes that "In a bull market, Noise tends to be
positive". This may be more true to long only managers than
quant managers running a hedged strategy (e.g., enhanced
funds), as we have noticed many times before.
Paper Type:
Working Papers
Date:
2006-09-22
Category:
Title:
Authors:
Source:
Link:
http://inquire.org.uk.loopiadns.com/inquirefiles/Attachments/inquk06/
Harris/Bababamento&Harris.pdf
Summary:

Black-Litterman portfolio construction framework. When applied to US,
UK and Japan national industries, this strategy generates 1.3-1.7%
over benchmark (0.3-0.7% after transaction cost)
This model can solve many practical issues faced by quant managers:
it can be easily programmed to track benchmark within a specific risk
tolerance, and under various constraints (e.g., full investment, long
only, or beta neutral).
Comments:
1. Why important
When most quant managers are using similar factors, the way these
factors are combined in portfolio plays an important role. In our view,
this paper may be helpful since it incorporates the value/momentum
combination with Black-Litterman model. The Black-Litterman model is
mathematically elegant and far more user-friendly than the
mean-variance model. As we all know, the portfolios based on
mean-variance framework are highly input-sensitive and can be highly
concentrated.
2. Data
The Morgan Stanley Capital International (MSCI) national industry
indices (59 industries for US, UK and Japan indices) are used. The
time period covered is 1995-2004.
3. Discussions
One of the key challenges is to forecast security expected returns
(equilibrium returns, or ). The methodology used in the paper looks
rather naive on the first glance; it uses US term spread (the difference
between the 10-year US treasury bond yield and the US T-Bill
three-month rate) to forecast momentum returns, and US market
aggregate book-to-market spread to forecast value return. We know
that the value premium and momentum premium are believed to be
linked with stock market returns, volatility as well as macro-economy
factors. A refined forecast model may yield better results.
Paper Type:
Working Papers
Date:
2006-09-08
Category:
Portfolio management, rebalancing Strategy, funds
Title:
Optimal Rebalancing Strategy for Institutional Portfolios
Authors:
Walter Sun, Ayres Fan, Li-Wei Chen, Tom Schouwenaars, Marius
A. Albota
Source:
QWAFAFEW discussion paper
Link:
Summary:
This paper proposes an optimal rebalancing strategy to minimize

the rebalancing cost, which is measured in terms of risk-adjusted
returns adjusted for transaction costs. This strategy is relevant
to index fund or quasi- index fund.
Comments:
1. Why important
For most index or enhanced index managers, various "rules of
thumb" are used for rebalancing. "Tolerance band" is perhaps
most widely used (i.e., rebalance when tracking error is out of
certain limit). Others may choose to trade on specific dates in
each month. We think the systematic methodology proposed
here may offer a tool to optimize this important yet less studied
process.
2. Discussions
Computation complexity may prevent people from using the
process on a portfolio of several hundred stocks. The authors
only give an example of 5 assets. A simplified version of utility
function (perhaps a linear version) may help.
A Monte Carlo simulation is provided in the paper. A back testing
based on actually stock prices will shed more light.
Paper Type:
Working Papers
Date:
2006-08-10
Category:
Portfolio optimization, Full-Scale Optimization, Statistic

methodology
Title:
Mean-Variance Analysis versus Full-Scale Optimization - Out of

Sample
Authors:
Timothy Adler, Mark Kritzman
Source:
Qwafafew discussion paper
Link:
Summary:
This paper, written by practitioners, discusses a new optimization

procedure (full-scale optimization) and shows that this new
approach has superior performance to the traditional
mean-variance optimization. The full-scale optimization does not
need to assume normal distribution of returns nor mean-variance
investor utility.
Comments:
1. Why important
The mathematic simplicity of Markowitz mean-variance portfolio
theory is built on two assumptions, (1) investors have quadratic
utility function (2) security returns are normally distributed. In
reality, however, investors may have non-linear asymmetric
utility function, and very few security returns are strictly
normally distributed. Given the lowered computation cost, we
think this paper may be of interest to practitioners since this new
approach is intuitively appealing and can be applied in a much
more generalized setting. This is supported by better
out-of-sample performance compared with Markowitz
methodology.
2. Discussions
The advantage of this new approach, in our view, should be
more visible when higher moment in security returns matters.
The authors apply this approach on hedge fund returns, which
are notorious for their negative skewness and excess kurtosis.
Practitioners with an interest on mid-small sized companies
(where higher moments return is an issue) may find this
approach helpful.
As with any other portfolio optimization methods, the authors
chose a dataset (hedge fund returns in this case) to test their
theory. The superiority can not be assumed before testing on the
data that a practitioner cares. Also we note that the authors did
not address the convergence issue.
Paper Type:
Working Papers
Date:
2006-06-15
Category:
Portfolio optimization, covariance estimation, statistic

methodology
Title:
Estimating the Covariance Matrix for Portfolio Optimization
Authors:
David Disatnik, Simon Benninga
Source:
Tel Viv University working paper
Link:
http://recanati.tau.ac.il/Eng/Index.asp?ArticleID=524&CategoryI
D=390&Page=1
Summary:
This paper shows that, in estimating the covariance matrix of

stock returns for portfolio optimization, the "portfolio of
estimator" method is computationally simple and performs at
least as well as the more sophisticated shrinkage estimators.
Comments:
1. Why important
The Markowitz framework of optimization requires estimation of
a stocks return covariance matrix. The classic way to estimate
such matrix, which uses the stocks monthly returns, proves to
be noisy (large off- diagonal elements) and also computationally
challenging, especially when the number of stocks increases (the
"dimension curse").
This paper may be helpful to managers because it compares two
improved alternatives estimation methodologies, namely, the
more complicated "shrinkage estimator" and the simpler
"portfolio of estimators". Gauging by constructing the global
minimum variance portfolio (GMVP), it shows that the simpler
"portfolio of estimators" is at least as good as its more
sophisticated counterpart, even in face of the short-sale
constraints. The two-block estimator the paper proposes looks
analytically simpler and is claimed to have stable performance.
Paper Type:
Working Papers
Date:
2006-04-21
Category:
Portfolio construction, Euro-zone, Industry, country correlation
Title:
International Diversification in the Euro-zone: The Increasing

Riskiness of Industry Portfolios
Authors:
Esther Eiling, Bruno Gerard, Frans De Roon
Source:
Eiling, Esther, Gerard, Bruno and de Roon, Frans A.,

\"International Diversification in theEuro-zone: The Increasing
Riskiness of Industry Portfolios\" (September 2, 2005). EFA 2004

Maastricht Meetings Paper No. 3454
Link:
Summary:
This paper documents that, in euro-zone, the cross-country

correlation has been going down while the cross-industry
correlation has been going up since the introduction of euro in
1999.
Comments:

This paper has direct implications on how to diversify ones
portfolio: a.) for those who needs to decide whether to diversify
portfolio by industry or by country, this paper shows that
industry will bring increasingly more benefit. b.) for those who
makes industry bets and/or country bets, this paper shows that
industry bets have higher potential to bring in alpha.
2. Data sources
Monthly returns on industry/country indices are from
DataStream.
3. Next steps
Another common challenge for quant managers is to decide
whether to rank stocks within countries, or within industries, or
simply across the board (all countries and industries). The result
of this paper cannot be directly used as it touches only on the
correlations among country/industry indices, but one can
certainly extend the study and compare the stockscorrelation
within countries/industries. Sections with lower correlation are
more promising.
Paper Type:
Working Papers
Date:
2006-02-23
Category:
Portfolio, optimization, statistic methodology
Title:
Optimal Portfolios from Ordering Information
Authors:
Robert Almgre, Neil Chriss
Source:
Carnegie Mellon seminar paper
Link:
http://www.math.cmu.edu/~ccf/docs/seminar_4f/Almgren.pdf
Summary:
This paper presents a general and stable portfolio optimization

method by using the ranking information of stocks. The
optimization results are shown to be superior to those by
traditional method.
Comments:
1. Why important
The Markowitz way of optimization requires estimating stock
expected return and a covariance matrix. In real-world, however,
most quant managers rank stock by to certain factors, e.g.,
value, momentum. The beauty of this paper is that it optimizes a
portfolio based on such ranking information. Moreover, its results
are shown to be very general, stable and superior to the results
of conventional mean-variance methodology.

Paper Type:
Working papers
Date:
2009-06-07
Category:
Novel Strategies, dividends, repurchase, alternative indexing
Title:
Portfolios Weighted by Repurchase and Total Payout
Authors:
Jack Clark Francis, Chirstopher Hessel, Jun Wang and Ge Zhang
Source:
SSRN working paper
Link:
Summary:
Thepaperstudies10fundamentalweightingfactors(assets,bookequity,
dividends,earnings,numberofemployees,cashflows,sales,repurchase,
retention,andtotalpayout)andfoundthatrepurchaseandtotalpayout
weighinggenerateshighestSharpeRatios
Therepurchaseweightedportfoliohasastatisticallyandeconomically
significantalphaof2.77%peryear.Bycontrast,mostotherfundamental
weightedportfolioshaveinsignificantalphas
Definitions
Thetotalpayoutisthesumofdividendsandrepurchases.
Howtocalculaterepurchase:Ifthefirmusesthetreasurystock
methodforrepurchases,thepaperusesincreaseincommontreasury
stock(Item226).Ifthefirmusestheretirementmethodinstead,then
usethedifferencebetweenstockpurchases(Item115)andstock
issuances(Item108)
Weightingstocksbyrepurchaseandtotalpayoutisbetterthandividend
RebalanceportfolioseachJuneandholdingthemforoneyear
Thepaperuses1,000largeststocksinUSmarketasthestock
universe
Repurchaseweightingperformbetterthandividendsandtotalpayouts
Weighting
Variable
Annualmean
return
Annual
SharpeRatio
AnnualCarhart
FourFactoralpha
Dividend
13.00%
0.53
0.45%
Repurchase
16.36%
0.64
2.77%
Totalpayout
13.51%
0.55
1.08%
Valueweighted
11.75%
0.38
0.51%
Discussions
Recentpicturechanged:perExhibit3,repurchaseweightedportfolio
performbetterbefore2000,anddividendperformbetterin20002007
Data
Wealsoquestiontheintuitionwhyrepurchaseturnsouttobethebest
performingfactor
Thispaperalsostudiesportfoliosweightedbyassets,bookequity,
dividends,earnings,numberofemployees,cashflows,sales,
repurchase,retention,andtotalpayout
ThestudycoversUSequitydatabetween1973and2007,withall
portfoliosrebalancedannually
Paper Type:
Working Papers
Date:
2007-08-23
Category:
Repurchase, earning management
Title:
Earnings Management and Firm Performance Following Open

Market Repurchases
Authors:
Guojin Gong, Henock Louis, Amy X. Sun
Source:
SSRN working paper
Link:
Summary:

company management tend to artificially
drive earnings downward (using earning
management tools)
before stock repurchase

. Both post repurchase abnormal returns
and reported improvement in operating performance therefore
do not reflect genuine earning growth.
Comments:
Paper Type:
Working Papers
Date:
2007-05-02
Category:
Managerial Stock Ownership , stock repurchase announcements
Title:
Informativeness of Managerial Stock Ownership and Market

Reaction to Stock Repurchase Announcements
Authors:
Alexander Vedrashko, Ilona Babenko
Source:
Haas School working paper
Link:
http://faculty.haas.berkeley.edu/vedrashk/Vedrashko-Alexanderjobmktp.pdf
Summary:

for companies that make stock repurchase
announcements, a higher managerial
tock
ownership
predicts
higher
3-day announcement
return. A one standard deviation
increase in managerial
shareholdings results in a 0.5% increase
in abnormal returns
(the average day announcement returns is
This future return is even higher for stocks with a high degree of
information asymmetry
(measured by analyst forecasts, return
volatility, market size)
Comments:
1. Why important
This paper provides a new perspective in studying repurchase,
and may improve the stock re purchase factor that some
practitioners are using. We have seen various discussions on the
relationship between repurchase and payout policy/accounting
data. For example, Share Repurchases as a Tool to Mislead
Investors: Evidence from Earnings Quality and Stock
Performance
,
where it is find that that companies with lower earning quality
prices in the short
2. Data
1996 2002 stock repurchase data are from Thomsons SDC
Platinum database and consists of 1281 announcements made by
742 firms.
Stock price and accounting data are from Compustat/CRSP.
Executive compensation data from Execucomp and analysts
forecast data are from IBES.
3. Discussions
We are concerned about the old data used (ends 2002), small
sample size and short time covered in this study (only 6 years).
We would like to see a larger period investigated to confirm the
effect.
The data used in the study may have been distorted by data
availability. The number of repurchases per year drops from a
high of 292 in 1998 to 100 in 2002, this is not in line with the
observation of growing number of re purchases these years.
Paper Type:
Working Papers
Date:
2007-04-17
Category:
Equity financing, repurchase
Title:
Commonality in Misvaluation, Equity Financing, and the Cross Section

of Stock Returns
Authors:
David Hirshleifer, Danling Jiang
Source:
University of Maryland 2007 Finance Symposium paper
Link:
http://www.rhsmith.umd.edu/finance/pdfs_docs/Symposium%202007
/Hirshleifer%20Jiang%20Commonality%20in%20Misvaluation%20200
6.pdf
Summary:
This paper defines a UMO (undervalue minus overvalue) factor based

on company stock issuance (initial
public offering (IPO), seasoned
equity offering (SEO) and repurchase.

A strategy that is long high UMO and short low UMO stocks earn
significant risk
adjusted return of 14%
in future 12 months.
Comments:
1. Why important
The use of IPO/SEO and repurchase is not very new, but the
methodology used in this paper addresses the issue of factor time
variations, and may be applied to other quant factors.
The authors use two approaches to address the issue of time variation
in mispricing: 1.) loadings are estimated using full sample (60
months) returns and assign portfolio loadings to individual stocks. 2.)
daily returns of individual stocks are used to estimate UMO loadings
over a relatively short period, e.g., 3 to 12 months.
2. Data
1981 2002 data on initial public offering (IPO), seasoned equity
offering (SEO), open market repurchases (OMR), and tender offer
repurchases (TOR) are from the Securities Data Corporation (SDC)
Global New Issues dataset and Mergers and Acquisitions database.
3. Discussions
This study reminds us of the paper External Financing and Future
Stock
Returns(http://finance.wharton.upenn.edu/~rlwctr/papers/0303.pdf),
where it studies a more comprehensive measure of how much a firm
raises (returns) capital from (to) investors:

Yearly change of External Financing = (Yearly change of common
equity) + (Yearly change of preferred equity) + (Yearly change of
debt)
This measure is shown to have higher predicting power than other
individual categories of financing transactions (e.g. SEO, repurchase)
This paper is different in the calculation of factor loading.
Paper Type:
Working Papers
Date:
2007-01-16
Category:
Shares outstanding, Stock repurchase, IPO/SEO
Title:
Shares Issuance and Cross Sectional Returns
Authors:
Jeffrey Pontiff, Artemiza Woodgate
Source:
Link:
Summary:
This paper shows that post 1970,

the change of shares
outstanding can strongly forecast cross
sectional stock returns.
Such predictive ability is significant after controlling for share

repurchase announcements, seasoned equity offerings (SEO),
size, book-to-market, and momentum.
Comments:
1. Why important
Is there new information in the share outstanding change, given
that many people are already using similar measures such as
change in shareholder equity? Maybe. The change in shareholder
equity is polluted by share price change. For example, SEO as
a percentage of total shareholder equity is a function of the
prices when stocks are offered and prices when the total
shareholder equity is computed. The change in share outstanding
sounds cleaner in this sense. The conclusion in this paper
suggests that one may be better off by using shares change.
2. Data
2003 US stock data are from CRSP and Compustat database.
3. Discussions
The millions of firm month covered in the study (1.58 million firm
month to be exact) always is a red flag to us as it signals
potential small bias.
It would be more comforting if the authors can give a direct
portfolio return back testing return (especially in large cap
universe), instead of just the regression coefficients.
Paper Type:
Working Papers
Date:
2006-11-03
Category:
Earnings, dividends, repurchase
Title:
The Evolving Relation between Earnings, Dividends, and Stock

Repurchases
Authors:
Douglas J. Skinner
Source:
University of Chicago seminar paper
Link:
http://gsb.uchicago.edu/research/workshops/finance/docs/skinnerstockrepurchases.pdf
Summary:
This paper studies how the relationship between earnings and

corporate payout policy changes over past 50 years. It finds that
1. Corporate earnings now drive total firm payouts dividends
2. Companies increasingly are using stock repurchases instead of
dividends
3. so dividend policy on average are becoming increasingly
conservative.
4. Repurchases now serve the role that special dividends served
earlier to distribute transitory earnings increases.
Comments:
1. Why important
For people with an interest in (dividend) income funds, this paper
shows that it is a good time to rethink what is "income" it should
perhaps include impact of repurchase, not just dividends.
This is especially true when investing in newer companies, as this
paper shows that newer firms without a dividend history are more
likely to use repurchases in place of dividends.
2. Data
2004 US stock data (excluding financial and utility firms) are from
US. Compustat Industrial Annual database.
Paper Type:
Working Papers
Date:
2006-04-21
Category:
Strategy, Repurchase, Accruals, Earnings
Title:
Share Repurchases as a Tool to Mislead Investors: Evidence from

Earnings Quality and Stock Performance
Authors:
Konan Chan, David L. Ikenberry, Inmoo Lee, Yanzhi Wang
Source:
AFA 2006 Boston conference
Link:
Summary:
This paper documents that companies with lower equity quality

prices in the short term.
Comments:

With record high cash reserve, more companies are expected to
make share repurchase announcements. A strategy based on
stock repurchase has been shown to yield significant return
historically, but recent performance is mixed. This paper can
potentially improve this factor by combining with the earning
quality.
2. Data source
The repurchase data is from SDC, and earning quality data are
based on CRSP.
3. Next steps
For practitioners, a key question is: will a strategy based on both
repurchase announcements and earning quality provide better
alpha than any of the single factor? What would be the
performance after controlling for usual factors such as value,
momentum, etc.?
Paper Type:
Working Papers
Date:
2009-01-12
Category:
Style, Share issuance, style rotation, industry rotation,

IPO/SEO
Title:
A Corporate Arbitrage Approach to the Cross-section of Stock

Returns
Authors:
Robin Greenwood and Samuel Hanson
Source:
Harvard Working Paper
Link:
http://people.hbs.edu/rgreenwood/corporate_arbitrage_1223
08.pdf
Summary:
The paper shows that one can forecast style factor (e.g.,
B/M) returns using spread of such factor (e.g. difference
of B/M) between equity issuing and equity repurchasing
firms.
For example, when issuing firms have larger market-cap than
repurchasing firms, large firms subsequently
underperform in coming 12 months.
Proposed reason: factor spread between
issuers/repurchasers reflect factor mispricing
Firm characteristics e.g., having a high
book-to-market ratio, high sales growth, paying a
dividend, or being in a particular industry may at
times be favored and hence mispriced by investors
Managers of companies with such favored
characteristics detect the mispricing and
successfully time the market with share issues
(repurchases)
So the factor spread between recent
issuers/repurchasers can be used to infer which
characteristics are mispriced
Since mispricing will be corrected, such spread can
forecast factor returns
Definitions and portfolio construction:
Net stock issuance is defined as the change in log
split-adjusted shares outstanding
Each December firms are divided into issuers,
repurchasers and others by their net stock
issuance in the previous year.
Issuers have net stock issuance of greater than
10%
Repurchasers have net stock issuance of less than
0.5%
Factor spread is significant between most
issuers/repurchasers
Spread is defined as the average characteristics
decile of issuers minus the average characteristics

decile of repurchasers. (based on Table 3)
Lagged factor spread can predict factor portfolio
returns
Such spread significantly forecast returns in six cases:
book-to-market, size, nominal share price, distress,
payout policy, profitability, and industry
Decomposing factor spreads
Such spread can be decomposed along dimensions
of prudence, growth" and profitability
(Principal Components method)
Likely reason is that investors categorize stocks
according to these "themes"
"Prudence" factor can be interpreted as investors
favoring old, high price, low-, low volatility, and
dividend paying stocks
"Growth" factor can be interpreted as glamour
factors, such as high sales growth and high
accruals stocks
Data
COMPUSTAT and CRSP datasets are used for the period
1962-2006
Paper Type:
Working Papers
Date:
2008-11-05
Category:
IPO/SEO, quiet period, analyst coverage
Title:
The Quiet Period Has Something to Say
Authors:
Patrick A. Lach and Michael J. Highfield
Source:
FMA 2008 paper
Link:
http://www.fma2.org/Texas/Papers/QuietPeriodLongRun.pdf
Summary:
IPO firms that receive positive analysts recommendation at the

expiration of the quiet period tend to perform better that firms
that do not. A related trading strategy yields statistically
significant profits
Definitions of quiet period
Quiet period refers to the period from the time a
company files a registration statement with the
SEC until SEC staff declares the registration

statement "effective."
During that period, the federal securities laws
limits what information a company and related
parties can release to the public.
NYSE Rule 472 and NASD Rule 2711 extended the
quiet period from 25 calendar days to 40 calendar
days beginning on July 9, 2002.
Along with the Global Settlement, which was
finalized on April 28, 2003 and forced investment
companies to not issue biased recommendations,
the rules may have made analyst
recommendations more reliable for investors.
Level of analyst coverage predicts 6-12 months returns
Stocks that have analyst coverage 3 days after the
expiration of the quiet period outperform firms
that do not have any coverage at that point over
6, 9, and 12 month horizons.
A trading strategy that buys(sells) the IPOs that
have (have no) analyst coverage yields statistically
significant profits of 15.44% and 16.96% over the
9 month and 6 month horizons, respectively
The portfolios are established 4 days after the
expiration of the quiet period (thus allowing time
for the public to receive the rating news).
Level of recommendations (buy vs hold) also matters
Of those firms with coverage, companies that
receive only buy recommendations outperform
those with at least one Hold (market-neutral)
recommendation over the 1, 6 and 9 month
horizons.
Regression results confirm that firms that receive
Buy ratings statistically outperform those with
Hold ratings over 1, 3, 6, 9, and 12 month
horizons.
Multiple Buy-ratings outperform single Buy rating.
Proposed Reasons:
Consensus among analysts suggests more precise
information
Data
Companies that went public between July 2002
and December 2005 (a total of 268 companies,
increasing from 14 in 2002 to 140 in 2005). IPO
data are from Thompson Financial Securities Data
Company (SDC) US Common Stock New Issues
database. Analyst recommendations are from
marketwatch.com and briefing.com. Stock returns

are from CRSP.
Paper Type:
Working Papers
Date:
2008-09-03
Category:
Title:

Authors:
Gueorgui I. Kolev
Source:
SSRN working paper
Link:
Summary:

value-weighted
in general
sentiment.
issuance
high.
Data

exchange.
Paper Type:
Working Papers
Date:
2007-10-29
Category:
IPO/SEO, Global markets
Title:
Share Issuance and Cross-Sectional Returns: International

Evidence
Authors:
David McLean, Jeffrey Pontiff, Akiko Watanabe
Source:
SSRN working paper
Link:
Summary:

in a sample of 41 countries, stocks with
high (low) past 1-year or 5-year net share
issuance has low
(high) returns in future 1-month to 3-year returns

. Key findings:
A one standard deviation increase in annual issuance
leads to a 0.16% decline in the cross section of monthly
returns.
Both past 1-year and 5-year net share issuance can
predict stock future 1month to 3year returns, most
significantly for 1 month.
Firms with high past returns are more likely to issue
shares.
Yet in sharp contrast with US evidence, value (ie high
book-to-market) stocks more likely to issue shares, and
growth (ie, low book-to-market) stocks are more likely to
repurchase stocks.
Regarding stock repurchase (buyback): generally weaker
predictive power than stock issuance, and exists only in
small stocks
Comments:
1. Discussions
First of all, it is always good to confirm an effect in different
markets.
All regression in the paper is done by pooling all stock data for
25 years and 41 countries, without separating the different
countries and sub-periods. We think its likely the authors will
find different patterns in different countries. This said, we are
cautious of some findings in the paper:
We doubt that outliers or statistic treatment errors lead to

the findings that "value stocks are more likely to issue
stocks and growth stocks do the opposite". Such
conclusion is very counter- intuitive.
The finding that ... issuance effect is generally greater in
the U.S. than in international markets is also a little
surprising, given that arguably there are far more quant
shops invest in US markets using such strategies.
2. Data
1981/07 - 2006/06 data for accounting and stock returns data
are from Thomson Datastream. 41 non-U.S. countries are
covered. Two largest markets are Japan and UK. Share issuance
is measured as the real change in shares outstanding, (ie, its
adjusted for distribution events such as stock splits and stock
dividends)
Paper Type:
Working Papers
Date:
2007-07-06
Category:
IPO/SEO, stock short term return
Title:
The Underwriter Persistence Phenomenon
Authors:
Gerard Hoberg
Source:
Journal Of Finance forthcoming paper
Link:
Summary:
This paper presents an interesting result based on old data. For

the period of 1984 2000, IPOs underwritten by certain
investment banks persistently generate significantly higher initial
returns than those IPOs underwritten by other investment banks.
The initial return is defined as difference between the IPO price
and the closing price on the first day of public trading, and the
result is robust when controlling for underwriter quality,
underwriter service, or size, industry, etc.
Paper
Type:
Working Papers
Date:
2007-06-20
Category: IPO/SEO, Value vs Growth

Title:
Growth to Value: A Difficult Journey for IPOs and Concentrated Industries
Authors:
Gerard Hoberg, Lily Qiu
Source:
University of Michigan Mitsui Research Center
Link:
http://www.bus.umich.edu/FacultyResearch/ResearchCenters/Centers/Mitsui
/Hoberg-GrowthtoValue-Oct2006.pdf
Summary
:
The paper is built on the following observations:

Firms going public in concentrated industries have the flexibility to do
so at the optimal time of their choosing (i.e., when the firm is
transitioning from growth to value
In contrast, IPO issuers in competitive industries have little flexibility
because their IP O decision is more likely to be forced by exogenous
innovation shocks requiring quick financing, or by venture capital
financiers demanding quick exit.
Consequently
IPO in concentrated industries
underperforms since it reveals
transition from growth to

value. Yet the same decision in a competitive
industry is uninformative.
A profit can be made by
long (
short) stocks in less (more)
concentrated
industries within different stock

universes.
From Table II,

the annual
return
spread between most competitive

and least competitive firms
are 10.1%
within IPO firms , 9.3% within Non IPO firms in IPO industries, 6.8% within
all stocks, 1.3% among firms in Non IPO Industries
Industry concentration is measured using average Herfindahl Hirschman
Sales Index, and a higher index means that large companies collectively
control a higher share of total industry aggregate
Comment
s:
1. Why important
This paper presents an interesting strategy with large abnormal returns. It
allows one to understand and measure the premium of concentration in an
industry , and it also can be used to measure the value added by VCs in the
IPO process of the firm.
2. Data source
2004 Issue specific IPO data are from the Securities Data Company (SDC)
U.S New Issues Database. Stock performance data and firm financial data
are from CRSP and COMPUSTAT, respectively.
3. Discussions
This is an interesting paper that combines industrial organization (IO)
research with asset pricing and corporate finance. The authors almost use
Herfindahl-Hirschman Index as a factor, which has been widely used in IO
papers.
Our concern is that t he strategy will be biased in several ways:
By definition it has an industry bias.
It may have a strong size bias as companies in concentrated
industries tend to be larger ones. This being the case, the profit on
paper can not be taken at face value due to transaction cost
It may also have value/growth bias: one would imagine that more
concentrated industries tend to be those stable industries, or value
industries. It would be interesting to do a 2 way sort by concentration
and book/market.
Paper Type:
Working Papers
Date:
2007-05-02
Category:
IPO/SEO, dividends
Title:
Does the Market React Less Negatively to Dividend Payers'

Seasoned Equity Offerings?
Authors:
Bin Chang
Source:
Link:
Summary:
Seasoned Equity Offerings (SEO) is normally associated with

negative future returns.
dividend-issuing
companies have less negative returns than non

dividend
companies since the mid

1980s,
although this pattern is not
obvious before that time.
Paper Type:
Working Papers
Date:
2007-01-16
Category:
Shares outstanding, Stock repurchase, IPO/SEO
Title:
Shares Issuance and Cross Sectional Returns
Authors:
Jeffrey Pontiff, Artemiza Woodgate
Source:
Link:
Summary:
This paper shows that post 1970,

the change of shares
outstanding can strongly forecast cross
sectional stock returns.
Such predictive ability is significant after controlling for share

repurchase announcements, seasoned equity offerings (SEO),
size, book-to-market, and momentum.
Comments:
1. Why important
Is there new information in the share outstanding change, given
that many people are already using similar measures such as
change in shareholder equity? Maybe. The change in shareholder
equity is polluted by share price change. For example, SEO as
a percentage of total shareholder equity is a function of the
prices when stocks are offered and prices when the total
shareholder equity is computed. The change in share outstanding
sounds cleaner in this sense. The conclusion in this paper
suggests that one may be better off by using shares change.
2. Data
2003 US stock data are from CRSP and Compustat database.
3. Discussions
The millions of firm month covered in the study (1.58 million firm
month to be exact) always is a red flag to us as it signals
potential small bias.
It would be more comforting if the authors can give a direct
portfolio return back testing return (especially in large cap
universe), instead of just the regression coefficients.
Paper Type:
Working Papers
Date:
2006-12-03
Category:
Stock equity offerings (SEO), IPO/SEO, Book Ratios
Title:
Behavioral and Rational Explanations of Stock Price Performance

around SEOs: Evidence from a Decomposition of Market Book
Ratios
Authors:
Michael Hertzel and Zhi Li
Source:
SSRN working paper
Link:
Summary:
he authors first decompose market-to-book ratios into two

T
components: mis valuation and growthopportunity.
It then finds
that
Returns of issuing firms with greater growth opportunities
does not suffer.
These firms invest in capex(capital
expenditures) and R&D
Returns of issuing firms with greater mispricing will
suffer( -0.54%/month).
These firms tend to decrease long
term debt
Comments:
1. Why important
The decomposition of p/b ratio (into misvaluation and growth
potential) is both intuitive and innovative. Itwould be very
interesting to see whether mis valuation will lead to lower
returns. This paper also sheds lights on the SEO strategy that
quite some practitioners have been using
2. Data
4,325 seasoned equity offerings during the period of 1970 2004
are from t he SDC database. Stock accounting and price data are
from Compustat and CRSP.
3. Discussions
A high Market Book Ratio can be either wrong (misvaluation) or
right (reflecting higher growth potential), we are very curious to
see whether the former will lead to lower stock returns? If yes,
that should help pick stocks in growth universe.
From equation (3) in the paper, we can see that the
decomposition can intuitively be thought as:
market value/book value =
market value/(firm value implied by contemporaneous
stock and sector accounting data)
+
(firm value implied by contemporaneous stock and sector
accounting data) / (firm value implied by historical average
stock and sector accounting data)
+
(firm value implied by historical average stock and sector
accounting data) / (book value)
The first two items are mis valuation, while the third one growth
opportunity. This implies that all misvaluation will mean revert to
the time series average value implied by sector accounting data.

This in some sense echoes the industry neutral value strategy
reviewed in this issue (Peer Pressure: Industry GroupImpacts on
Stock Valuation Precision and Contrarian Strategy Performance,
-8478E1ED4484/0/Peer_Pressure_JPM.pdf)

Paper
Type:
Working Papers
Date:
2014-10-22
Category: Volatility anomaly, short interest

Title:
The long and short of the vol anomaly
Authors:
Bradford D. Jordan and Timothy B. Riley
Source:
U.S. Securities and Exchange Commission
Link:
http://harbert.auburn.edu/binaries/documents/finance/2014/fall/VolAnomaly
.pdf
Summary
:
High volatility stocks on average underperform. But high volatility stocks

with low short interest outperform. A long/short strategy yields a monthly
alpha of 1.67%
Intuition
On average, stocks with high prior-period volatility underperform
those with low prior-period volatility
However, both positive and negative misvaluation exists among these
highly volatile stocks
Short sellers are arguably adept at identifying those valuation errors
As a result, high volatility stocks can experience significant positive or
negative future abnormal returns depending on the level of short
interest
The level of short interest is proxied by Days to Cover (DTC) and
Short Interest Ratio (SIR)
DTC = (the level of short interest in month t) / ( the average daily
trading volume in month t)
SIR = the short interest level / shares outstanding
Portfolio formation
Volatility sort
In month t, sort stocks into quintiles based on idiosyncratic
volatility in month t-1
Short interest sort:
In month t, sort stocks into quintiles based on their short
interest (SI) in month t-1
Long strategy: buy high volatility stocks with low short interest
Long/short strategy: buy high volatility stocks with low short interest,
short high volatility stocks with high short interest
Source:thepaper
Robusttoexecutioncosts(illiquidity,shareturnover,andinstitutionalholdings)(Table6)
Robusttomomentum(large,positivealpharemainsregardlessofpriorreturns)(Table7)
Highvol/lowSIportfolioperformswellduringturbulentmarkets(thedotcombubble
andtherecentfinancialcrisis)(Table8)
Source:thepaper
Data
U.S.stockdatafromTheCenterforResearchinSecurityPrices(CRSP)
ShortinterestdatafromCompustataugmentedwithdatasuppliedbyNASDAQ
Datarange:19912012
Paper Type:
Working Papers
Date:
2014-01-07
Category:
Short interest, Lend-able stocks
Title:
In short supply: Equity Overvaluation and Short Selling
Authors:
Messod Daniel Beneish, Charles M.C. Lee, Craig Nichols
Source:
SSRN
Link:
Summary:
Hard-to-borrow stocks yield negative future returns. Returns to

the short side of nine well-documented anomalies may not be
obtainable given the high short cost and the availability of

lend-able shares
Short-interest ratio (SIR) is usually used to measure
short-sale intensity
The ratio of total shares shorted / total share
outstanding
However, higher SIR stocks continue to earn lower
returns in subsequent months, well after this information
is publicly available
A potential explanation maybe the supply of shares
available for lending is limited
Or market is very inefficient
Define special stocks as those hard-to-borrow stocks
Based on a Daily Cost of Borrowing Score (DCBS)
measure
13.7% of observations are special stocks (whose
DCBS >= 3) (panel B of table 2)
86.7% stocks are easy-to-borrow (DCBS = 1 or 2)
Define Utilization= borrowed shares / lendable
inventory
By comparison, SIR is demand as a percentage of
shares outstanding, whereas utilization is demand
as a percentage of available supply
DBCS does not equal SIR
Not surprisingly, more special stocks are in the highest
SIR decile (Table 4)
However, 70%+ of high SIR stocks are not special and
are easy to borrow, despite the high level of SIR
A U-shaped relationship: more special stocks in highest

and lowest SIR deciles
The lowest two SIR deciles have roughly 14%
special stocks each (Table 4)
Higher DCBS, lower return
Stocks with DCBS of 3 and above have significant
negative returns
The magnitude of returns increases as DCBS progresses
from 3 to 10
One month ahead returns for stocks with DCBS of 3-9 is
-0.7% to -2.5% (Table 2)
One month ahead returns for stocks with DCBS of 10
average -4.9 percent. (Table 2)
By comparison, DCBS of 1 and 2 are associated with
positive size adjusted returns of 0.4% and 0.3%,
respectively
Supply-related measures better predict negative returns
Many
Data
When regressing one month ahead size adjusted returns

on SIR and utilization in regression, SIR is not significant
(-0.2% per month) but utilization remains strong (-1.3%
per month) (Table 3b)
SIR only works within easy-to-borrow stocks
Among easy-to-borrow stocks, those with low SIR
experience consistently higher size-adjusted
returns (0.9% per month) (Table 4)
Among special stocks, SIR has only marginally
predict returns
SIR only works within high supply stocks (Table 5)
SIR yields -2.3% monthly returns within low
supply stocks, and insignificant return within high
supply stocks
Holding a firms utilization ratio constant (Table 5)
Low demand stocks outperform high demand
stocks by 1.1%
Lowest returns accrue to stocks with the lowest
supply
anomalies relies on special stocks
These anomalies are Gross profits, Asset growth,
Investment/assets, NOA, Accruals, Payout%, Quarterly
earnings, Ohlson score, M-Score
Negative short side returns are concentrated in the
special stocks (except for accruals)
Easy-to-borrow stocks do not underperform (Table 7)
Hence likely these anomalies are not as useful due to
short sale limits
July 2004 - October 2011 measures of the total number
of shares borrowed and the total lendable inventory
available are from Data Explorer Limited (DXL)
Stock data are from COMPUSTAT/CRSP
Pape Working Papers

r
Type:
Date: 2013-04-30
Cate
Novel strategy, disposition effect, short interest
gory:
Title:
Biased Shorts: Stock Market Implications of Short Sellers Disposition Effect
Auth
ors:
Bastian von Beschwitz, Massimo Massa
Sour
ce:
Link:
http://icf.som.yale.edu/sites/default/files/2013%20Behavioral%20Conference/Bia
sed%20Shorts%20Bastian.pdf
Sum
mary
:
Short sellers are subject to the disposition effect, similar to average investors. A
related strategy generates up to 26% annual alpha
Average investors demonstrate the disposition effect: they tend to hold
onto losing stocks to a greater extent than they hold onto their winning
stocks
Short sellers demonstrate similar pattern: they too tend to hold on to their
losing stocks
Define Short Sale Capital Gains Overhang I (SCGO I): the capital gains
overhang using the reference points
Where S is share of stocks that were shorted in different periods, P is the

price for each short selling horizon(1 day ago, in the last 3 days, in the last
7 days, in the last 30 days and longer)
Define Short Sale Capital Gains Overhang II (SCGO II): the capital gains
overhang using the reference point computed from short seller horizon
For all investors in the market, define reference price
So Long Capital Gains Overhang (LCGO) = (Rt - Pt) / Rt

On average, each week 3.72% (median 1.55%) of shares outstanding are
on loan, with an average holding period of 5-8 weeks (Table 1)
Average SCGO I is positive with 0.97%, average LCGO is 0.87% (Table 1)
Higher SCGO, less shares covered by short-sellers
Regressing closing (i.e., shares returned / shared on loan) on SCGO,
plus risk variables such as stock turnover in the past year and past
returns(Table 2)
A one standard deviation (10.86%) increase in SCGO raises the closing of
the short position by 0.6% percentage points, or approximately 5%
relative to its median (Table 2)
SCGO negatively predicts future stock returns
Constructing portfolio: long stocks in the lowest SCGO quartile and short
those in the highest SCGO quartile
Weekly 3-factor alpha is 20 - 30 basis points (11.5% to 18% annually)
When excluding January (when trades might be influenced by tax
considerations), the alpha is 14.5% to 26% per year
Not surprisingly, it did not work only in the case of very negative past
returns (Table 6)
Robust to disposition effect of other investors
Regress stock returns on SCGO and the capital gains for the market
overall (LCGO)
One standard deviation of SCGO decreases the return by 3.3% per year,
when controlling for LCGO
One standard deviation increase in LCGO increases the return 7% per
year, when controlling for SCGO
Data
2004 - 2010 US stocks weekly short interest data are from Data Explorer
US stock price and accounting data are from CRSP/Compustat
Paper
Type:
Working Papers
Date:
2012-10-28
Categor
y:
Novel strategy, insider trading, insider silence, short interest
Title:
The Sound of Silence: What Do We Know When Insiders Do Not Trade
Author
s:
George P. Gao and Qingzhong Ma
Source: Cornell University Working Paper

Link:
http://forum.johnson.cornell.edu/workshop/ACCOUNTING/TheSoundOfSilence_
GaoMa_20121015.pdf
Summa
ry:
Insider silence (periods when corporate insiders do not trade), coupled with
high short interest, predicts significant negative future returns, which are even
lower than when insiders net sell. Such pattern lasts for at least 10 months
Insider silence is the period when insiders do not trade
Define Net insider demand (NID) as the net shares purchased/sold by
insiders
A firm is net buying if NID > 0, net selling if NID < 0, and
silence if no insider trading activity occurs
Insider silence is very common: percentage of insider silence is 74%
(50%, 33%, 20%) when NID is measured over the past 1 (3, 6, 12)
months (Panel A of Table 1)
Insider silence can be informative
Corporate insiders are not allowed to buy or sell their companys
stocks during the period before the announcement of major
corporate events, such as acquisition
As an illustration, the proportion of merger targets whose
insiders net buy their own company shares is 8%-10% during
the time period at least six months before the announcement
month, and then decreases to only about 3% in the
announcement month (Table 2 and Figure 2)
NID correlated with short interest
Percentage of firms with net insider selling increases when short
interest piles up (Panel B of Figure 1)
Insider silence predicts negative future returns
Every month, form three portfolios (silence, buy, and sell) based
on their insider trading activities over the past six months
Calculate each portfolios buy-and-hold abnormal returns (BHAR) over
the subsequent holding period of 1, 3, 6, 12, and 24 months
Silence portfolio has a 12-month BHAR of -2.5%, significant at the 1%
level
No return reversal: for up to two years after portfolio formation (Panel
A)
Slow decay: significant at 0.97% (0.65%) for the first (sixth) month
Mostly information reflected around earnings announcements: In the
first (third) month after portfolio formation, the 5-day abnormal return
accounts for 47% (94%) of the same-month alpha (Table 6 and Figure
6)
Similar findings in Fama-MacBeth regressions (Table 9)
Controlling for short interest, firm size, B/M ratio, and return
momentum etc
Coefficients on insider silence remain significant in all regression
models, and hold for two sub-periods (Table 9): pre- and post2002/10 (SarbanesOxley Act)
NID effect strongest when short interest highest
Double sort firms first by short interest (into 5 quintiles) and then over
the past six months (silence, buy, and sell)
Within the high short interest quintile, the silence portfolio

underperforms most
The 12- (24-) month BHARs of silence portfolios are highly
significant -7.5% (-11.19%)
The sell portfolio predicts insignificant -1.48% (Panel B)
Source: the paper

Longer silence period, lower future returns: when insiders are silent for
1 (12) months, the one-year BHAR is -0.99% (-10.72%) (Table 4)
Within the bottom or low short interest quintile, no positive BHARs in
the silence portfolios
Data
1992/1-2010/12 insider trading data are from Thomson Reuters
Monthly short interest data are from the exchanges (1992/1 to
2002/12), and Standard and Poors Compustat (2003/1-2010/12)
Stock data are from CRSP/Compustat merged database
Paper
Working Papers
Type:
Date:
2012-05-21
Catego
ry:
Novel strategy, security lending, short interest
Title:
Exploring Alpha from the Securities Lending Market
Author
s:
Vivian Ning, Li Ma, Kirk Wang, Temi Oyeniyi
Source
:
Capital IQ working paper
Link:
https://www.capitaliq.com/media/131415-SP%20Capital%20IQ%20Quant%20
Research%20-%20Alpha%20in%20the%20Securities%20Lending%20Market_M
arch_new.pdf
Summ
ary:
Stock lending factors can predict stocks returns during July 2006 October
2011 among Russell 3000 companies
Background
As of 2011 in Russell3000 stocks, shares on loan accounts for 6% of
stock shares outstanding
At its peak in 2007, the ratio is close to 10%
This study uses DataExplorer securities lending database
Lending factors predict stock returns
Group lending factors into 5 categories
Categor
y
Definition
Rationale
Demand
The quantity on loan
High demand reflects

investors pessimism
Supply
The quantity of
shares available to
be borrowed
Limited supply can be

an indication that a
security is difficult to
borrow, which leads
to a tighter constraint
on short-selling
Utilizatio
n
Demand / supply
Reflect the short

investors sentiment
Cost
Borrowing cost
High cost to borrow

may be due to limited
supply (low
institutional
ownership) or high
demand
Special
Factors
DataExplorer
measure of a
securitys sentiment
DX indicators are
derived from
securities lending data
and stock price
information
Factors in Utilization category show the strongest performance

Weekly return spread of 1.00% for all Russell 3000 stocks, and 1.22%
for stocks with the top/bottom 4% (Table 1)
16 out of the 19 factors have annualized return spreads of 16%+
between July 2006 - October 2011 among Russell 3000 companies
Most factors are statistically significant at the 5% level
Stronger results in the top and bottom 4% of factor scores
Combination of the 5 categories works best
In the tailed universe (stocks with top/bottom 4% measure), a simple
equal-weighted five-factor strategy yields an annualized return spread of
41% (information ratio 1.91) (Table3)
Where the return spread is 30.89% for in-sample period, 52.26%
for out-of-sample period
Strong small-cap bias in the short-side (Table 5)

Short side (Q5) has much lower median market cap ($453mn)
Long side (Q1) has much higher median market cap ($4,117mn)
Limited turnover
Turnover is 4.1% for Q5 (Table 5)
Suggesting that transactions costs should not significantly impact the
factor return spreads
Works in other international developed markets (Table 7)
Such as United Kingdom, France, Italy, Sweden, and Switzerland in
Europe; Japan, Australia, Hong Kong, and Singapore in Asia; and U.S
and Canada in North America
Similar multi-factor strategies yields significant return spreads
The annualized return spreads are 38.8%, 36.3%, and 37% in
Canada, Europe and Asia respectively
Data
July 2006 - October 2011 securities lending data (including daily shares
borrowed, inventory of available, Shares on loan, and stock borrowing
costs) are from Data Explorers
Paper Type:
Journal Papers
Date:
2009-04-20
Category:
novel strategy, short interest
Title:
Which Shorts Are Informed?
Authors:
EKKEHART BOEHMER, Charles M. Jones, XIAOYAN ZHANG
Source:
Link:
63&iid=2&aid=1324&s=-9999
Summary:
WeconstructalongdailypanelofshortsalesusingproprietaryNYSEorder
data.From2000to2004,shortingaccountsformorethan12.9%ofNYSE
volume,suggestingthatshortingconstraintsarenotwidespread.Asa
group,theseshortsellersarewellinformed.
Heavilyshortedstocks
underperformlightlyshortedstocksbyariskadjustedaverageof1.16%
overthefollowing20tradingdays(15.6%annualized).Institutional
nonprogramshortsalesarethemostinformativestocksheavilyshortedby
institutionsunderperformby1.43%thenextmonth(19.6%annualized).
The
resultsindicatethat,onaverage,shortsellersareimportantcontributorsto
efficientstockprices.
Paper Type:
Working Papers
Date:
2009-01-12
Category:

Recommendations
Title:

Authors:
Source:
SSRN working paper
Link:
Summary:

Specifically, the
strategy is
low short interest
short interest,
not work
(2003-2006)
months

1999-2003)
predicting factors
factors
Data
database
Paper Type:
Working Papers
Date:
2008-03-16
Category:
Short interest; idiosyncratic risk, UK market, Global markets
Title:
Daily short interest, idiosyncratic risk, and stock returns
Authors:
Andrea Au, John Doukas, Zhan Onayev
Source:
SSRN working papers
Link:
Summary:
This paper finds that in UK stock market,

stocks with very high
and stocks with very low short interest levels outperform market,
and idiosyncratic risk plays a major role in the relationship
between short interest (short sales) and stock returns.
The authors use three ratios to measure the degree of
shorting:
SI_Avail (short interest (Shares on loan) divided
by available shares to lend (Shares in CREST));
SI_Float (short interest divided by float);
SI_Shrs (short interest divided by shares
outstanding).
In a value-weighted portfolio,
stocks with low short
interest have significant weekly abnormal returns of
0.15% (relative to the Fama-French market, size and
book-to-market factors), while stocks with high short
interest have weekly positive abnormal returns of 0.07%.
These results contradict US evidence that stocks with high
short interest enjoy negative abnormal returns.
Stocks with low short interest and high idiosyncratic risk
earn an average weekly return of 0.27% and 0.23%,
using equal- and value-weighted portfolios, respectively.
This finding suggests that idiosyncratic risk represents a
deterrent to arbitrage, and thus, short selling activity is
mostly concentrated in stocks with low idiosyncratic risk,
given the lower costs of short selling those stocks.
Comments:
1. Discussion
The inference is drawn from a three-year period, one would
prefer to use a long time horizon to draw a more statistically
meaningful conclusions about the relation of idiosyncratic risk,
short interest and returns. This is especially relevant given the
evidence confirmed in the paper that aggregate short interest
has been increasing over time.
There is some evidence that short interest forecasts negative
subsequent returns, in accordance to the idea that short-sellers
are well informed.
2. Data
2003/09-2006/09 daily FTSE 350 stock lending data is available
from CRESTCo Limited. The two stock loan variables obtained
from CREST dataset are (1) Shares on Loan, which is a proxy for
short interest, and (2) Shares in CREST, which is a proxy for the
availability of lendable stocks.

Data on stock returns, market capitalization, shares outstanding,
float and book-to-market (BM) ratios are from WorldScope and
FTSE.
Paper
Type:
Working Papers
Date:
2007-12-26
Category:
UK short interest, Global markets
Title:
Patterns in Stock Lending
Authors:
James Clunie, Yi Wu
Source:
internet
Link:
http://shortstories.typepad.com/globalequities/files/patterns_in_stock_lendi
ng.doc
Summary: This paper founds that (only) for non-dividend paying stocks, the most
shorted quintile UK stocks yield -1.70% abnormal return one month after
the observation date.
For FTSE 10 stocks, the average proportion of shares on loan is
3.90%, whereas for FTSE 250 it is 2.33%
The average percentage on loan increases with the
dividend yield (sug esting that security borrowing is
associated with dividend tax arbitrage and dividend capture
activities)
how active the stocks trades
past performance
On a sub-sample containing only non-dividend paying stocks (thus
eliminating the effect of dividend tax arbitrage), the most shorted
quintile UK stocks yield -1.70% abnormal return one month after the
observation date. Such effects disappeared when using all stocks
There is no weekend effect, and there is also no evidence that stocks
with greater price-to-fundamentals ratios have greater lending
activity.
There is some evidence that borrowers are subject to
short-squeezes in response to predatory trading from other market
participants.
Comment
s:
1. Discussions
This paper documents a significant future under-performance of short-sold
stocks among non-dividend payers. This is meaningful for practitioners since
it may help refine quant strategies as well as understanding the motivations
behind stock borrowing.
Our concerns are:
Although the database available in this study is publicly available
(contrary to some other short- sales studies), the conclusions from
the study are draw on a very short time-series sample
(09/01/2003-09/27/2004) and therefore they are not very reliable.
We also can not infer the statistical significance associated with some
of the results stated above, since the authors do not provide
standard error estimates. It should also be important to estimate the
joint effect of dividend yield, turnover, volatility, past returns, and
valuation ratios on stock lending percentages, to assess the relative
importance of each of those factors.
2. Data
09/01/2003-09/27/2004 daily number and value of shares on loan for each
stock in the FTSE 100, FTSE 250 (mid-cap) and FTSE 350 indexes are
obtained from a commercial database (Data Explores Ltd) based on
information provided by CREST, the organization that makes the settlement
of all trades on the London Stock Exchange.
Paper
Type:
Working Papers
Date:
2007-10-16
Category:
Short interest, institutional ownership
Title:
Why Do Short Interes t Levels Predict Stock Returns?
Authors:
Ekkehart Boehmer, Bilal Erturk, Sorin Sorescu
Source:
SSRN working paper
Link:
Summary:
The number of stock shares available for short selling is largely determined
by the level of institutional.
This paper studies the interaction of short
interest and institutional ownership
, and the findings support the view that
short sellers do have stock picking skills.
Key findings:
A strategy that long (short) least (most) shorted stocks yields a

monthly return 2.2% (1.7% risk adjusted return for most shorted
decile stocks, 0.5% for the least shorted)
For the 20% most shorted stocks and during the quarters when
institutional ownership changes, a strategy that is long (short) the
stocks with highest (lowest) institutional ownership change yields a
quarterly return of 7.7%, and such hedge returns consistently
increase with the level of short interest.
Note that this is not a
trading strategy per se, it merely relates
contemporaneous
returns
and changes in institutional ownership
Impact of earning announcements:
A hedged portfolio that is long (short) least (most) shorted
stocks generates a daily return of 0.31% during the four
days around earning announcements.
Among the 20% of stocks with the lowest institutional
ownership, a hedged portfolio that is long (short) least
(most) shorted stocks generates an abnormal return of
0.70% around earning announcements, and such hedge
returns consistently increase with the decrease of
We thought this paper may prompts researchers to test the interaction of
short interest and institution ownership, which makes economic sense since
the level of institutional holding largely determines the supply of short
interest.
Intuitively, short interest as a percentage of ownership is a
better measure than short interest as a percentage of total share
outstanding.
By how much the effectiveness of the short interest factors is improved by
adding institution ownership change is yet to be seen. From the
contemporaneous relationship one can see that it helps but not very
significantly. As shown in the paper, short interest as a stand alone factor
yields 2.2% monthly hedged return. After adding institutional ownership
changes, the paper profit goes up marginally to 2.5% per month.
One other related paper provides similar results. In Short interest,
institutional ownership, and stock
returns(http://www.people.fas.harvard.edu/~ppathak/papers/shortjfe.pdf)
, it is shown that during 2002, stocks with high short interest and yet low
institutional ownership under perform a significant 2.15% per month when
equally weighted, and (only) 0.39% per month when value weighted.
2. Data
1988/01 2005/12 US stock data are from CRSP. Monthly short interest
data are from respective stock exchanges. Institutional ownership data
(13F) are from Thomson Financial.
Paper Type:
Working Papers
Date:
2007-08-23
Category:
Short interest, insider trading
Title:
Shorts and Insiders
Authors:
Amiyatosh Purnanandam, Nejat Seyhun
Source:
SSRN working paper
Link:
Summary:

the combination of standardized short
interest and insider trading can effectively predict stock returns.
The definitions are:
Standardized short interest =
(current short interest historical mean short interest) / short
interest standard deviation)
Standardized insider trading =
(current insider trading historical mean insider trading) / insider
trading standard deviation
Key findings:
As a stand alone factor, stocks with highest(lowest) 1/3
short interest earn an average monthly equal weighted
return of 0.29% (0.49%) after adjusting for market return,
size, book market and momentum.
Interaction of the two factors:
Comments:
Two-way sort works best

: A value
weighted portfolio that
is short stocks with high standard short

interest and low
insider buying and long opposite stocks generates

significant risk adjusted return of
10% annually (0.82%
monthly).
1. Why Important
The challenge of short interest as a quant factor is that some
short selling are not informative by nature (eg, t may be a result
of program, ie hedging). This paper provides a methodology to
detect informationally motivated shorting demand, and may be
meaningful to managers who are currently using either one or

both factors.
2. Data
2003 stock return data for all NYSE/AMEX stocks are from CRSP.
We could not find the source of monthly short interest, insider
trading data in the paper.
3. Discussions
We covered another paper, Supply and Demand Shifts in the
Shorting Market
(
http://fisher.osu.edu/~diether_1/papers/shifts.pdf
),
where the
authors use a proprietary database and find that changes in stock
shorting demand can predict stock returns. An increase of
shorting demand is identified when shorting cost goes up (i.e.,
increase in stock loan fee) and shorting quantity increases. Stocks
with increasing shorting demand has a 2.98% abnormal return in
the following month.
One other interesting paper that also addresses the relationship
between the two factors is Short Interest, Insider Trading, and
Stock Returns
(
http://www.fma.org/Barcelona/Papers/HKShortIns.pdf
), which
finds that in Hong Kong market, although short selling suggests
lower future return, insider purchasing helps to mitigate the
negative impact of short selling transactions.
Paper Type:
Working Papers
Date:
2006-11-03
Category:
Strategy, short interest
Title:
Supply and Demand Shifts in the Shorting Market
Authors:
Lauren Cohen, Karl B. Diether, Christopher J. Malloy
Source:
Link:
http://www.som.yale.edu/faculty/lc394/pdffiles/supplyanddemand.pdf
Summary:
This paper finds that changes in stock shorting demand can predict
stock returns An increase of shorting demand is identified when
shorting cost goes up (i.e., increase in stock loan fee)
and,
shorting quantity increases

It finds that stocks with increasing shorting demand have 2.98%
abnormal returns in the following month. This strategy works better
for stocks with less public information flow.
Comments:
1. Why important
Short interest strategy is used by many, but its performance has been
mixed these years. This paper presents an improved version of such
strategy. The only drawback at this stage is that the database is
2. Data
1999/09 2003/08 proprietary stock lending data from a large
institutional investor is used. Data items include rebate rates, shares
on loan, collateral amounts, collateral/market rates, estimated income
from each loan, and broker firm names.
3. Discussions
Given that this paper is based on a private database from one
institution, it would be ideal if we can apply the new methodology on
a publicly available database. Change of total shorting positions may
help, as its not easy to find a proxy for shorting cost change
Two caveats: 1. only 1999 2003 data are used. 2. Only small cap
stocks are covered in the database Nonetheless, the results makes
the new strategy look promising: 4.5% per year after incorporating
commissions, bid ask spreads, and price impact, Sharpe ratio 2.5 3.5
times that of the market or HML.
Paper Type:
Working Papers
Date:
2006-07-13
Category:
Strategy, short interest
Title:
Is aggregate short selling a useful proxy for sophisticated

information based trading? New evidence from NYSE daily data
Authors:
Holger Daske, Scott A. Richardson, Irem Tuna
Source:
Link:
http://accounting.wharton.upenn.edu/faculty/richardson/DRT-SH
ORTS.pdf
Summary:
This paper studies daily short sale transactions on NYSE for the
period 2004/04 - 2005/03. The result shows that short
transactions are no longer informative, as they are not

concentrated prior to bad news announcements or large price
declines or predict stock returns.
Comments:
1. Why important
Many practitioners employ short-selling factor to predict stocks
under-performance. This paper should be helpful since it reveals
that, on a daily and individual stock levels, short selling on
average are not informative as it used to be.
2. Data
The daily short sale data are based on the summaries files of
daily transactions executed on the SuperDOT (NYSE trading
platform).
3. Discussions
We think this is a valuable study to practitioners. Besides
cautioning people of the predicting power of short trades, it also
reminds us that the market is constantly changing. Strategies
that worked in the past may not necessarily work now.
Some questions remain to be answered. For example, we are
curious of the performance within different styles (large/small
cap, value/growth, etc). A related paper, Which Shorts Are
Informed
http://www.columbia.edu/~cj88/papers/whichshorts.pdf
)
find
that large short sale orders are the most informative for the
period of 2000-2004.
Also anecdotal evidence suggests that convertible bond issuance
may put a selling pressure on stock prices due to arbitragers
hedging needs. A study within this sub-sample may be
interesting.
Paper
Type:
Working Papers
Date:
2006-06-02
Category:
Strategy, Risk, Short Interest
Title:
Idiosyncratic Risk, Short-Sellers, and Stock Returns
Authors:
Ying Duan, Gang Hu, and R. David McLe
Source:
2006 WFA conference paper
Link:
https://wpweb2.tepper.cmu.edu/wfa/wfasecure/upload/2006_2.397646E+0
7_Short-Selling_Idio-Vol-paper.pdf
Summary: This paper shows that idiosyncratic risk can predicts subsequent returns
better within high short interest stocks. Within such stock group, a hedged
portfolio to short (long) stocks with high (low) idiosyncratic risk earns an
abnormal return of 14% annually.
Comment
s:
1. Why important
This is the third paper we reviewed on idiosyncratic risk (i.e, idiosyncratic
volatility) since this new factor may help us develop new strategies. This
paper offers a unique perspective by studying the impact of short interest on
idiosyncratic risk.
2. Data
Monthly short interest data for NASDAQ stocks are from NASDAQ (June
1988 through May 2003) Stock return data are from CRSP/Compustat, and
institutional holdings data are from Thompson Financials.
3. Discussions
One intriguing findings is that the authors show that the idiosyncratic risk
effect are limited only to stocks with high short interest. In other words,
there is no significant relation between the returns of low short interest
stocks and idiosyncratic risk.
Why would short interest be a meaningful way to group stocks here? Since
prices of stocks with higher short interest tend to go down, does this mean
that high idiosyncratic risk stocks will generate lower returns only when its
going down? The paper further claims that "... idiosyncratic risk tends to be
the most important arbitrage cost." Then does idiosyncratic risk equal to
high transaction cost, illiquid and low quality? Its still a puzzle to us.
The authors claim that the 14% abnormal return comes from the fact that
un-hedged volatility can deter arbitrage. Some questions to follow are: Is
this strategy practical in reality? What risks are we taking in a hedged
portfolio based on idiosyncratic risk? Whats the idiosyncratic risk of such a
stock portfolio?
A quant manager may find juice by combining these two factors discussed.
The annual short interest strategy yield ~12%, the proposed strategy within
high short interest stocks yields 14%. A two-way sort based on both
idiosyncratic risk and short interest may presumably offer higher returns.

Paper Type:
Working Papers
Date:
2015-08-30
Category:
Size premium, value premium, leverage premium
Title:
Leveraged Small Value Equities
Authors:
Brian Chingono, Daniel Rasmussen
Source:
The University of Chicago
Link:
Summary:
Leverage enhances the average returns of a small-value

investment strategy, particularly in companies that are already
paying down debt and exhibit improving asset turnover. Annual
portfolios of such firms can yield annual alphas of 11% - 13%
Intuition
Financial leverage improves the returns of a small-value
investment strategy
Excess returns from this strategy come primarily through
deleveraging, a virtuous cycle of reduced interest payments,
improved financial stability, and value accrual for equity
investors
Enterprise value (EV) = market capitalization + long term
debt
Financial leverage = long-term debt / enterprise value
Debt pay-down = 1 if long-term debt has decreased since
the previous year, 0 otherwise
Improving asset turnover = 1 if revenue growth exceeded
asset growth in the previous year, 0 otherwise
Portfolio formation
Each year, sort stocks independently based on size, value
and leverage
The universe of leveraged small-value stocks is based on
the following criteria:
Size premium: stocks are between 25th and 75th
percentile of market cap
Value premium: 25% cheapest stocks in each year
based on EBITDA/EV
Leverage premium: stocks with above-median
leverage ratio relative to the universe of all U.S.
stocks in each year
Further rank leveraged small-value stocks based on their

debt pay-down, ln(LT Debt/EV), asset turnover, ln(Market
Cap) and ln(EBITDA/EV)
Invest in the 25 (50) highest ranking stocks (Top 25 (50)
Portfolios)
Rebalance annually
Leveraged small-value stocks outperform the market
Full universe of leveraged small value stocks outperforms
the market by 1.88% per year (Figure 2)
Firms that are already paying down debt earn an average
annual return 3.6% higher compared to other firms (Figure
5)
Firms with improving asset turnover earn an average annual
return that is 2.7% higher compared to other firms (Figure
5)
Greater returns in the Top 25 (50) Portfolios
Top 25
Portfolios
Top 50
Portfolios
Annual return in excess of

market
11.70%
9.20%
Sharpe ratio
0.51-0.53
0.45-0.46
5-factor alpha
13.06%
10.92%
Source: The paper

Return volatility is significantly higher for leveraged
small-value stocks than broader market indices
CAPM beta is 1.66
Data
Prices (CRSP)
Pap
er
Typ
e:
Working Papers
Dat
e:
2015-02-17
Cat
ego
Novel strategy, size, quality
ry:
Titl
e:
Size Matters, if You Control Your Junk
Aut
hor
s:
Clifford S. Asness, Andrea Frazzini, Ronen Israel, Tobias J. Moskowitz, and Lasse
Heje Pedersen
Sou SSRN Paper

rce:
Lin
k:
Su
On average, size factor is weak. But after controlling for the quality factor, size
mm premium is strong and on roughly equal footing with value and momentum
ary: Background
Size factor (SMB) is suffering from these observations:
Weak returns in the U.S.: from 1926 - 2012, the average month
gross return spread between small-big deciles is 0.55% (Table 1)
Not consistent: did not work during 1980 - 1999 (Table 1)
Only works within small stocks (Figure 3)
Only works in January: SMB in January are 2.3% per month and the
1-10 spread in size decile returns is 6.8%. In February through
December SMB delivers only 0.04% and the 1-10 portfolio spread -1
basis point (Table 1)
Is subsumed by illiquidity: in regression, when adding the liquidity
risk variables to size, the alpha declines to 6 bps with a t-stat of 0.42
(Table 5)
Is weak internationally
Why adding quality may improve size: stocks with very low quality are
typically very small, have low average returns, and are distressed and
illiquid
This negative size-quality relationship largely explains unfavorable
findings for the size effect
Quality (QMJ) is defined using a profitability, profit growth, safety and
payout
Ranking stocks into value-weighted tenths (deciles) each month
Value weight portfolio and reconstructed every month
Significant size premium after controlling for quality
Significant premium: in regression, SMBs alpha jumps from 14 to 49 bps
per month (t-stat = 4.89) (Table 2)
Source: the paper

QMJ helped in every single industry (Figure 2)
Stable over time: even during 1980 to 1999 when SMB did not work, adding
QMJ restores SMBs positive alpha to a robust and sizeable 50 bps (t-stat of
3.06) (Table 2)
QMJ helped in 9 out of 10 size deciles
Source: the paper

Worked in non-January months: adding QMJ to the regression delivers a
positive and significant size premium outside of January of 38 bps (t-stat =
3.62)
Worked in international markets: increase in SMB alpha for 23 out of 24
countries once controlling for QMJ (Figure 7)
Data
Covers US stocks from July 1957 through December 2012, and stocks in 23
other
developed country during January 1983 through December 2012
Data are from CRSP tapes and the XpressFeed Global database

Paper
Type:
Working Papers
Date:
2012-03-30
Catego
ry:
Momentum, reversal, momentum conditioning on size and B/M
Title:
Momentum and Reversal: Does What Goes Up Always Come Down?
Author
s:
Jennifer Conrad and M. Deniz Yavuz
Source
:
SSRN Working Paper
Link:
Summ
ary:
Conditioning momentum on size and book-to-market ratio can improve

momentum returns. High past return stock with small-cap and high B/M ratio
has significant momentum profits without subsequent reversals
Background
Many studies suggest intermediate-term momentum and longer-horizon
reversals
This study shows that winner (loser) stocks are chosen from high (low)
expected return stocks has significant momentum profits without
subsequent reversals
Expected returns are proxied by size and B/M ratio
Define a stock as a winner (loser) if its prior 6-month return is higher
(lower) than average (skipping 1 month)
Weight stocks by the absolute difference between its lagged 6- month
return and that of all stocks
Create three long-short portfolios
Long
Short
MAX
portfolio
Past winners with

small cap and/or
high B/M ratio
Past losers with

large carp and/or
low B/M ratio
MIN
portfolio
Past winners
(losers) with large
cap and/or low B/M
ratio
past losers with

small cap and/or
high B/M ratio
ZERO
portfolio
Past winners with

past losers with

ratio
More
Data
ratio
The three portfolios have similar past 6-month W-L return difference
(table 1)
Suggesting that any return differences between MAX, ZERO and
MIN are unlikely to be due to significant differences in
momentum
consistent returns for MAX portfolio
Strong momentum and no reversals for MAX
MAX earns average returns of 1.31% (t=6.43) during months 0-6
and 0.49% (t=2.56) during months 6- 12, with no evidence of
reversal over the next 2 years (table 3)
No significant momentum, just significant reversals for MIN
MIN earns average returns of -0.18 % (t=-0.74), -0.66%
(t=-3.20), -0.73% (t=-4.63), and -0.33% (t=-2.30) during
months 0-6, 6-12, 12-24 and 24-36, respectively (table 3)
By contrast, traditional portfolios see 6-month momentum and 12-24
month reversal
Month 0-6 return is 0.65% per month
Months 6-12, 12-24, and 24-36 return -0.11%, -0.36%, and
-0.16%, respectively (Table 2)
The sample includes all stocks trading on the NYSE, Amex and Nasdaq
between January 1965 and December 2010 in the CRSP database

Paper
Type:
Working papers
Date:
2010-07-19
Catego
ry:
Return reversal, size effect
Title:
Another Look at Trading Costs and Short-Term Reversal Profits
Author
s:
Wilma de Groot, Joop Huij, Weili Zhou
Source
:
SSRN working paper
Link:
Summ
ary:
Short-term reversal trading works in large cap stocks though not in small cap
stocks. Within large cap stocks, turnover can be reduced such that a reversal
strategy can generate 30 to 50 basis points per week net of transaction costs
Methodology
Two trading cost estimates: (1) using Keim and Madhavan (1997) model
and (2) using models provided by Nomura Securities
Nomura model better than the widely-used Keim and Madhavan model,
as the latter was designed for a much earlier period (1991-1993)
The Nomura model includes three components: (1) instantaneous
impact due to the bid-ask spread, (2) permanent impact, which is the
change in market equilibrium price due to executing a trade, and (3)
temporary impact, which refers to a temporary movement of price
because of short-term imbalances in supply and demand
Broker commissions is estimated as 5bps per trade (during the 1990s)
and a 3 bps (since 2000)
More stable results in 2000-2009 for large stocks and smart reversal strategy
For small cap, the gross profitability of reversal strategies is lower:
81bps during 1990 to 2009, but 40bps during 2000-2009
For large cap, such strategy profitability remained constant: for the 100
largest stocks,, the gross returns are 78bps during 1990 to 2009, and
79bps during 2000-2009
For the largest 100 stocks using smart reversal strategy, the net return
slightly increased from 53bps to 59bps per week
Data
This study covers 1990-2009 US 1,500 largest stocks that were
constituents of the Citigroup US Broad Market Index (BMI) (roughly to
the 75% largest stocks in the CRSP universe)
Daily stock returns including dividends, market capitalizations and price
volumes are obtained from Factset

Paper
Type:
Working papers
Date:
2009-05-08
Category: Quant factor performance momentum, value, size, P/E

Title:
Is there momentum in cross-sectional anomalies
Authors:
Jarkko Peltomaki and Emilia Peni
Source:
EFA-2009 conference
Link:
/S-2-30.pdf
Summary
:
Thepapershowsthereexistsmomentuminquantfactors(eg,Size,P/BandP/E)
1monthand3monthreturns.
TacticalAssetAllocation(TAA)basedonquantanomalies
Theauthorstreateachquantfactorportfolioasanassetclass
Factorportfoliosarelongshortzeroinvestmentportfolioswithrespectto
acertainfactor
TheTAAstrategyinvestsinthebestperformingfactorofpast1monthor3months
TAAstrategiesbasedon1monthand3month
Strategy1usesthelast3monthsfactorreturns
TacticalHML,SMBandP/Egoeslong(short)ontheindividualfactorifthe
previousmonthsfactorreturnispositive(negative)
Performancesareevaluatedusinga5factormodel(Carhart4factorandP/E
factor)
Strategy
3month
winner
1month
winner
Tactical
SMB
Tactical
HML
Tactical
P/E
monthly5
factor
alphas
19702007
0.13%
0.26%
0.42%
0.31%
0.25%
19701990
0.14%
0.22%
0.49%
0.67%
0.01%
19902007
0.09%
0.27%
0.24%
0.23%
0.46%
Concerns
Giventhetransactioncostandrequiredturnover,wedoubttheimplementabilityof
TAAstrategies,particularlytheTacticalSMB/HMLandP/Estrategieslistabove
Data
Butthefindingsheremayhelpquantmanagersdeterminetheirfactorweightings.
ItalsointerestingtonotethatP/Eisshowingmuchhighermomentumin
19902007thanothertwofactors
Thesampleperiodcovers19702007
P/E,SMB,HMLandMomentumfactorreturnsaredownloadedfromKenneth
Frenchswebpage
Paper Type:
Working Papers
Date:
2009-02-25
Category:
Title:
Authors:
Source:
SSRN Working Paper
Link:
Summary:

As an
beta, and alpha
Asset class beta
Style betas
Strategy beta
Alpha
and asset classes
Diversifying based on the risk premia of styles, strategies
and asset classes
The strategy is
equally
-weighted in all the styles,
strategies and asset classes in above table
There is monthly rebalancing between 1995 and
2008
The strategy is compared to the classical 60/40
strategy, which is 60% long on MSCI World and
40% long on Domestic US bonds
The strategy beats the classical 60/40 strategy in
terms of Sharpe ratio (0.94 vs. 0.26)
The strategy is also superior in extreme event
months such as Asian Crisis, LTCM, 9/11, etc.
(Table 7)
Data
The paper uses data for the period of 1995 to
2008. MSCI indices and Merrill Lynch Domestic
Master Bond Index are from datastream.
Paper Type:
Journal Papers
Date:
2009-01-30
Category:
Title:
Authors:
Source:
Link:
Summary:
This paper explores

To

Comments:
Paper Type:
Working Papers
Date:
2008-06-27
Category:
size, value, statistic methodology, Stock Price Jumps
Title:
The Cross-Section of Stock Price Jumps and Return Predictability
Authors:
George J. Jiang, Tong Yao
Source:
Link:
http://gatton.uky.edu/Faculty/lium/jiang.pdf
Summary:
This paper finds that cross-sectional differences in stock price

jumps explains the size premium, liquidity premium and
(partially) value premium, but not momentum and nets share
issuance effect.
The study includes information events such as earnings
announcements, analyst forecast revisions, takeovers and
bankruptcies, which can create dramatic stock price
changes over a relatively small number of days.
Jumps are identified at 2 critical levels: (intuitively,
critical level measures how unusual a daily return is. An
unusual return is defined as a jump)
1% critical level
5% critical level
Jump Frequency
60% (45% positive

+ 15%
negative )
68% (51%
positive +
17% negative )
Average positive
jump Size
19.89%
19.42%
Average negative
jump Size
-19.82%
-19.08%
Individual stocks jumps not caused by market return

jumps
very different frequency: index has much less
jumps vs individual stocks (23% vs 60% )
very different jump size: index has much lower

jumps (8.60% for positive jumps and -4.63% for
negative jumps)
Size, liquidity and b/M effects can be explained by jumps
When stocks returns are decomposed in average
continuous return and average jump return, ie,
stock return = aggregate returns on jump days +
aggregate returns on non-jump days
the total returns on non-jump days is shown to
have little return predicting power
Portfolio Return
(per annum)
high-low spread with

continuous returns
(t-stats)
high-low spread
with jump
returns (t-stats)
Size
3.20% (1.28)
-8.90% (-9.71)
Liquidity
0.32% (0.15)
7.57% (14.46)
Book to market
3.27%(4.19)
6.65% (2.48)
Comments:
1. Discussions
The paper essentially says that the difference between size
premium, liquidity premium and (partially) value-growth stocks
are determined in few days and by few events. This echoes the
paper we covered before, Black Swans and Market Timing: How
Not To Generate Alpha (
http://ssrn.com/abstract=1032962)
,
which shows that, at stock index, the returns of a few days
largely determines the total return for a very long period.
For quant managers, this means black swan is playing its role at
multiple levels.
2. Data
CRSP daily stock returns from 1927 to 2005; COMPUSTAT tapes
for firm-level characteristics.
Paper Type:
Working Papers
Date:
2008-06-08
Category:
size, novel strategy, Low price stocks, small cap effect
Title:
Waiting for the Rise of the Phoenix
Authors:
Cam Hui
Source:
SeekingAlpha blog
Link:
http://seekingalpha.com/article/79507-waiting-for-the-rise-of-th
e-phoenix?source=news_sitemap
Summary:
This blog proposes buying Phoenix stocks (those with low

prices, bad recent performance and insider buying) after market
bottoms. Stock price is a simple factor and yet is not in most
quants models.
Phoenix stocks are those stocks
with low price
with very bad recent performance (70-90% off
from the 52-week high)
with high-leverage and near bankrupt
that are likely to benefit greatly from an improving
economy
with recent insider buying (at least lack of insider
selling)
During the one year after the four market lows from 1980
2008 (1982/08, 1990/10, 2001/09, 2002/10), the
small-cap Russell 2000 index outperformed the large-cap
S&P 500 by ~17%.
Large cap usually outperform during the initial period
after market bottom
In this perspective, the recent 2008/03 market low may
not be the true bottom since small cap out performed
during the following months.
Stocks with lowest deciles prices outperform top decile by
annual 110% after the 2002/12 market low, though
admittedly this study suffers from survivorship bias.
Comments:
1. Disucssions
The strategy is simple and intuitive. For us, one big challenge
seems to detect the market bottom. And if one can detect
market bottom, he probably is already very rich and does not
need this strategy :)
The other concern is that the author only tested 4 market
bottoms for the past 20 years.
Paper Type:
Working Papers
Date:
2008-05-01
Category:
Size effect
Title:
Resurrecting size effect: firm size, profitability shocks and

expected stock returns
Authors:
Kewei Hou, Mathijs A. van Disjk
Source:
Ohio State working paper
Link:
http://www.cob.ohio-state.edu/fin/dice/seminars/Size_KHMVD_
Oct%202007.pdf
Summary:
The paper shows that the recent evidence about the

disappearance of size effect is because starting from early
1980s, there was
a large negative profitability shocks that have hit the
small firms and
a large positive profitability shocks that have affected the
big firms
After controlling for the profitability shocks, there still exists an
economically and statistically significant size effect.
Paper Type:
Working Papers
Date:
2007-07-06
Category:
Title:
Authors:
Source:
Link:
Summary:
This paper explores the role of industry in explaining the cross

section of stock returns.
Key findings:
1. when decompose size and BM into within and cross industry
components:
On average, BM premium is a within industry

phenomenon. (a portfolio ranking B/M within industry
should generate higher return than that ranking across
industries)
Size premium exists both within industry and cross
industry
January plays an important role. BM premium is on
average significant, but not in January months after 1981
(table 2) the size effect is mostly attributed to the out
performance of small firms in January months (table 6).
2. Within industries, firms with lower than industry mean (size
and B/M) have higher (size and B/M) risk premium.
Size premium exists only for firms performing below
averages, but not above.
BM premium exists for firms with B/M both above and
below industry average. But after removing the extreme
5% observations, it exists only for below average firms.
explanatory power beyond the commonly accepted size and
(book to market) BM factors. The authors run the following Fama
Macbeth regression:
Rit = b
MV
- 1 + b
BM
- 1 + e
0t +
b
1t
it+ b
2t
it
3t
it
it
Where it
(industry implied return) is a normalized measure of
the covariance of returns of the stock i with its own industry.
4. Firms with a ROE (returns on equity) higher than industry
average yield higher expected returns.
Comments:
1. Why important
This paper finds that industry returns has explanatory power
beyond the commonly used size and BM factors. They also show
that within industries, firms which earn lower than the median
size or B/M have higher risk premium.
The asymmetric findings in the paper may be of use to quant
managers. If the results are confirmed, then one may profit from
a portfolio that rank stocks with size or B/M below the industry
medians.
In terms of methodology, this paper re minds us of the
importance of extreme stocks: whether or not stocks with 5%
extreme values (size, B/M) are removed can have a big impact.
Table 8(extreme stocks not removed) and Table 9(extreme
stocks removed) is a great example
2. Data
1963 2002 US stock data (ordinary common equities of all
firms listed on the NYSE, AMEX, and NASDAQ) are from
CRSP/COMPUSTAT database.
3. Discussions
It is interesting to see the different results when the authors

remove stocks with 5% extreme values (size,B/M). On one hand,
it does yield insights in terms of the role of the extreme stocks.
On the other hand,ideally the two scenarios (with and without
extreme stocks) give similar results, as either of them just tells
part of the bigger picture.
Also it would be interesting to control of other known factors:
concentration of the industry as shown by Robinson (2003),
momentum, etc.
Paper Type:
Working Papers
Date:
2007-02-15
Category:
Size premium, deviation from profitability estimation
Title:
Can Overreaction Explain Part of the Size Premium?
Authors:
Ozgur Demirtas, Burak Gner
Source:
SSRN working paper
Link:
Summary:
This paper studies small cap stock profitability mean reversion

and stock. The authors first defined profitability "lagger stocks
as stock whose profitability is lower than a forecast value based
on a regression of dividend, enterprise value, and firm value, and
profitability "leaders stocks as those with profitability higher
than forecast. Key findings:
Small cap laggers demonstrate stronger profitability mean
reversion than small cap leaders (higher than forecast
past profitability).
Small cap laggers have significantly higher future returns
(3.6%/year) than leaders.
Small cap stocks with low past profitability largely
accounts for the size premium
Earnings surprises may explain excess returns for small
laggers.
Comments:
1. Why important
We hope this study, which shows that small size premium largely
comes from stocks with lower than expected earnings, can help
managers to refine their size related strategies. For example, as
opposed to long small cap and short large cap, one may consider
long small cap laggers and short large cap leaders (Table 3 in the
paper seems to confirm this may be a better way)
2. Data
1971 2001 data for NYSE/Amex/Nasdaq stocks are from
CRSP/Compustat
3. Discussions
In our view, this paper may be interpreted as stocks with
negative profitability surprise are likely to reverse, potentially
this result may help people to catch to stock price reflection
points
Some concerns we have:
Given the small size of stocks covered in this study, the
3.6% out performance may look stretched when one
accounts for transaction cost. Small cap laggers large cap
leaders may be more robust (12%+ annually according to
Table 3).
If earning surprise is driving the out performance of
laggers the period covered in the study, than such out
performance may have gone in recent years when earning
surprise is no longer a stable strategy.m
The names "lagger" and "leader" are a bit misleading
since,
a stock is categorized as a LAGGER if [Earning/Total assets]
Expected [Earning/Total assets] < 0
a stock is categorized as a LEADER if [Earning/Total assets]
Expected [Earning/Total assets] > 0
The expected [Earning/Total assets] is calculated based on
regression of dividend, enterprise value, and firm value.
Profitability surprise may be more appropriate.
Paper Type:
Working Papers
Date:
2006-10-20
Category:
Daily stock return patterns, turn of the month, calendar effects,

size
Title:
Equity Returns at the Turn of the Month
Authors:
Wei Xu and John McConnell
Source:
SSRN working paper
Link:
Summary:
This paper documents that for stocks worldwide, almost all

market excess returns occur during the first 3trading days of a
month
the average daily excess return for these first 3 days is
0.14%
the average daily excess return for other trading days is
0.01%
This concentration is found in both large/small cap stocks, in 30
out of 34 stock markets worldwide, and in all months (not just
year end or quarter end). Interestingly, return variation is not
higher during these 3days, and treasury/corporate bonds do not
exhibit such effects.
Comments:
1. Why important
The conclusion in the paper, if true, may help practitioners
choose their portfolio rebalance timing. The positive return in
first 3 trading days suggest that the out performance of "good"
stocks is concentrated in these 3 days, so it may be a good idea
to long stocks right before month end
This pattern also suggests that the underperformance of "bad"
stocks seems to be evenly spread throughout month, so to
certain extent it does not matter much when to short these
stocks.
2. Data
2005 US daily stocks returns are from CRSP, 19 2006
international stock returns are from
3. Discussions
What causes this turn month effect? The authors exclude
explanations based on "payday", risk factor, trading volume, and
net flows to mutual funds. Our guess is that it may be driven by
the psychological nature of investors. People tend to be more
optimistic at the beginning of a month (quarter, year), as it is
time to close an old chapter and turn on a new one. Indeed,
Table 3 seems to support this point, as end months show a lower
excess return than quarter end months, which in turn has a
lower return than year end months
Paper Type:
Working Papers
Date:
2006-10-20
Category:
Size, value
Title:
Does Noise Create the Size and Value Effects?
Authors:
Robert Arnott, Jason Hsu, Jun Liu and Harry Markowitz
Source:
UCSD working paper
Link:
http://rady.ucsd.edu/faculty/directory/liu/docs/size-value.pdf
Summary:
This paper builds a model where stock price is composed of a

true (random walking) value and a mean reverting noise. Key
conclusions
High price stock tends to be relatively over valued, since
the noise tend to be positive (and vice versa)
It is the noise that leads to size and value premium, not
riskiness.
The author seem to reinforce the fundamental weighted index
proposed by the first two authors (the key idea is that, an index
weighted by fundamental factors, e.g., sales, will outperform a
cap weighted index like SP500).
Comments:
1. Why important
When Harry Markowitz talks, everyone listens (though not
necessarily always agrees).
The idea behind this model seems to be the fundamental
weighted index that is being aggressively marketed. It is surely
very meaningful if the authors can show that this new index does
add value to investors, and is not just a combination of existing
style biased indices.
2. Discussions
We are a little cautious about how people make their
assumptions in behavioral models, especially after reading
Stephen Ross critique
(http://www.law.yale.edu/cbl/papers/Ross_roundtable.pdf).
Ross key points that behavior models tend to make an
assumption that is virtually the result of the model.
The conclusion that value stocks is no riskier than growth is
debatable, as shown in previous papers that were viewed (see,
e.g. Is Value Riskier Than Growth?,
http://www.simon.rochester.edu/fac/zhang/ValRisk05JFE.pdf).
Paper Type:
Working Papers
Date:
2006-10-20
Category:
Technical analysis, size
Title:
Is Technical Analysis Profitable on U.S. Stocks with Certain Size,

Liquidity or Industry Characteristics?
Authors:
Ben Marshall, Sun Qian, Martin Young
Source:
Link:
http://www.fma.org/SLC/Papers/Technicaltrading.pdf
Summary:
This paper tests three types of common technical trading rules

(variable/fixable length moving average ruleand trading range
break out rule). Key findings:
Such popular trading rules yield profits for only 3% of
stocks, and these stocks tend to be small cap and low
volume stocks.
For such stocks, profits can be justified by to transaction
costs.
Comments:
1. Why important
Though most quant managers are at least not only using
technical rules, we suspect the same pattern may exist for some
most popular quant strategies: value, momentum, etc.
The implication? It seems that the adaptive efficiency theory
and thats especially true to largerstocks. Perhaps thats why
companies like Intech are successful given their philosophy that
(in large capworld) stock prices are mainly driven by liquidity.
2. Data
2004 daily stock data for ~1000 US stocks are from CSRP.
Paper Type:
Working Papers
Date:
2006-10-06
Category:
International Diversification, size, Global markets
Title:
International Diversification with Large- and Small-Cap Stocks
Authors:
Cheol Eun, Wei Huang and Sandy Lai
Source:
China International Conference in Finance paper
Link:
Summary:
For US stock investors, foreign small-cap stock funds are better

option in terms of risk diversification. The reason: for each of the 10
open capital markets studied (Australia, Canada, France, etc), the
large-cap (small-cap) fund has the highest (lowest) correlation with
the U.S.
Comments:
Paper Type:
Working Papers
Date:
2006-09-08
Category:
Strategy, value, size, style
Title:
Migration
Authors:
Source:
SSRN working paper
Link:
http://papers.ssrn.com/sol3/Delivery.cfm/S
RN_ID926556_code998.pdf?abstractid=926556&mirid=1
Summary:
This short study groups stocks by how their size/value styles

changed. It shows that value premium mainly comes from high
(low) returns of value (growth) stocks move to growth (value),
and to a lesser extent, value stocks that are unchanged have
higher returns than unchanged growth stocks.
Comments:
1. Why important
This paper is thought provoking. In evaluating the impact of any
style factor, we can always re-group stocks by how their styles
changed. In the case of value factor, intuitively we can form 4
segments:
1. value stocks whose style not changed
2. value stocks migrated from growth
3. growth stocks whose style not changed
4. growth stocks migrated from value
Segment 2 and 4 are particularly interesting. Operationally, they
are likely undergoing fundamental changes, either experiencing
low growth or starting to show great growth potential. In the
stock market, they are likely being changed hands between
growth managers and signal-managers. It will be of great
interest to study their contribution and other characteristics.

2. Data
US stock data are used for the period of 1926 to 2004.
3. Discussions
For a large cap value manager, Table 2 seems to suggest that
one should avoid those Minus valueds and dSize stocks.
Though the number of such stocks is limited, they perform far
worse than other peers.
We note that this paper studies the size premium and value
premium simultaneously, consequently the stock universe was
segmented into four parts: Same, dSize, Plus and Minus. This
way we can not study those stocks which changed in both size
and style (e.g., with price going up, a stock moves from small to
big, and meanwhile from value to growth). A more direct way is
to group stocks by one single factor, and study those unchanged
stocks and migrants.
On a related note, we reviewed the paper "Style Migration and
the Cross-Section of Average Stock Returns"
(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=687375),
which shows that "style migrants" seem under-valued as they
exhibit a higher return compared with other stocks.
Paper Type:
Working Papers
Date:
2006-09-08
Category:
Strategy, distress risk, failure mode, size, value, volatility
Title:
In Search of Distress Risk
Authors:
John Y. Campbell, Jens Hilscher, and Jan Szilagyi
Source:
NBER working paper
Link:
http://papers.nber.org/papers/w12362.pdf?new_window=1
Summary:
This paper builds a corporate failure prediction model that is

better than existing models. It also shows that, in longer term,
those more persistent measures (size, b/p, and volatility) have
higher forecasting power than other factors.
Comments:
1. Why important
This study may help managers build their "failure models", i.e.,
find stocks that may fail in the form of filing for bankruptcy,
delisting, etc.
The empirical results (that distressed stocks generate lower
return) suggest that distress risk is not properly priced on
average.
2. Data
US data (1963 - 2003) are from COMPUSTAT/CRSP. Bankruptcy
indicator is from Chava and Jarrow (2004) (includes bankruptcy
filings in the Wall Street Journal Index, the SDC database, SEC
filings and the CCH Capital Changes Reporter).
3. Discussions
People have seen many corporate failures models, most notably
Altmans Z-score, Ohlsons O-score, and Shumway hazard
model. In our view, this paper adds value by presenting a model
that can more accurately predict risk at both short and long
horizons. At least part of the power is in its details - some
commonly used factors are modified (e.g, income and leverage
scaled by asset market value rather than book value) and also
some are added (e.g. cash holdings)
Like other failure models, this one also suffers from high the
volatility, arguably due to "vulture investors" and private equity
investors. Recent 2 years have seen far more such deals than
before, which clearly indicates that the hit rate of this strategy is
definitely related to general market condition.

Date:
2006-08-10
Category:
Title:

Asset Growth Effect
Authors:
Source:
Link:
Summary:
Comments:
1. Why important
2. Data
from CRSP/COMPUSTAT
3. Discussions
Paper Type:
Working Papers
Date:
2006-06-29
Category:
Strategy, technical trading, size
Title:
Simple Technical Trading Strategies: Returns, Risk and Size
Authors:
Satyajit Chandrashekar
Source:
University of Texax dissertation
Link:
http://phd.mccombs.utexas.edu/satyajit.chandrashekar/technicals.pdf
Summary:
This paper claims that the widely-used Daily Moving Average

crossover (DMA) strategy can generate a 1.7% monthly profit in small
cap universe, although it does not work in large cap universe. The
profit is stable even after controlling for the Fama-French factors as
well as liquidity/transactions costs.
The strategy is to long/short a stock when short term averages (5, 2
or 1 day average price) is above/below the long term average( 200,
150 and 50 day average price).
Comments:
1. Why important
We believe that compared with large cap stocks, the small cap
universe may be less efficient given that it is less researched and
traded. This paper may have given us an illustration.
2. Data
The data used in this study is the daily index series of the ten CRSP
(NYSE, AMEX and NASDAQ) size deciles from July 1963 through
December 2002.
3. Discussions
Almost all anomalies work better in small cap universe, so the key
question for this paper is whether the transaction cost issue is
correctly addressed. We note that the author uses the three
regressions (Fama- French three factor model, Carhart four factor
model, Pastor-Stambaugh five-factor Model) to estimate the alpha
after transaction cost. Though there are certainly merits to these
methodologies, we are concerned because the result may still be
subject to the extreme outliers. Regression result may be misleading
since stock returns are never normally distributed, particularly in
small cap universe. A more prudent approach will start by removing
the smallest 5% stocks, the stocks with low prices, and also the
stocks with extreme return numbers.
We are concerned about the turnover of this strategy, which can be a
wildcard that again is linked to transaction cost.
For recent years, one can test the result by using the data of
size-based indices, e.g., SP600 or Russell small cap index.

Paper Type:
Journal Papers
Date:
2009-04-20
Category:
statistic methodology, investment horizon, novel strategy
Title:
Optimal Trading Strategy with Optimal Horizon
Authors:
Edward E. Qian
Source:
Journal of Investment Management, Third Quarter 2008
Link:
297
Summary:
Portfolio implementation is an essential part of active investment

strategies. The trading horizon-the length of time allocated for
trade implementation, is an important consideration in portfolio
trading.
Previous research on optimal trading limits the trading
horizon as a fixed value. In this paper, we treat it as an
endogenous factor and find the optimal trading horizon as a part
of optimal trading strategy to further reduce trading costs.
We
derive analytical results for optimal trading strategy with optimal
horizon and provide numerical examples for illustration.
Paper Type:
Journal Papers
Date:
2009-04-20
Category:
statistic methodology
Title:
Biases in Decomposing Holding-Period Portfolio Returns
Authors:
Norman Strong, Weimin Liu
Source:
Link:
http://rfs.oxfordjournals.org/cgi/gca?gca=21/5/2243&gca=21/5/230
7&sendit=Get+All+Checked+Abstract(s)
Summary:
A growing number of studies in finance decompose multiperiod
portfolio returns into a series of single-period returns, using

these to
test asset pricing models or market efficiency or to

evaluate the
returns to investment strategies such as those

based on momentum,
size, and valuegrowth. We provide

a formal analysis of the
decomposition method.
Crucially, we
argue and present empirical
evidence that some methods researchers

use involve portfolios that
nobody would seriously consider

ex ante, that transactions costs

associated with such portfolios
make them poor investment vehicles,
and that they can lead to

spurious statistical inferences.
Comments:
Paper Type:
Journal Papers
Date:
2009-04-20
Category:
statistic methodology
Title:
Biases in Decomposing Holding-Period Portfolio Returns
Authors:
Norman Strong, Weimin Liu
Source:
Link:
http://rfs.oxfordjournals.org/cgi/gca?gca=21/5/2243&gca=21/5/230
7&sendit=Get+All+Checked+Abstract(s)
Summary:
A growing number of studies in finance decompose multiperiod
portfolio returns into a series of single-period returns, using

these to
test asset pricing models or market efficiency or to

evaluate the
returns to investment strategies such as those

based on momentum,
size, and valuegrowth. We provide

a formal analysis of the
decomposition method.
Crucially, we
argue and present empirical
evidence that some methods researchers

use involve portfolios that
nobody would seriously consider

ex ante, that transactions costs
associated with such portfolios

make them poor investment vehicles,
and that they can lead to

spurious statistical inferences.
Comments:
Paper Type:
Working Papers
Date:
2009-03-18
Category:
Title:
Authors:
Source:
Link:
Summary:
The paper develops a modified momentum strategy that uses an

alternative past return measure, and also uses quadratic optimization to
trade-off between risk and return.

2. where f= expected returns, V=var-cov matrix,
h=portfolio weights, lambda = risk aversion
High (low) values of risk aversion imply high (low)
emphasis on the expected returns
Increased universe: the long (short) portfolio invests in
stocks in the top (bottom) 50% of the stocks sorted by
expected returns (by contrast, the classic momentum
strategy invest in top(bottom) 10% stocks
zero-investment momentum portfolio is regressed on
Fama-French factors and the predicted sum of squares is
taken as variance-covariance matrix
1. benchmark case: use the stocks average returns
between the month (t-7, t-2)
2. Method1: use the 1965 to 2006 historical average
return of the 10 respective bucket the stock falls
in
3. Method2: use the 1965 to 2006 historical average
return of the 20 respective bucket the stock falls
in
4. Method3: use the 1965 to month (t-1) historical
average return of the 10 respective bucket the
stock falls in
5. Method4: use the 1965 to month (t-1) historical
average return of the 20 respective bucket the
stock falls in
Reasons for treatment in method 2-5: the shape of
realized return is usually very different from forecast
returns. (see the graph below)
The strategies with more buckets and higher risk
aversions bring higher monthly Sharpe Ratios
Of course, Method1 and Method2 are for illustration
purpose only given its look-ahead bias, while Method3
and Method4 may be more useful
Discussions
The two graphs above are very thought provoking, since
most quant factors have similar problem, i.e., the
forecast returns and realized returns for different buckets
are very different. For better optimization results, it
makes sense to use the past realized for different buckets
as expected returns.
Interestingly, the difference between method2 (with
look-ahead bias) and Method4 (without look-ahead bias)
is relatively small
The study doesnt really beat the conventional
momentum strategy for high values of risk aversion
parameter
Data
The study uses NYSE and AMEX stocks during the time
period 1926-2005 from CRSP and Fama-French factors
from Kenneth Frenchs webpage.
Paper Type:
Working Papers
Date:
2009-02-01
Category:
statistic methodology, asset allocation
Title:
Beat the Market - A Strategy for Conservative Investors
Authors:
Lewis Glenn
Source:
SSRN Working Paper
Link:
Summary:
The paper develops a stock/cash allocation strategy based on the

past market returns moving-average. Such strategy yields an
annual return of 12% over stock index return.
The motivation
The strategy rotates between the market portfolio
and risk-free asset
The motivation is to take advantage of the high
profitability of the market portfolio in bull markets
and its underperformance in bear markets
The Moving Average Look-Back (MALB) strategy
The strategy is (1) to long on the index when the
ratio of the k-day moving average at day n-1 to
the same average at day n-m-1 exceeds
equivalent of 3% per annum (which is the rate of

interest that could have been obtained in the
period n-m by being in cash position) and (2) to
long on the risk-free asset otherwise.
From 03/10/1999 to 11/20/2008 the MALB (k=200
and m=20) has brought a total return of 78%
compared to -49% for the Buy-and-Hold strategy
MALB method is shown to create superior excess
returns to other moving average methods (such as
Moving Average Crossover (MACO) and Moving
Average Convergence/Divergence)
A volatility adjusted version (MALBV) also add value
MALBV uses the implied volatility data from the
VIX index
MALBV is identical to MALB whenever VIX>20
MALBV has the additional feature of turning into a
Buy-and-Hold strategy whenever VIX<20.
The intuition of the MALBV strategy depends on
the high market returns in low volatility regimes
and therefore buy-and-hold strategy is the most
profitable one
MALBV strategy has brought a total return of
141% between 03/10/1999 to 11/20/2008
Data
For the period of 1980-2008, VIX index of S&P 500
index are from Chicago Board Options Exchange,
S&P 500, QQQQ and risk-free asset returns are
from Datastream.
Paper Type:
Working Papers
Date:
2009-01-12
Category:
Future/currencies, predictive regressions, statistic methodology
Title:
Predictability and Good Deals in currency markets
Authors:
Richard M. Levich and Valerio Poti
Source:
SSRN Working paper
Link:
Summary:
The paper documents that there is strong predictability pattern

for exchange rates of major currency pairs at monthly
frequencies, even after controlling for transaction cost.

"Good-deals" are investment opportunities that offer
"unduly" high Sharpe ratios
In an efficient market, predictability should never
exceed a no good deal bound
The paper compares the explanatory power of
predictive regressions with the theoretical no
good deal bound
It examines how predictability has varied over
time, and contrast predictability patterns with
historical patterns
Intuitively, this is one type of "moving-average strategy"
on pairs of foreign exchanges.
The predictive regressions only use AR and ARMA
models without any macroeconomic variables as
predictor variables.
For daily returns AR(5) turns out to be the optimal
model (the intuition is that lag 5 captures the time
series persistence the best for the currencies)
For monthly returns ARMA(5,2) is the best model
Out of sample forecasts are calculated with rolling
estimation windows (252 days for daily data, 60
months for monthly data)
Daily frequency is not suitable for a profitable trading
strategy because of high transactions costs.
Monthly frequency makes a highly profitable trading
strategy possible
Such predictability peaked in the 1970s, but it is still
present in the final part of the sample period.
(1971-2006)
Paper Type:
Working Papers
Date:
2009-01-12
Category:
Index predictability, predictive regressions, statistic methodology
Title:
Non-linear Predictability in Stock and Bond Returns: When and

Where is it Exploitable
Authors:
Massimo Guidolin, Stuart Hyde, David McMillan and Sadayuki

Ono
Source:
St Louis Fed Working Paper
Link:
Summary:
This paper shows that non-linear models perform better than

linear models in predicting future index returns in G7 country
stock markets, particularly in although US and UK.
Linear and non-linear models tested in the paper
Non-linear models that capture the regime
switching: Markov switching, threshold
autoregressive (TAR) and smooth transition
autoregressive (STAR)
Non-linear models with time-varying conditional
heteroskedasticity: GARCH, TARCH, EGARCH and
ARCH-in mean
Non-linear models depend only on the own
dynamics of the return time series data
Linear model: the linear predictive regression uses
the macro factors (such as dividend yield,
short-term interest rates, term spread, return on
exchange rate, inflation, industrial production
growth and changes in oil prices).
Non-linear models outperform in out-of-sample tests,
Markov switching models best
Predictive accuracies of the non-linear models are
measured with statistics of forecast errors (e.g.
Mean absolute error, mean forecast bias, forecast
bias variance and success ratio).
In general Markov switching models outperform
the linear and other non-linear models in terms of
out-of-sample predictive accuracy.
US and UK are the only two countries that show
statistically significant differences between the
predictive powers of the compared models.
For Japan, Germany, France and Italy the linear
models are doing well in short forecast horizons
(up to 1-quarter).
Our concerns
The reliability of the results: The results are not
similar across countries and with respect to
different evaluation methods. The ranking of the
model performances vary greatly between
countries and within countries for different forecast
error statistics(Table 2)
Improving the linear models can be done by
finding better variables or creating non-linear
models using macroeconomic predictor variables
Data
For the sample period 1979-2007, stock market

index returns, government bond returns, oil prices,
inflation, industrial production and exchange rates
are take from Datastream. Bond return indexes,
t-bill rates and unemployment rate are used from
Global Financial Database.
Paper Type:
Working Papers
Date:
2008-12-20
Category:
Quantitative Insights, Asset allocation, statistic methodology
Title:
Seven Quantitative Insights into Active Management
Authors:
Ronald N.Kahn
Source:
Barra
Link:
http://www.barra.co.za/research/misc/quantitative_insights.pdf
Summary:
Seven quantitative insights into active management are

discussed.
Insight 1: Active Management Is Forecasting
The goal of active management is to forecasts
differently from the consensus and produce a
portfolio with higher Sharpe ratio and positive
alphas
As such, the implied expected returns will be
different from the consensus expected returns
Insight 2: Information Ratios Determine Value Added
No matter what is an investors risk aversion level,
the most desirable manager will have the highest
information ratio (IR), which is defined as IR =
alpha / residual risk
A top quartile manager on average has an
information ratio of 0.5. In other words, they add
50 basis points of outperformance for every 100
basis points of active risk, before expenses.
Insight 3: The Fundamental Law of Active Management
To achieve a high IR, a manager must
demonstrate an edge for every asset chosen and
must diversify that edge over many separate
assets."
IR = IC (square root of BR)
IC = information coefficient (skill, or

correlation of forecast and realized residual
returns)
BR = independent bets per year (breadth
or the number of independent bets the
manager takes per year, which measures
diversification)
Implications
Given skill, the more bets a manager
makes, the higher the IR will be
Breadth applies across models as well as
assets. E.g., an international equity
manager can bet on countries, currencies,
and individual stocks."
Insight 4: Three-Part Alpha
There are three parts to every alpha: an
information coefficient (IC), a volatility, and a
score: = IC S
IC is a measure of skill, it is the correlation of raw
signals (like analyst expectations) and realizations
is the standard deviation of the residual return.
Higher means higher volatility of alpha
S is a variable with mean zero and standard
deviation 1. It ranges roughly from -2 to +2.
Insight 5: Data Mining Is Easy
Statistics of Coincidence: The odds of Evelyn
Adams winning the lottery twice in a matter of 4
months are in fact 17 trillion to 1. The odds of
someone, somewhere, winning two lotteries
given the millions of people entering lotteries
every day are only 30 to 1. If it wasnt Evelyn
Adams, it could have been someone else."
So when viewed from the correct (broad)
perspective, coincidences are no longer
so improbable. But in research, some promising
strategies tend to have a narrow perspective and
are hence not likely to add value
The four Guidelines for Backtesting Integrity
Intuition:
Need to make economic sense
Restraint:
it is not desirable to studying
strategies, looking and results and then
going back to continually revise the
strategy.
Sensibility:
Results that seem improbably
successful should be ignored.
Out-of-sample testing:
Strategies should be
tested using an independent data set.
Insight 6: Implementation Subtracts Value

Constraints reduce value added. Some constraints
come from the structure of the strategy (like
transaction costs) and some from investors
perspective (like stocks they cannot own).
Controlling transactions costs can help, most of
the value added can be accomplished by reducing
turnover
Thus: (1) promising strategies with high turnovers
may be worth taking a second look, and (2)
transaction cost research is highly valuable.
Insight 7: Its Hard to Distinguish Skill from Luck
It takes improbably long periods of observation to
estimate skills with some precision.
Four types managers when measured on two
dimensions: skill and luck
Blessed
(those who have both) succeed and
thrive
Doomed
(those who have neither) fail and
get eliminated
Forlorn:
possess skill but not luck, thus
their performance often fails to show their
true potential and they suffer for that
Insufferable:
possess luck but no skill, yet
they thrive.
Overall, successful managers need both luck and
skill to succeed.
Implications of these 7 insights on active management
Stage
Explanation
Relates to Insight #
Research
Search for
information that is
superior to the
consensus.
1: Active
Management is
Forecasting
Investigating many
signals may help
succeed
3: The Fundamental
Law of Active
Management
But data mining

should be avoided
5: Data Mining Is
Easy
The outcome should

be a strategy with a
high information
ratio
2: Information Ratios
Determine Value
Added
Refinement
Convert research
signals into alphas
4: Three-Part Alphas
Portfolio
Construction
and
Rebalancing
Trading
Implement while
6: Implementation
losing as little of the Subtracts Value
strategy value as
possible
Performance Observe what has

7: Its Hard to
Analysis
worked and what
Distinguish Skill from
has not, provide
Luck
feedback to research
stage
Paper Type:
Working Papers
Date:
2008-12-20
Category:
CAPM volations, efficient frontiers, optimal portfolio, risk, statistic

methodology
Title:
Impossible Frontiers
Authors:
Thomas Brennan, Andrew Lo
Source:
SSRN Working Paper
Link:
Summary:
The paper shows (in a

very
academic fashion) that the classic
mean-variance optimization in most cases results in impossible
efficient frontiers, because the resulting portfolios will include
negative stock weights.
The classic mean-variance optimization violates
assumptions of CAPM
The market portfolio by definition consists of
non-negative weights on individual stocks.
However the frontier portfolios are mean-variance
efficient, on which all the portfolios have at least
one negative asset weight.
Therefore the mean-variance efficient frontier
violates the CAPM assumption.
The claim is supported by empirical simulations
Daily data implies mean-variance efficient

300%.
Monthly data implies mean-variance efficient
500%.
In the case of mean-variance optimization with
short-selling constraint of 50%, the efficient
frontier becomes a straight line with constant 50%
short position.
The probability of having an impossible frontier increases
with the number of stocks
With 300 stocks the daily data implies an efficient
frontier with 350% short positions
With 300 stocks the monthly data implies an
efficient frontier with more than 1200% short
positions
This paper only talks about the impossibility, but not what
is a better alternative
Data
CRSP monthly stock returns for the period
1980-2005.
CRSP daily stock returns for the period 1995-2005.
Paper Type:
Working Papers
Date:
2008-11-05
Category:
statistic methodology, R-Square
Title:
R-Square: Noise or Firm-Specific Information?
Authors:
Siew Hong Teoh, Yong (George) Yang, Yinglei Zhang
Source:
SSRN working paper
Link:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=926948&re
c=1&srcabs=929916
Summary:
Does a low R2 in stock return prediction regression stand for (1)

higher systematic noise in stock prices, or (2) a higher
idiosyncratic risk?
This paper finds evidence to support (1). I.e., low R2 is not an
indication of stock prices being informative of firm-specific
information.
Definition of R-square (R2)

R-square is the proportion of variation in the
independent variable that is explained by an asset
pricing model
High R2 can be interpreted as the model
explaining the variation well
Low R2 debatable. It can be interpreted as
High firm-specific (idiosyncratic) variation,
which would mean that the low R-square
would be a good measure of firm-specific
information or,
High noise in the model, which would
suggest that R-square is not a useful
measure of firm-specific information
Methodology and intuition: test how anomalies work in
low R2 stocks
This is because if low R2 implies high firm-specific
information, we should not observe the anomalies
for these companies.
Intuition: there will be 0 profit for quant strategies
if stocks\\ returns can not be forecast with any
common factors (ie, if stocks have extremely low
R2). If the strategies work better for low R2
stocks, then such stocks should have higher
noises.
Four accounting based anomalies tested
Post Earnings Announcement Drift (PEAD),
Accruals Effect, Net Operating Assets (NOA)
Effect, (firm value) /Price Effect
Sort the stocks first on R-squares and then
further divide these subsamples into 4
portfolios based on the accounting measure
(say accruals)
Anomalies works better in low R2 stocks, so low R2
suggests high noise
Varying degrees of support for high firm-specific
information interpretation of low R-square (and
less evidence for the counterargument )
For accruals, lowest R-square quartile shows
higher return (0.68% per month vs 0.20% per
month) (Table 3, Panel A)
Data
All NYSE, AMEX and Nasdaq companies for which
there is sufficient data in CRSP and Compustat,
and I/B/E/S analyst coverage exist. Sample period
covers July 1964 to December 2002.
Paper Type:
Working Papers
Date:
2008-09-03
Category:

Title:
Authors:
Erik Hjalmarsson
Source:
SSRN working paper
Link:
Summary:

developed markets,
short term interest
dividend-Price and
Comments:

respectively.
1. Discussions
time series data.
2. Data
Paper Type:
Working Papers
Date:
2008-09-03
Category:
Title:

Authors:
Gueorgui I. Kolev
Source:
SSRN working paper
Link:
Summary:

value-weighted
in general
sentiment.
issuance
high.
Data
exchange.
Comments:
Paper Type:
Working Papers
Date:
2008-08-13
Category:
Title:
Authors:
Source:
Link:
Summary:

2001-2007 period.
risky.
increases.
Comments:
1. Discussions
2. Data:
31/12/2007
Paper Type:
Working Papers
Date:
2008-08-13
Category:
statistic methodology,value, Expected return estimation and

corporate bond yields
Title:
Expected Returns, Yield Spreads and Asset Pricing Tests
Authors:
Murillo Campello, Long Chen and Lu Zhang
Source:
Review of Financial Studies
Link:
http://rfs.oxfordjournals.org/cgi/reprint/hhn011?ijkey=A3wwgpv
qXFZc5Vm&keytype=ref
Summary:
The paper estimates expected equity returns using firm-specific

corporate bond yields and uses them instead of realized returns
in asset pricing tests.
The forward-looking nature of the risk premium
embedded in yield spreads are used to estimate expected
stock returns.
With estimated expected returns, market beta is
significantly priced in the cross-section of expected
returns and there is no evidence of positive momentum
profits.
Size and book-to-market factors are significantly positive
and counter-cyclical.
Paper Type:
Working Papers
Date:
2008-06-27
Category:
Title:
Authors:
Source:
Link:
Summary:

issuance effect.

1% critical level
5% critical level
Jump Frequency
60% (45% positive

+ 15%
negative )
68% (51%
positive +
17% negative )
Average positive
jump Size
19.89%
19.42%
Average negative
jump Size
-19.82%
-19.08%

jumps
negative jumps)
Portfolio Return
(per annum)

continuous returns
(t-stats)
high-low spread
with jump
returns (t-stats)
Size
3.20% (1.28)
-8.90% (-9.71)
Liquidity
0.32% (0.15)
7.57% (14.46)
Book to market
3.27%(4.19)
6.65% (2.48)
Comments:
1. Discussions

),
multiple levels.
2. Data
Paper Type:
Working Papers
Date:
2008-06-27
Category:
Statistic methodology
Title:
Finiteness of Variance is Irrelevant in the Practice of Quantitative

Finance
Authors:
Nassim Nicholas Taleb
Source:
Link:
Summary:
This paper finds that power laws (Mandelbrot, 1963, 1997) are
incompatible with derivatives pricing and portfolio theory
For flat tailed distribution, standard deviation is unstable
compared to mean deviation Time aggression of probability
distribution with infinite moment does not obey the central limit
theorem and leads to asymptotic properties.
Time independence of return (no serial correlation)
assumption is restrictive in application and also
probability distribution is mostly assumed not observable
The assumption of finite variance is insufficient for
portfolio theory
Bachelier(1900) model does not require dynamic hedging

and therefore superior to Black-Scholes (1973) option
pricing model
Paper Type:
Working Papers
Date:
2008-06-08
Category:

trading strategies
Title:

500
Authors:
Camillo Lento
Source:
SSRN Working paper
Link:
Summary:

timing S&P index.
Definitions:
(first number the short moving average, the
second number the long moving average),
respectively.
rises by f % above the most recent trough and
sells when the price falls f % below its most recent
peak. It has 5.2%, -2.4% and -1.8% excess
returns per annum for f values of 1%, 2% and
3%, respectively.
(TRB-O): buys when the price breaks out above
the resistance level and sells when the price
breaks below the support level. It brings -2%,
-0.7% and -0.5% excess returns per annum for
Comments:
50, 150 and 200 days of local max/min,

respectively.
only
1950-2008.
return):
transaction cost :
brings non-negative excess returns for all
scenarios tested in the paper: (excess returns
before transaction costs are 3.2%, 1.8%, 1.9%,
1.8%, 1.8% and 0%, and after the transaction
costs are 1.6%, 0.0%, 0.1%, -0.2% and -2.6% for
values of n=2, 3, 4, 5 and 6, respectively).
1. Discussions
CSA approach which uses the signals from three technical rules
in a straight-forward manner.
2. Data:
Paper Type:
Working Papers
Date:
2008-06-08
Category:

trading strategies
Title:

500
Authors:
Camillo Lento
Source:
SSRN Working paper
Link:
Summary:

timing S&P index.
Definitions:
(first number the short moving average, the
second number the long moving average),
respectively.
rises by f % above the most recent trough and
sells when the price falls f % below its most recent
peak. It has 5.2%, -2.4% and -1.8% excess
returns per annum for f values of 1%, 2% and
3%, respectively.
(TRB-O): buys when the price breaks out above
the resistance level and sells when the price
breaks below the support level. It brings -2%,
-0.7% and -0.5% excess returns per annum for
50, 150 and 200 days of local max/min,
respectively.
only
1950-2008.
Comments:

return):
transaction cost :
brings non-negative excess returns for all
scenarios tested in the paper: (excess returns
before transaction costs are 3.2%, 1.8%, 1.9%,
1.8%, 1.8% and 0%, and after the transaction
costs are 1.6%, 0.0%, 0.1%, -0.2% and -2.6% for
values of n=2, 3, 4, 5 and 6, respectively).
1. Discussions
CSA approach which uses the signals from three technical rules
in a straight-forward manner.
2. Data:
Paper Type:
Working Papers
Date:
2006-11-18
Category:
Regression methodology; predictive systems, statistic methodology
Title:
Predictive Systems: Living with Imperfect Predictors
Authors:
Lubos Pastor, Robert F. Stambaugh
Source:
Link:
http://faculty.chicagogsb.edu/lubos.pastor/research/predsys2_8.pdf
Summary:
This paper provides a new regression methodology which deliver

substantially more precise estimates
than traditional regression.
The key difference is that this new
method acknowledges
that stock return predictors are usually not perfect (where
old version assumes that expected return can be perfectly
predicted by independent variables in linear fashion
that unexpected return is usually negatively correlated with
expected returns.
Lagged returns and lagged predictors were used to accommodate
imperfect predictors. As an illustration( ), the new method can be
12.5 times more precise (as measured by posterior variance) than
conventional regression when use "bond yield" to forecast stock
returns.
Comments:
1. Why important
Regression is a textbook tool that is used by quant researchers
worldwide. This paper may provide us with a much better tool to
test the effectiveness of stock predictors.
This seems to be a highly technical paper, and we acknowledge that
we do not understand all the technical details, especially on how to
develop prior ( 5). This said, it would be great if new research can
build on it and develop a simpler version.
2. Data
19522003 stock and bond data are from CRSP.
Paper Type:
Working Papers
Date:
2006-10-06
Category:
Stock selection models, genetic programming (GP), Statistic

methodology
Title:
Stock Selection
Authors:
Ying Becker, Peng Fei and Anna Lester
Source:
SSRN working paper
Link:
Summary:
There are millions of ways to combine return forecast factors,

but what combinations are most effective?
There are millions of possible genes combinations, but which

ones can survive?
The authors (from SSgA, State Street Global Advisors) see the
relationship between these two questions. They show that,
compared with traditional linear factor models (based on
valuation, quality, analyst forecasts, price), models based on GP
perform better in both a high and low tracking error settings.
Comments:
1. Why important
This methodology seems novel to us. This paper is developed by
practitioners, so we believe they have seen the value in it. Yet
perhaps not surprisingly, there is no step-by-step menu to
follow, and this model needs human judgment to check sanity.
In fact, the authors claim this strategy to be "as much art as
science.
2. Data
1990/01 - 2005/12 S&P 50 (excluding financials and utilities)
data are from Compustat. 65 factors for 350 stocks are used.
3. Discussions
How is this model built? The authors use a 3-step approach
(training, selection and validation), to mimic the gene
development process. Some details are left out, but readers are
directed to Neely, Weller and Dittmar (1997), a paper on
identifying technical trading rules in the forex markets using GP.
Paper Type:
Working Papers
Date:
2006-09-22
Category:
Strategy overview, Statistic methodology
Title:
Fundementals drive alpha
Authors:
Bob Litterman
Source:
NYU seminar presentation
Link:
http://pages.stern.nyu.edu/~ehs/slides/EHS.Bob%20Litterman.p
pt
Summary:
A very nice overview of the optimization framework adopted in
Goldman Sachs Asset Management (GSAM). The author

addresses how Black-Litterman theory fit into the GSAM
quantitative investment process, and how alpha drivers are
combined in portfolio.
Comments:
Paper Type:
Working Papers
Date:
2006-08-10
Category:
Portfolio optimization, Full-Scale Optimization, Statistic

methodology
Title:
Mean-Variance Analysis versus Full-Scale Optimization - Out of

Sample
Authors:
Timothy Adler, Mark Kritzman
Source:
Qwafafew discussion paper
Link:
Summary:
This paper, written by practitioners, discusses a new optimization

procedure (full-scale optimization) and shows that this new
approach has superior performance to the traditional
mean-variance optimization. The full-scale optimization does not
need to assume normal distribution of returns nor mean-variance
investor utility.
Comments:
1. Why important
The mathematic simplicity of Markowitz mean-variance portfolio
theory is built on two assumptions, (1) investors have quadratic
utility function (2) security returns are normally distributed. In
reality, however, investors may have non-linear asymmetric
utility function, and very few security returns are strictly
normally distributed. Given the lowered computation cost, we
think this paper may be of interest to practitioners since this new
approach is intuitively appealing and can be applied in a much
more generalized setting. This is supported by better
out-of-sample performance compared with Markowitz
methodology.
2. Discussions
The advantage of this new approach, in our view, should be
more visible when higher moment in security returns matters.
The authors apply this approach on hedge fund returns, which

are notorious for their negative skewness and excess kurtosis.
Practitioners with an interest on mid-small sized companies
(where higher moments return is an issue) may find this
approach helpful.
As with any other portfolio optimization methods, the authors
chose a dataset (hedge fund returns in this case) to test their
theory. The superiority can not be assumed before testing on the
data that a practitioner cares. Also we note that the authors did
not address the
Paper
Type:
Working Papers
Date:
2006-06-29
Category:
Statistic methodology, New directions of quantitative finance research?
Title:
Finance Gets Physical
Authors:
Jonathan Rhinesmith
Source:
Yale Economic Review
Link:
http://yaleeconomicreview.com/issues/spring2006/econophysics.php
Summary:
Our purpose of reviewing this article is to brief our readers of Econophysics,

a new research field that links financial market with physics. We believe
that it may be a new direction in quantitative research.

We have always been asking ourselves two (related) questions:
1.) What would be the next phase for quantitative finance research: in 5
years, would we still rely on CRSP/Compustat/Datastream databases and
regressions to find a factor that can predict stock returns?
2.) What can a quant researcher/manager to do differently than most
others?
We still dont have a solid answer, but Econophysics, a new research field
that links financial market with physics, certainly is a fresh air to us.
The guiding philosophy of econophysics is that the financial market may be
governed by the same law that governs our tangible world. Below is a very
telling picture from
http://yaleeconomicreview.com/issues/spring2006/econophysics.php
where the "Omori Law", which predicts post-earthquake seismic activity, is
found to be able to model market crashes very well.
Source:
http://yaleeconomicreview.com/issues/spring2006/econophysics.ph
p
Since its creation in 1999, physicists have published many papers on this
topic. As an illustration,
http://meetings.aps.org/Meeting/MAR06/Event/39695
is a paper that
studies the order flow data on London

Stock Exchange (we reviewed a monthly order-imbalance strategy in May
issue of Alpha Letters). It is shown that the rules of the continuous double
auction" is able to predict price changes.
Econophysics is still at its infant age. We think it may potentially be very
powerful because its new, its scientific, and because we believe that
maybe all human activities, as random as they may look on surface, are
governed by the same law that governs other natural events.

Paper Type:
Working Papers
Date:
2006-06-15
Category:
Portfolio optimization, covariance estimation, statistic

methodology
Title:
Estimating the Covariance Matrix for Portfolio Optimization
Authors:
David Disatnik, Simon Benninga
Source:
Tel Viv University working paper
Link:
http://recanati.tau.ac.il/Eng/Index.asp?ArticleID=524&CategoryI
D=390&Page=1
Summary:
This paper shows that, in estimating the covariance matrix of

stock returns for portfolio optimization, the "portfolio of
estimator" method is computationally simple and performs at
least as well as the more sophisticated shrinkage estimators.
Comments:
1. Why important
The Markowitz framework of optimization requires estimation of
a stocks return covariance matrix. The classic way to estimate
such matrix, which uses the stocks monthly returns, proves to
be noisy (large off- diagonal elements) and also computationally
challenging, especially when the number of stocks increases (the
"dimension curse").
This paper may be helpful to managers because it compares two
improved alternatives estimation methodologies, namely, the
more complicated "shrinkage estimator" and the simpler
"portfolio of estimators". Gauging by constructing the global
minimum variance portfolio (GMVP), it shows that the simpler
"portfolio of estimators" is at least as good as its more
sophisticated counterpart, even in face of the short-sale
constraints. The two-block estimator the paper proposes looks
analytically simpler and is claimed to have stable performance
Paper Type:
Working Papers
Date:
2006-02-23
Category:
Portfolio, optimization, statistic methodology
Title:
Optimal Portfolios from Ordering Information
Authors:
Robert Almgre, Neil Chriss
Source:
Carnegie Mellon seminar paper
Link:
http://www.math.cmu.edu/~ccf/docs/seminar_4f/Almgren.pdf
Summary:
This paper presents a general and stable portfolio optimization

method by using the ranking information of stocks. The
optimization results are shown to be superior to those by
traditional method.
Comments:
1. Why important
The Markowitz way of optimization requires estimating stock
expected return and a covariance matrix. In real-world, however,
most quant managers rank stock by to certain factors, e.g.,
value, momentum. The beauty of this paper is that it optimizes a
portfolio based on such ranking information. Moreover, its results
are shown to be very general, stable and superior to the results
of conventional mean-variance methodology.

Paper Type:
Working Papers
Date:
2014-02-06
Category:
Return dispersion, index returns, style allocation
Title:
Return dispersion and The Predictability of Stock Returns
Authors:
Paulo Maio
Source:
Hanken School of Economics
Link:
http://www.fma.org/Chicago/Papers/rd1012.pdf
Summary:
Return dispersion (RD) outperforms most alternative factors in

predicting stock index returns. It also has forecasting power for
equity portfolio returns
There is a positive aggregate risk-return trade-off in the
equity market: stock volatility can forecast an increase in
aggregate returns
RD corresponds to the cross-sectional variance of equity
portfolio returns
Therefore, including RD in predicting market returns
clarifies the predictive role of stock market volatility
Define RD as the cross-sectional standard deviation of
returns among a group of equity portfolios:
Where N denotes the number of portfolios

Rit is the simple return on portfolio i at time t
R it denotes the cross-sectional mean return at time
t
The final measure of RD is the three-month moving
average of rdt above
100 portfolios sorted on size and book-to-market ratio are
used to compute RD. Using portfolios mitigates the
estimation error arising from the noise associated with
illiquid and small stocks
Alternative predictors are:
a. The aggregate dividend-to-price ratio: the log ratio of
the sum of annual dividends to the level of the Standard &
Poors (S&P) 500 Index
b. The slope of the yield curve: the yield spread between
the ten-year and one-year Treasury bonds
c. The default spread: the yield spread between BAA and

AAA corporate bonds from Moodys
d. The realized stock market variance: the sum of squared
daily returns on the S&P 500
e. The change in the Fed funds rate
Higher RD, lower future stock index returns
Use monthly long-horizon regressions to evaluate the
forecasting power
RD is consistently negatively correlated with the future
aggregate stock return and market equity premium
(Table 2, Table 3)
If RD increases by one standard deviation (0.011), the
corresponding decrease in the market return one year
ahead is about 3.95% (Table 2)
If RD increases by one standard deviation (0.011), the
corresponding decrease in the equity premium one year
ahead is about 3.53% (Table 3)
The predictive slope for RD is significant for 12, 24, 36,
48, and 60-month horizons, for both stock market returns
and equity premium
Though not significant for one-month horizon
RD better than other predictors except for dividend yield
Dividend yield outperforms RD in forecasting the
market return for all horizons and equity premium
at 60 months (Table 2, Table 3)
Multivariate regressions confirm that the forecasting
power of RD remains robust in the presence of the
alternative predictors (Table 4)
Robust out-of-sample: RD outperforms the alternative
variables in forecasting the (excess) market return (Table
5, Table 6)
Combining RD and stock market variance works best
Including stock market variance adds forecasting power
to RD
Forecasting ratio of 9.05% compared to 5.35% in
the single regression for RD
RD and stock market variance have opposite signs
Stock market variance forecasts an increase in
expected (excess) returns while RD forecasts a
decline (Table 4)
RD has forecasting power for equity portfolio returns
Fama-French decile portfolios are used. These are sorted
on size, book-to-market, earnings-to-price ratio, cash
flow-to-price ratio, dividend-to-price ratio, and
momentum
Data
Forecasting power of RD is significantly greater for growth

stocks compared to value stocks, for large-cap stocks
compared to small stocks, and for past winners than for
past losers (Figures 2, 3, 4)
Most results also hold for out-of-sample portfolio (excess)
returns but RD loses its increased forecasting power for
past winners (Table 8)
Portfolios from Kenneth Frenchs webpage
Data on bond yields and Fed funds rate from the FRED
database
Daily returns on the S&P 500 from Amit Goyals webpage
Stock price and dividend data for the S&P 500 index from
Robert Shillers webpage
Stock market return from the Center for Research in
Security Prices (CRSP)
Data range: July 1963 - December 2010
Paper Type:
Working Papers
Date:
2013-07-03
Category:
Factor investing, factor timing, style timing
Title:
Factor covariances predict factor returns
Authors:
Nigel J. Barradale and Soeren Hvidkjaer
Source:
SSRN Working Paper
Link:
Summary:
At any given time, average investors may favor certain

high-characteristic stocks (e.g., high dividend yield), which leads
to contemporary overpricing and lower future returns
Background
At any given time, certain styles are favored by investors
E.g., high dividend stocks were popular among
many investors in 2012, and won much media
coverage
Such popular stocks may be over priced, and may revert
to the mean later
In other words, the respective long-short portfolio
(the factor), may exhibit negative systematic risk
This study covers nine factors, plus a composite factor
portfolio which is the average return of all factors
Including book-to-market, long-term returns, the

earnings-to-price ratio, net stock issuance,
accruals, net operating assets, asset growth, and
investment-to-assets
All annual rebalance, equally weigh stocks and adjust
returns for Market Premium, Size and Momentum
Measuring the popularity of high-characteristic stocks
For each factor portfolios, calculate
1) the market beta of the factor portfolios
2) the relative volatility of the factor portfolios
3) dispersion (standard deviation) between the factor
betas
4) dispersion (standard deviation) between the factor
volatilities
5) the first principal component of the former four proxies
Measure5 (the first principal component) is most effective
Significantly predicts seven of the nine factors at the 1%
level
In factor timing model, Measure5 generates 0.92%
monthly risk-adjusted return spread (t-stat = 3.99)
between highest/lowest deciles (Table 13)
Comparable benefit from long (0.52%) and short
portfolios (0.40%) (Table 13)
By comparison, investor sentiment does not predict,
generating 0.18% return spread (Table 13)
Data
1967 - 2010 data for US stocks are from CRSP and
Compustat
Paper Type:
Working Papers
Date:
2013-02-28
Category:
Value premium, style migration, European countries
Title:
Style Migration In Europe
Authors:
John Paul Broussard, Jussi Mikkonen, Vesa Puttonen
Source:
Aalto University working p
Link:
http://finance.aalto.fi/en/people/puttonen/valuemigrationeurope281-2013.pdf
Summary:
In 25 European markets, the average value premium is 9.58% per
year, which is mainly driven by stocks that migrate between value

and growth categories
Background
Earlier study shows that in US from 1927-2006, value
premium comes from 3 sources
1) value stocks migrating to neutral or growth
portfolios
2) growth stocks migrating to neutral or value
portfolios
3) value stocks that do not migrate earn higher
returns than growth stocks that do not migrate
This study replicates the test in European markets
Sort stocks first into six portfolios: first into two size groups
and then into three P/BV groups
Four types of migration
1) Same: stocks that stay in the same portfolio
2) dSize: small-cap stocks that move into large-cap
portfolios and vice versa
3) Plus: stocks that move towards growth portfolios
(from value or neutral)
4) Minus: stocks that move towards value portfolios
Most value premium comes from value/growth migrants
1980-2011 average annual value premium is a 9.58% (Table
2)
Consistent across regions: positive premium in each region,
although not significant in Benelux countries (Table 3)
In value universe, premium mostly comes from plus
migrations (Table 7)
In small value category, plus migrants accounts for
5.8% out of 8.1% total premium
In large value category, plus migrants accounts for
5.3% out of 5.4% total
In growth category, premium mostly comes from minus
In small growth category, minus migrants contribute
-9.5% to the total -5.3%
In large growth category, minus migrants contribute
-2.5% to of total -0.6%
Non-migrating stocks contributes little (Table 7)
E.g. Small-cap value stocks that stay in the same
category contribute negatively (-1.6%) to the total
portfolio (8.1%)
Size effects is disappearing in Europe
From 1980-1988, with average returns of 4.20%
From 1989 to 2011 the average annual size premium is
-2.04% (Table 2)
Data
1980-2011 data for Europe stocks are from Worldscope and

Datastream
Paper Type:
Working Papers
Date:
2012-10-28
Category:
Equity premium, risk parity, alternative beta, style diversification
Title:
Equity Premium and Beyond
Authors:
Antti Ilmanen
Source:
Q Group Fall Conference Paper
Link:
http://www.q-group.org/pdf/2012fall_equityslides.pdf
Summary:
In a low return environment, better ways to earn equity

premium include: global diversification with regular rebalancing,
volatility targeting, defensive (low beta) equity, value and
momentum tilting through stock selection and market timing.
More aggressive strategies include diversification through risk
parity and alternative beta
Background
In developed countries, it is no longer easy to earn the
historical average of CPI +5% equity premium
Expected equity returns are lower because
Long-run real earning-per-share (and
dividend-per-share) growth is only 1% and has
lagged real GDP growth
Potential inflation would push stock market
valuations lower, as inflation not likely staying in
the 1-3% sweet spot
Likely threats from de-leveraging, debts/deficits,
demographics
Traditional diversification strategy hasnt worked well
recently
Better ways to earn equity premium
Global diversification with rebalancing
Global diversification may reduce portfolio volatility
Rebalancing regularly is necessary because
market-cap weights across countries may imply
overweighting overpriced markets
Novel
E.g., a simple monthly rebalance strategy can

improve MSCI World index by 67 bps (9.83% vs
9.16%) over 40+ years
Volatility targeting improves risk accuracy and even
performance
Constant volatility targeting may help keep
portfolio risk more stable over time
E.g., sizing positions inversely to past months
volatility boosts annual equity premium by 1% and
improves Sharpe Ratio to 0.43 from 0.34 (page
15)
Overweighting low risk stocks helps reaching similar
return with less risk
Low risk stocks offers much better returns, and
can boost Sharpe Ratio to 0.48 from 0.39 (page
16)
Value and momentum tilting
Mixing the Market, Value and Momentum portfolios
together delivers better returns and information
ratio
E.g., scaling S&P index position size based on the
inverted Shiller P/E ratio and past-year real stock
market momentum improves the buy-and-hold
S&Ps return
strategies for investing beyond equity
Diversification through risk parity investing and
alternative beta premia
Diversify more aggressively through multiple
return sources, such as long-only market premia
(risk parity) and long-short alternative beta premia
Diversification and leverage help boosting
expected returns
Styles, a source of alternative beta premia, can improve
both returns and diversification
Styles that show most consistent long-run
rewards: value (prefer assets with low valuations),
carry (prefer assets with high income),
trend/momentum (prefer assets with high recent
returns), low risk (prefer assets with low
beta/volatility)
Source: the paper
Paper
Type:
Working papers
Date:
2009-07-06
Category: Novel strategies, industry rotation, style rotation

Title:
How Predictable are Components of the Aggregate Market Portfolio?
Authors:
Aiguo Kong, David Rapach, Jack Strauss, Jun Tu, and Guofu Zhou
Source:
SSRN working paper
Link:
Summary
:
2 key findings: (1) This paper presents an profitable industry/style rotation

strategy that uses macro-economic factors and lagged industry returns. This
strategy consistently outperforms the nave strategy of forecasting returns
using historical returns
(2) 14 economic variables and lagged returns for 33 industries can better
forecast industry/style returns than in overall U.S. stock market
(industry/style refers to 33 industries, 10 market capitalization deciles, and
10 book-to-market ratio segments)
Definitions:
The 14 economic variables are (page 7): Dividend-payout ratio, Stock
variance, Default return spread, Long-term bond yield, Long-term
bond return, Inflation, Term spread, Treasury bill rate, Default yield
spread, Dividend-price ratio, Dividend yield, Earnings-price ratio,

Book-to-market ratio, Net equity expansion
The 33 industries definition are provided by the website of Kenneth
French
Predicting effectiveness in different stock industries/styles
33 industries
10 market
capitalization
deciles
10
book-to-market
ratio segments
14
economic
variables
Significantly
predict for 23
out of 33
industries
Variables that
works best:
returns on
long-term
government
bonds, inflation,
term spread,
treasury bill rate,
dividend yield,
and net equity
expansions
Significantly
predict for 23 out
of 33 industries
Variables that
works best:
returns on
long-term
government
bonds, inflation,
term spread,
treasury bill rate,
dividend yield,
and net equity
expansions
Significantly
predict returns
for all
book-to-market
portfolios
Little difference
across the ranges
of
book-to-market
ratio
Variables that
works best:
returns on
long-term
government
bonds
Lagged
returns for
33
industries
Significant
predict for 16 of
33 industry
portfolios
Predictability is
strongest for
construction,
textiles, apparel,
furniture,
printing,
automobiles and
manufacturing
Significantly
forecast returns
for the 7 smallest
market
capitalization
portfolios
Better
predictability for
smaller size
portfolios
Lagged
industry returns
significantly
forecast returns
for the two
highest
book-to-market
ratio portfolios
Results are remarkably consistent across the out-of-sample

evaluation period
Lagged industry returns are better predictors than economic
indicators
Regression to test predicting effectiveness
The authors essentially run this regression
Returns of industry/size/book-to-market segments = alpha + predicting
factors (i.e., economic factors or lagged industry returns) + error
A predicting regression that combines 14 macro-economic factors and

lagged industry returns can better forecast than individual predictive
factors
The industry/style rotation strategy
The new strategy seeks to beat the benchmark (which is the nave
strategy that uses the historical industry/style returns)
Step1: forecast industry/style returns using 14 macro factors and 33
lagged industry returns
Step2: allocate the portfolio to the industry/style portfolio with the
highest forecasted return for the next month
Compared with benchmark strategy that uses historical returns, this
rotation strategy generates higher returns and lower volatility
Data
14 economic indicators and industry/size/book-to-market return data
are from 1945 to 2004
Comments
A better benchmark should include usual quant factors used by quant
managers (e.g., those using industry value, momentum, aggregate
accruals, etc), rather than the nave strategy that uses the historical
industry/style returns
As implied in the portfolio construction process, this strategy calls for
shifting all investment into the portfolio with the highest expect
returns. A natural by-product is high turnover and high transaction
cost
Not surprisingly, Sharpe ratios is not very impressive (per table XIX,
Sharpe ratio ranges from 0.12 to 0.22)
Paper Type:
Working Papers
Date:
2009-02-25
Category:
Title:
Authors:
Source:
SSRN Working Paper
Link:
Summary:

yields higher returns. In low-volatility stock index and
momentum stocks generate higher returns

regime-switching model (for the Carhart
four-factor model) based on Markov Chain Monte
Carlo Methods
In high volatility regime, the market volatility is
2.6 times higher than the low volatile regime
profitable
Data
1927-2004 data for index returns, the
high-minus-low (HML) factor, the small-minus-big
(SMB) factor, the momentum factor (UMD) and the
risk-free rate (RF) are from the Fama and French
data library
Paper Type:
Working Papers
Date:
2008-12-20
Category:
Quant factor timing, novel strategy, style
Title:
Anomaly Timing
Authors:
Devraj Basu and Chi-Hsiou Hung
Source:
2008 NTU International Conference
Link:
https://editorialexpress.com/cgi-bin/conference/download.cgi?db_na
me=MMF2008&paper_id=56
Summary:
Thispaperdiscussesaquantfactortimingstrategythatturnsonandturnsoffa
quantfactorconditioningonpriormonthsmarketreturns.
Comparedwitha
conventionalsinglefactorportfolio,suchalternatingstrategyyieldshigherreturns
withreducedvolatility.
Definitions:
Anomalyportfoliosaresinglefactorportfolios.Theyarebuilt
usingoneofthefourquantfactors:momentum,booktomarket,
sizeandlongtermreturnreversal.
Momentumanomalyportfolio:select(both)winnerandloser
stocksbasedonreturnsinprevious212month
Booktomarketanomalyportfolio:select(only)stockswithhigh
booktomarketattheendofeachJune
Sizeanomalyportfolio:select(only)smallcapstocks,
constructedattheendofeachJune
Longtermreversalanomalyportfolio:select(both)winnerand
loserstocksbasedonreturnsinmonthst60tot13andheldfor
4years
Strategymethodology:
Twotypesoftimingstrategiesdiscussed.Theyalternate
betweenananomalyportfolioand1monthTreasurybills:
TypeIstrategy
TypeIIstrategy
Comments:
Conditioningonthe
marketindexduring
month
t1
Duringmonth
t
,investin
>0
theanomalyportfolio
<=0
Tbills
>2%
theanomalyportfolio
<=2%
Tbills
ThetimingstrategyyieldshigherSharpeRatio:
Thetimingstrategiesyieldshigherriskadjustedreturnand
higherSharperatio(onlyexceptioniswinnermomentum
portfolio)
Somerepresentativestatistics
Robustto1%2%roundtriptransactioncostsassumptions
Proposedintuition:
Thistimingstrategyseemtocapturethereturnupsidewhile
avoidthedownsideloss(Table4)
Addinganupmarketfactortothemodelconfirmthattheprofits
areduetosuccessfulmarkettiming(Table8and9).
Aconditional,multifactor,dynamicmodelbasedon
macroeconomicvariablesandanUpmarketdummyvariable
explainsthereturnsoftheTypeIandIIstrategyportfolioreturns
muchbetterthanthe4factorFamaFrenchCarhartdoes.
1. Discussions
If the finding here is true, then there should be a correlation
between prior month market return and the current month
single-factor portfolio returns. If confirmed, this will be a very
useful pattern.
It would be interesting to discuss the conditioning effect of
strong negative market returns, such as when the market
index is down more than -2%.
2. Data
1975-2006 NYSE, AMEX, and NASDAQ stocks data are from

the CRSP and Compustat files.
Paper Type:
Working Papers
Date:
2008-12-20
Category:
style, Quant factors
Title:
Case Closed
Authors:
Robert A. Haugen and Nardin L. Baker
Source:
SSRN Working Paper
Link:
Summary:
The paper claims to provide "conclusive evidence" that US

market is not efficient. It does so by showing the predictive
power of 56 cross-sectional factors on US data for the time
period 1963-2007. It also shows lower risk stocks tend to have
higher returns.
Several quant factors covered in the study:
Negative stock return predictability of idiosyncratic
and total variances (defined as ) and recent
1-month stock return
Positive stock return predictability of BM, Cash
flow/Price, Earnings/Price, Momentum, Returns on
Assets and Equity, Profitability
These factors have high out-of-sample return
predictabilities:
A comprehensive factor model successfully
predicts future return, out of sample, in 44 out the
45 years covered
For each factor, its expected return for n months
ahead is calculated by the last 12 months average
return for that factor
For each stock, its expected return n months
ahead is estimated using the factor loadings and
expected factor returns
Each month, stocks are ranked into deciles and
equal-weighted returns of all the deciles are
calculated. Each year, the annual return of each
decile and high-low expected return spread are
calculated
Lower risks, higher returns
This runs counter to the textbook high risk, high

return principle.
The 10% stocks with highest expected return tend
to be low risk.
Higher profits and positive profitability
trends
Cheap relative to current earnings, cash
flow, sales, and dividends.
Relatively large market capitalization and
positive price momentum.
The 10% worst stocks have the lowest expected
returns, and the opposite profile in terms of
profitability, size and momentum.
In other words, the cross-sectional payoff to risk
bearing is highly negative.
Data
1963-2007 US stock return data are from CRSP ,
and accounting data are from COMPUSTAT
Paper Type:
Working Papers
Date:
2008-11-30
Category:
Style return difference, style rotation, interest rate change
Title:
Interest Rates and the Relative Performance of Style and

Size-Defined Indices
Authors:
Stephen M. Andoseh
Source:
SSRN Working Paper
Link:
Summary:
This paper demonstrates that the return difference between

growth and value indices or between large-cap and small-cap
indices is driven their sensitivity to interest rate changes.
Intuition: interest rates play a big role in the security
valuation by
measuring the opportunity costs of funds
directly impacting cost of capital, financial leverage
and capital structure
When the interest rates are going up (going down), the
value and small-cap stocks outperform (under-perform)
growth and large-cap stocks, respectively.
The excess return of the value index over growth

index is related positively to the interest rate
changes
The excess return of the large-cap index over
small-cap index is negatively correlated with
interest rates changes.
The findings are explained by the previously established
firm characteristics:
The growth and large firms are more levered
compared to value and small-cap stocks,
respectively.
High leverage becomes troublesome in high
interest rates regimes
Firms with relatively high leverage fall in value in
high interest periods.
Comments:
1. Discussions
There isnt a single table or regression in the whole paper.
The return difference series between growth and value
indices or between large-cap and small-cap indices can be
easily regressed on interest rates instead of simply
drawing graphs.
One good possible investment strategy from the paper
would be trading on low-leverage and high-leverage firms
depending on the expected future interest rates.
2. Data
Interest rates are from OECD Financial Indicators tables. All
index data used are from Morgan Stanley Capital International
(MSCI BARRA) family of global indices
for US, UK and Japan during 1990-2008
for EU and China during 1998-2008
Paper Type:
Working Papers
Date:
2008-11-30
Category:
style, Financing of investment projects
Title:
The Profitability and Equity Financing of Style Groups:

1926-2006
Authors:
Source:
SSRN working paper
Link:
Summary:
The paper shows the surprising result that firms with higher cash
flows do more equity-financed investment.
The finding contradicts the Myers and Majluf(1984)
pecking order theory
which predicts that firms prefer equity issue the
least to finance new investment projects
Their theory ranks investment sources as
1st choice: retained earnings, it is preferred
to equity financing by management
because of there is no risk associated with
using internal resources
2nd choice: borrowing, it is preferred to
equity financing because of the smaller risk
3rd choice: equity financing, because it is
always underpriced by the market because
of the assumption that managers only issue
equity when their stock prices are
overpriced.
Such pecking order theory only worked in a small part of
the sample period
Time
Major source to finance new

projects
1926-1962
Share issues had equal importance

as the retained earnings
1963-1982
Primarily use retained earnings.

This period saw high profitability
with low dividends resulted in the.
1983-2006
Primarily new share issues. This

period saw low profitability with
fall in dividends.
The paper compares firm characteristics of net equity

issuers to non-issuers throughout the sample period
1926-2006.
The stock issuers are shown to be less profitable
than non-issuers (7.96% vs. 8.45% per annum)
The issuers and non-issuers have very similar

dividend pay-out ratios ( 5.61% vs. 5.78% per
annum)
The issuers have lower retained earnings
compared to non-issuers (2.35% vs. 2.67%).
Data:
For the period 1926-2006 individual stock returns
are taken from CRSP and accounting variables are
taken from COMPUSTAT.
Paper Type:
Working Papers
Date:
2008-09-25
Category:
Style Investing, stock co-movement, momentum
Title:
Style Investing, Co-movement and Return Predictability
Authors:
Sunil Wahal and Deniz Yavuz
Source:
SSRN Working Paper
Link:
Summary:
The paper finds that combining style investing measures with

traditional momentum can generate high alphas.
Style investing generates excess co-movement of (assets)
stocks within styles
Style is defined by sorting stocks into 5x5 size and
value-growth portfolios
A "hot style" is those enjoy high return during past
several months
Basic intuition: style investing can be a source of the
momentum
If the hot style does well in one period (3,6,9 or
12 months), it keeps attracting inflows fin the next
period and the assets does well the next period
Style investing generates momentum in individual
asset returns at intermediate horizons (3 and 6
months) and reversals at longer horizons (12
months)
Style based investing generates asset-level
momentum
Methodology to calculate co-movement beta
Each security is assigned to a size and
value-growth portfolio using a 5-5 grid to create
the style investing
For each security, the co-movement beta with its

style is calculated as its regression coefficient to its
style in the last 3 months.
The stocks are sorted into co-movement terciles
by their co-movement betas
Each month stocks are sorted into momentum
deciles based on past 3,6 and 12 month returns
Higher momentum returns within higher co-movement
stocks
Robusttoknownfactors:(Table6).
Sizeandbook,equal/valueweight,turnoverlevel
Onceidiosyncraticvolatilityandliquidityareusedtocreatethestylecomovements,the
differenceinmomentumreturnsshrink
Data:CRSPstocksbetween1965and2006aswellasFamaandFrenchfactorsfromKenneth
Frenchswebpage.BooktomarketvariablesarecreatedusingCOMPUSTATtapes.
Paper Type:
Working Papers
Date:
2007-10-29
Category:
Style transition, relative performance of growth and value
Title:
Growth at Parity to Value
Authors:
Credit Suisse research
Source:
Bloomberg terminal
Link:
on Bloomberg terminal, type NSN JQFK1S3PWT1F <go>
Summary:
Currently growth stocks are cheap compared with value

stocks when measured by valuation gauges such as
price/earning and price/cash flow.
As economy looks slowing down, we are likely witnessing
a style transition from value to growth, so growth is likely
to lead value stocks.
In fact, "this year, we saw the ending of the value cycle
as growth outperformed value across all
capitalizations.
This marked an end to the longest value cycle since 1977.

"
Paper Type:
Working Papers
Date:
2007-08-23
Category:
Style timing, value, growth
Title:
The Profitability of Style Rotation for Value and Growth Stocks

Along Their Earnings and Momentum Life Cycle
Authors:
Ron Bird, Lorenzo Casavecchia
Source:
Link:
Summary:
This paper proposes a strategy

to rotate portfolio between value
and growth stocks in European markets.In essence, this strategy

combines
timing the cycle of each stock by its market sentiment
(momentum) and financial health
(based on Principal
component analysis of several accounting variables)
timing the macro
cycle by
selecting various
macroeconomic variables.
Sales-to-price
price is used to define value and growth portfolios.
The macro factors used are
monthly unexpected inflation (UI)
difference in yield to maturity between Baa and Aaa
corporate bonds (Baa Aaa)
monthly dividend yield on European markets ex Financials
(EuroDY)
monthly change in the spread between 10 year
Government Bond and 3 month Treasury Bill yield(YTM)
month Treasury Bills returns less the monthly rate of
inflation (RTB)
the monthly variation in the value premium
Key results:
When use only macro factors, this style rotation strategy
generates 22%+ annually, which almost doubles that of
the value portfolio.
When combined with momentum, the style rotation
strategy generates 32%+ annually.
When combined with momentum and financial health
factor, he style rotation strategy generates 44%+
annually.
Comments:
1. Why important
All quant strategies are more or less functions of macro factors.
This paper provides a nice framework to incorporate macro

economic factors in quant modeling. If proven reliable, this
should be a high capacity strategy.
2. Data
1990 2004 data for non financial stocks from 15 European
countries (France, Italy, The Netherlands, Germany, Spain,
United Kingdom, Belgium, Portugal, Ireland, Austria, Greece,
Norway, Sweden, Denmark, and Finland) are from 1.) Compustat
Global Vantage (accounting data) 2.) DataStream and GMO
UK(Data for stock indices, other financial variables and macro
variables) 3.) Moodys Investor Services (the average monthly
yield maturity of corporate bonds with different ratings)
All of the data are in local currencies. The sample contains 1,800
stocks each year.
3. Discussions
Our concerns:
1. Short history given the annual rebalance scheme : only
15 years history available to support this annually
rebalanced strategy
2. Total raw returns are used, as opposed to different risk
factor(size, beta, etc) and country/industry adjusted
return. The momentum and financial health factors may
be of less use to quant managers who already have them
in their models
3. Extending the study to other markets, such as US, would
be interesting.
4.
Paper Type:
Working Papers
Date:
2006-09-08
Category:
Title:
Migration
Authors:
Source:
SSRN working paper
Link:
Summary:


Comments:
1. Why important
segments:
growth managers and signal-managers. It will be of great
interest to study their contribution and other characteristics.
2. Data
3. Discussions

Paper Type:
Working Papers
Date:
2006-07-27
Category:
Strategy, value, style, order imbalance
Title:
The Anatomy of Fluctuations in Book/Market Ratios
Authors:
Source:
UCLA working paper
Link:
http://www.anderson.ucla.edu/documents/areas/fac/finance/1406.pdf
Summary:
This paper studies the process by which a stock swings from a

value stock to a growth stock, or from growth to value. The
interesting finding is that stocks with large price decrease (b/p
increase) and positive order imbalance tend to strongly reverse.
Comments:
1. Why important
A big challenge for quant managers is how to avoid the value
trap - when a stock price plunges, it may easily fall into the
value category in most quant models. We are interested in
knowing what stocks are more likely to reverse themselves, and
this paper seems to provide a new angle.
2. Data
Transactions data are from the Institute for the Study of
Securities Markets (ISSM, covers 1988-1992) and the NYSE
Trades and Automated Quotations (TAQ, covers 1993-2002)
databases.
3. Discussions
The author argues that BMO (the product of order imbalance and
the book/market ratio in calendar year
n
) is predicative of stock
price reversals. This result suggests that, the stocks that are not
"value trapped" are those experienced large price decrease AND
large positive order imbalance (i.e., being bought by other
investors). In other words, if in the past year price decreased
and large investors are buying, this stock is more likely to
reverse the price drop. This sounds like the combination of
momentum and value, although one cannot tell until doing the
research on the stocks.
We are not sure of the authors explanation of the result. Market
makers tend to have a shorter balance horizon, most of which
presumably take little, if not zero inventory, on daily basis. The

conclusion of this paper is based on monthly stock returns, and
we are not sure whether order imbalance is still relevant at this
time horizon (though papers like Chordia and Subrahmanyam
(2004) predicts that autocor elations in imbalance may lead to
greater inventory buildups and later reversals).
Only regression results were given in the paper. It would be ideal
if the author can provide the profit for a simulated zero-financing
portfolio. Another concern is that most of the numeric results
covers only the period of 1988/01 - 1998/12.
Paper Type:
Working Papers
Date:
2006-07-13
Category:
Title:
Authors:
Source:
SSRN working paper
Link:
Summary:
This paper studies "style migrants", i.e. stocks with large

changes in their style characteristics (size/bookto-market/momentum) in the past years. Such stocks seem
under-valued as they exhibit a higher return compared with
other stocks, and a higher covariance with the style cohort.
Comments:
1. Why important
2. Data
necessary data.
3. Discussion
(size/book-to-market/momentum) can all be driven by large
price changes. Is the "high style risk" merely another name for
"high price volatility stocks"? A quant manager would also need
to look at the Sharpe ratio and recent performance (given the
changing volatility environment these past 3 years).
Paper Type:
Working Papers
Date:
2015-01-16
Category:
Fama-French model, timely value, momentum
Title:
Our Model Goes to Six and Saves Value From Redundancy Along
the Way
Authors:
Cliff Asness
Source:
AQR working paper
Link:
AQR working paper
Summary:

One recent study
of Fama-French(FF) uses five factors to explain
stock returns
the size effect)
5. CMA: The return spread of firms that invest
conservatively minus aggressively.
redundant
The holy grail of investing is to identifying with factors
that are uncorrelated to existing set, but have high
average returns

mean factors
One recent study of Fama-French(FF) uses five factors to explain
stock returns
the size effect)
5. CMA: The return spread of firms that invest
conservatively minus aggressively.
redundant
The holy grail of investing is to identifying with factors
that are uncorrelated to existing set, but have high
average returns
mean factors
Comments:
aper Type:
Working Papers
Date:
2013-02-28
Category:
Value premium, style migration, European countries
Title:
Style Migration In Europe
Authors:
John Paul Broussard, Jussi Mikkonen, Vesa Puttonen
Source:
Aalto University working p
Link:
http://finance.aalto.fi/en/people/puttonen/valuemigrationeurope2
8-1-2013.pdf
Summary:
In 25 European markets, the average value premium is 9.58%

per year, which is mainly driven by stocks that migrate between
value and growth categories
Background
Earlier study shows that in US from 1927-2006, value
premium comes from 3 sources
1) value stocks migrating to neutral or growth
portfolios
2) growth stocks migrating to neutral or value
portfolios
3) value stocks that do not migrate earn higher
returns than growth stocks that do not migrate
This study replicates the test in European markets
Sort stocks first into six portfolios: first into two size
groups and then into three P/BV groups
Four types of migration
1) Same: stocks that stay in the same portfolio
2) dSize: small-cap stocks that move into large-cap
portfolios and vice versa
3) Plus: stocks that move towards growth portfolios
(from value or neutral)
4) Minus: stocks that move towards value portfolios
Most value premium comes from value/growth migrants
1980-2011 average annual value premium is a 9.58%
(Table 2)
Consistent across regions: positive premium in each
region, although not significant in Benelux countries (Table
3)
In value universe, premium mostly comes from plus
In small value category, plus migrants accounts for
5.8% out of 8.1% total premium
In large value category, plus migrants accounts for
5.3% out of 5.4% total
In growth category, premium mostly comes from minus
In small growth category, minus migrants
contribute -9.5% to the total -5.3%
In large growth category, minus migrants

contribute -2.5% to of total -0.6%
Non-migrating stocks contributes little (Table 7)
E.g. Small-cap value stocks that stay in the same
category contribute negatively (-1.6%) to the total
portfolio (8.1%)
Size effects is disappearing in Europe
From 1980-1988, with average returns of 4.20%
From 1989 to 2011 the average annual size premium is
-2.04% (Table 2)
Data
1980-2011 data for Europe stocks are from Worldscope
and Datastream
Comments:
Paper Type:
Working Papers
Date:
2015-08-30
Category:
Size premium, value premium, leverage premium
Paper Type:
Working Papers
Date:
2013-08-02
Category:
Risk, return, value, liquidity, volatility
Title:
Risk and Return Within the Stock Market: What Works Best?
Authors:
Roger G. Ibbotson and Daniel Y.-J. Kim
Source:
Zebra Capital Management Working Paper
Link:
http://www.zebracapm.com/files/Risk%20and%20Return%20Withi
n%20the%20Stock%20Market%206-27-2013.pdf
Summary:
When grouping stocks into quartile by quant factors (beta,

volatility, size, value, liquidity, momentum, etc.), the winning
quartile tend to have lower risk and lower volatility
Background
Prior studies have show the excess returns when group
stocks by various characteristics such as beta, volatility,
size, value, liquidity, and momentum, etc
This study shows that stocks in winning quartiles have lower

risks
In other words, popularity (i.e., high risk stocks)
underperforms
Each year, sort stocks into quartiles by beta, volatility, size,
value, liquidity, momentum, Fama-French betas, and factor
betas
Hold for one year
Limit the universe to a maximum of 3,000 stocks
Every winning quartile sees higher returns and lower risks
Using value and momentum as an example (Table 5 and
Figure 3, 5), the graph below shows that winning stocks
(low growth stocks, winner momentum stocks) yield higher
returns and lower risk
Source: the paper
Value
Data
Note that high-growth companies tend to be newsworthy

hot companies. In this sense, popularity predicts
underperformance
Same pattern for each of every factors studied
factors generate highest returns
On raw return basis, value works best (Figure 8)
Low volatility, low beta, and low turnover portfolios see
highest risk-adjusted returns
These portfolios not only outperform, but also are less risky
than the universe equally weighted portfolio (Figure 8)
1971 - 2011 U.S. stock data are from CRSP/Compustat
Comments:
Paper Type:
Working Papers
Date:
2015-05-03
Category:
Value investing
Title:
Fact, fiction, and value investing
Authors:
Asness, Clifford S. and Frazzini, Andrea and Israel, Ronen and

Moskowitz, Tobias J
Source:
SSRN paper
Link:
Summary:
This paper documents some facts of value investing. Notable

points are: 1) Fundamental Indexing is, and only is, systematic
value investing 2) Value works better when combining with
Quality and/or Momentum 3) Value works best in small caps
Fundamental Indexing is, and only is, systematic value
investing
This is evident in the fact that
Note here the extremely high t=35.2

Hence Fundamental Index delivers no additional average
returns beyond those of value, as measured by Fama and
Frenchs HML
Timely Value (HML-DEV) works, not the traditional HML
Traditionally, HML portfolios rebalances annually at the
end of June. It uses book value and price from December
31st of last year
The HML-DEV value uses the same book value definition,
but the price as of June
The reason is 1) it is a more timely measure 2) it is more
negative correlated with momentum
Comparing with the traditional HML factor, HML-DEV is
now significant in factor regression
An average of multiple value measures works best
No single measure performs consistently
Different valuation ratios performing best in each of the
last 4 decades
A composite HML portfolio has 20% lower volatility, and a

modestly higher Sharpe ratio
Even though the correlation wiwth BE/ME is 0.9
Value works better when combining with Quality and/or

Momentum
This is because the stand-alone value strategy also buys
some firms that are value trapped stocks
A three-way equally weighted portfolio yields a Sharpe
Ratio of 0.84, much higher than the 0.46 of a single value
strategy
Value works best in small caps

Value premium is strongest amongst small cap stocks, but
not in large caps
The market-adjusted return to value within small cap
stocks is a significant 5.5% per annum, but within large
cap it is an insignificant 1.7% per annum
Yet value in combination with momentum remains highly
effective amongst large caps
Comments:
Paper Type:
Working Papers
Date:
2012-10-28
Category:
Value effect, momentum, emerging equity market
Title:
Size, Value, and Momentum in Emerging Market Stock Returns
Authors:
Nusret Cakici, Frank J. Fabozzi and Sinan Tan
Source:
SSRN Working Paper
Link:
Summary:
There exists strong evidence for the value effect in the 18

emerging markets and the momentum effect for all but Eastern
Europe. Value effects are similar for big and small stocks while
momentum effects are stronger for small firms
Background
To ensure a reasonable number of stocks in the portfolios,

combine 18 countries into the following three emerging
regions as defined by MSCI
1. Asia: China, India, Indonesia, South Korea,
Malaysia, Philippines, Taiwan, and Thailand
2. Latin America: Argentina, Brazil, Chile,
Colombia, and Mexico
3. Eastern Europe: Czech Republic, Hungary,
Russia, Poland, and Turkey
Reasonable number of stocks (Table 1)
Mean number of firms is 4,000 (800, 400) in Asian
(Latin American, Eastern Europe)
Mean firm size is close to $108 ($165, $86) million
dollars in Asia (Latin America, Eastern Europe)
Mean B/M ratio is about 0.70 regardless of the
region
Value and momentum works in emerging markets (Table 2)
Value premium (bps)
Momentum
Asia
103
93
Latin America
66
96
Eastern Europe
188
25 (insignificant)
All
115
86
US
30
55
Developed markets
40
63
Different patterns by market cap groups

Value is similar in large and small stocks, unlike in
the U.S. and the Global Developed markets, where
value premia exists only for small stocks
Momentum is significant only for small stocks but
not large stocks, similar to the pattern in US and
Global Developed Markets
Volatility much higher in emerging markets
Volatilities of the Eastern European portfolios
formed on size and B/M ratio is ~15%
By comparison, the volatilities are 5-10% (5-6%)
for the U.S. (Global Developed markets)
Potential for diversification given correlation patterns
Diversify by factors
Thanks to the negative correlation between value
and momentum
Data
Such correlations ranging from -10% (Eastern

Europe) to -26% (All-Emerging markets), (Table
3)
Lower volatility and higher returns when combining
value and momentum (Figure 1)
Diversify within emerging markets
Low correlation among emerging markets
The average of market returns (HML, WML)
correlations between Asia, Latin America, and
Eastern Europe is 49% (8%, 17%) (Panel A, Table
4)
Hence offer the potential for multi-region
diversification
Diversify from U.S. markets
Low correlations with the U.S
The average correlation of Asia, Latin America, and
Eastern Europe with U.S is 55% (1%, 27%) for
market returns (HML, WML) (Panel A of Table 4)
Hence provide a reason for internationally
diversifying value and momentum
1990/1 to 2011/12 monthly stock data for 18 emerging
countries is from Datastream
U.S. and the Global Developed explanatory factors and
cross-sectional portfolio data are from Kenneth Frenchs
website
Comments:
Paper Type:
Working Papers
Date:
2012-07-29
Category:
Enhancing low-volatility strategy, value
Title:
Enhancing A Low-Volatility Strategy Is Particularly Helpful When

Generic Low Volatility Is Expensive
Authors:
Pim van Vliet
Source:
Robeco white paper
Link:
http://www.robeco.com/images/enhancing-a-low-volatility-strate
gy.pdf
Summary:
Adding valuation and sentiment factors improves a generic

low-volatility strategy by up to 6% per year. Such enhancement
is particularly helpful given that low-volatility stocks are getting
expensive and the generic low-volatility strategy tends to
underperform
Background
Historically, low volatility stocks yield higher return with
lower risk
Sharpe ratio is 0.71 vs. 0.50 of market index
during 1920-2010 (page1)
Historically, low volatility stock are more like value stocks
Slightly lower price-to-book ratio (1.61 vs. market
index of 1.66 (page1)
Higher dividend yield (page 1)
Recently however, low vol stocks valuation has jumped
P/B ratio has gone up relative to index
Enhancing by adding value and sentiment factors

This paper does not give details of how to construct value
and sentiment factors
The improved strategy is still mostly low vol strategy:
only allocate 20% tracking error to value/sentiment
factors
The enhanced strategy can increase return from 10.1% to
13.7%, and Sharpe Ratio from 0.71 to 0.88
The selected stocks are more value: average P/B is 0.17
lower than generic low vol stocks and the dividend is
0.6% higher
Source: the paper

Such enhancement is particularly helpful in current
environment
As currently low vol stocks have high P/B (growth)
In such growth environments, low-volatility strategy
underperforms index (Table on page 4)
The enhanced version, however, outperforms market
index
Increasing return and alpha by up to 6 percentage
points (Table on page 4)
Paper
Type:
Working Papers
Date:
2012-07-29
Category
:
Title:
Authors:
Source:
Link:
12.pdf
Summary
:

Background
Recent study
(t-stat =1.5)
=0.79) per month
each year
high (top 30%)
rebalance monthly

strategy
Source: the paper

Data
Datastream
Paper
Type:
Working Papers
Date:
2012-05-21
Category
:
Value investing
Title:
Value Investing: Investing for Grown Ups?
Authors:
Aswath Damodaran
Source:
SSRN Working Paper
Link:
Summary
:
Commonly used value factors have their problems and may be improved.
Successful value investing requires long investment horizon, diversification,
regular review of value screens, and consideration of taxes and transaction
costs
Background
Value investors characterize themselves as the grown ups, immune
from perceptions or momentum, and driven by fundamentals
Three types of value investing
1. Passive value investing (quant investing): screen for stocks with
value multiples such as P/E or P/B
2. Contrarian value investing(fundamental investing): invest in
unpopular companies because of poor past performance or bad news
3. Activist value investing: take large positions in poorly managed and
low valued companies and make money from turning them around
Passive value investing (quant inveting) can be improved
Value
factor
Problem
Solutions
Buy low
P/B stocks
- Low P/B may suggest

higher risk of financial
trouble
- Low P/B be well
deserved for firms with
low ROE
- Select stocks with low

P/B and reasonable ROE
- Find stocks with low
default risk (low debt
ratios) and high ROE
- Look at only current
assets and compute a net
net value (book value of
current assets book
value of current liabilities
book value of long term
debt)
Market
Value to
Replaceme
nt Cost
Tobins Q
- The replacement
value of some assets
may be difficult to
estimate
- In practice, analysts
use book value of assets
as a proxy for
replacement value
Buy Low
P/E stocks
- Low P/E may include

companies with great
uncertainty about
future earnings
- Low P/E may include
stocks with large
dividend yields and
hence larger tax burden
for investors
- Low P/E may signal
low growth
- Enterprise value to
EBITDA is a more stable,
cash-based measure of
pre-debt earnings
- Three widely used
alternatives to actual
earnings: 1. use
normalized earnings over
5-10 years; 2. eliminate
one-time items (income
and expenses), etc; 3.
Buffetts owners
earnings, which is close
to a free cash flow
measure
Buy low
price/reven
ue stocks
- Comparing with P/E,

P/R is less susceptible
to accounting decisions
- But low P/R may
suggest high leverage
and low margin
- Use enterprise value

instead of market value
of equity in the
numerator, and screen on
both price-sales ratios
and profit margins
Buy high
dividend/pr
ice
- Comparing with
earnings, dividends
show mixed empirical
results
- Dividend comes with a
much greater tax cost;
- High dividends may
indicate slow growth
Passive value underperform hypothetical portfolios because

Time Horizon: lack of long enough investment horizons (five
years or greater) for the ratios to work
Dueling Screens: applying multiple screens leads to worse
portfolios because multiple screen may work against each
other
Absence of Diversification: one sector may be

disproportionately represented in portfolios created using
screens due to its value characteristics
Taxes and Transactions costs: this effect becomes smaller as
time horizon lengthens, but some screens (high dividends) can
increase the effect
Success and Imitation: so many investors begin using the
same screen due to its success that the premium is decreased
or even eliminated
Contrarian value investor (fundamental investors)
Three strategies
1. Buying the Losers (long-term reversal): stocks that have gone down
the most over the last 5 years are more likely to go up over the next
5 years
2. Playing the Expectations Game: bad companies can be good
investments
3. Vulture investing: this extreme version of contrarian investing is to
buy the equity and bonds of companies that are in bankruptcy and bet
either on a restructuring or a recovery
To succeed, investors need to have
1. Long Time Horizon: for stocks to recover and to allow you to spread
the high transactions costs over more time
2. Diversification: spread bets across a large number of stocks and
sectors because some distressed firms will go under
3. Personal qualities: need self-confidence to hold up and a stomach for
short-term volatility
Active value investors underperform
From 2007 to 2011Active value mutual funds underperform indexes,
particularly with large market cap companies (Figure 17)
Source: the paper
Comment
s:
Active value funds perform the worst of any group of funds

Only growth funds beat their benchmarks and in all three market cap
universes
Paper Type:
Working papers
Date:
2011-03-03
Category:
Competition among quant investors, value
Title:
Dead or Destabilized? Anomalies in an Age of Automated Arbitrage
Authors:
Peter Rathjens
Source:
Arrowstreet working paper
Link:
http://www.arrowstreetcapital.com/pdf/Dead%20or%20Destabilized.p
df
Summary:
Competition among quant investors can alter the behavior of

anomalies(i.e., quant factors) in two ways. 1) anomaly can be
eliminated or dead; 2) anomaly profits can be more volatile or
destabilized. Profits of such destabilized anomalies are not
necessarily lower and may be predictable
Some quant factors are more likely to be eliminated through
competition
Criteria 1: No behavioral pattern involved, so once publicized,
few investors will continue to take the opposite side
Criteria 2: Trading on the anomaly cause the profits to shrink
immediately
Example: January small-firm effect (ie, small firms usually
outperform in January compared than larger stocks)
After the publication of a 1984 paper by Kiem, the
profitability dropped to close to 0
Some quant factors are more robust to competition, though become
less stable
Criteria 1: Those anomalies with behavioral basis, such as
value effect because glamour stocks always attract more
attention
Criteria 2: Trading on the anomaly moves prices in a way that,
in the short run, the returns to anomaly trading increase
Example: value factor, which has been known since 1930s
The performance of value is far from demise (Figure 3)
Yet risk has been be trending up
since the 1940s as
more investors become aware of the anomaly (figure 4,
risk measured as the standard deviation of value
strategy )
New return patterns as a result of competition
: the
return of the value strategy goes up with its past 12
months return (suggesting that more people using
value factor and bid up low value stocks), and goes
down with its past 36 months return (suggesting that
the low value stocks have been bid up too much) (table
1)
Such momentum/reversal pattern only emerges after
1990s
Quant managers can take 4 strategies for destabilized factors
1. Do nothing, so long as an anomaly appears to have long-term

effectiveness
2. Lower bets given the greater risk associated with destabilized
anomalies
3. Exploit style momentum: try to identify when to tilt towards
one style or another
4. Diversify away from destabilized signals
Comments:
Paper Type:
Working papers
Date:
2011-01-23
Category:
Novel strategy, value, gross profitability
Title:
The Other Side of Value: Good Growth and the Gross Profitability
Premium
Authors:
Robert Novy-Marx
Source:
Link:
http://faculty.chicagobooth.edu/robert.novy-marx/research/OSo
V.pdf
Summary:
Gross profits-to-assets ratio (GPA), especially when measured

within industry, can significantly predict stocks returns. GPA
works even better when combined with book-to-market ratio, as
it differentiates good growth firms from bad value firms
GPA is defined as ( revenue - cost of goods sold) /
(total assets)
Why gross profitability measure? Gross profits is the
cleanest measure of true economic profitability
The farther down the income statement, the more
polluted profitability measures become
GPA differentiate good growth firms from bad value
firms, because firms with high GPAs tend to be large-cap,
growth firms with lower book-to-markets ratios
GPA has equal or higher return predictive power than other value
measures
In Fama-McBeth regression, value measures (eg, earnings

and free cashflow) has weaker return predictive power
than GPA (table 2)
Book-to-market has comparable power as GPA (table 2)
A value-weighted portfolio that is long (short) the
top(bottom) quintile stocks by GPA generates an annual
excess return (over risk-free rate) of 4.0% during
1962-2009, with a three-factor alpha (adjusted for
market, size and book-to-market) of 6.6% per year (table
4)
GPA returns not driven by small cap stocks: the
Fama-French three-factor alpha is almost the same for
large-cap stocks and small-cap stocks (table 6)
GPA within
industries generates greater returns than GPA
across industries
Industry-adjusted GPA generates excess average
returns 1/3 higher than the unadjusted strategy
In terms of Sharpe ratio, industry-adjusted GPA is
0.99 compared with 0.49 when not adjusted by
industries (table 14)
Combining GPA and book-to-market greatly improves
performance
Especially among large, liquid stocks
A portfolio allocated 50/50 between GPA strategy and
book-to-market strategy generates an average monthly
excess return of 0.75%, nearly doubling that of one-factor
strategy (table 3)
A value-weighted portfolio based on high GPA and
book-to-market generates an average monthly excess
return of 1.16%
This may be because GPA has a growth tilt, so it provides
a hedge for value factor
GPA differentiate good growth and bad value stocks:
value effect is stronger among unprofitable stocks, while
the profitability effect is stronger among growth stocks
Data
1962-2009 US stocks annual data are from Compustat,
with financial firms excluded
Paper Type:
Working papers
Date:
2009-12-30
Category:
Title:
Authors:
Source:
SSRN working paper
Link:
Summary:
This paper proposes a new value-to-price ratio which

incorporates shareholders option to liquidate the company when
business prospect looks bad. This new value measure can better
predict stock returns than the classic book-to-market ratios and
the residual-income-based ratios
Intuition
company)
sustainable
model
Volatility: the standard deviation of asset price for the
past five years
quintile of IV
Long high IV stocks in the top Vo/P quintile, shorts high

IV stocks in the bottom Vo/P quintile
significant 48%
the book value. In such case, the hedged return in
highest IV is 55% (panel C, table 4)
Robustness
The pattern is the same when measuring returns based
on 1- and 2-year returns (table 6) instead of 3 years
The pattern holds when measuring abnormal returns
using Fama-French factors, and when measuring IV over
the past 1- or 2- years instead of past 3 years
Discussions
Data
1976 2006 accounting data are from the 2009 version
of Compustats combined industrial annual data files;
stock prices, monthly returns, and monthly size-decile
returns from the CRSP database
Comments:
aper
Type:
Working papers
Date:
2009-11-23
Category: Earning surprise, value, growth

Title:
When Two Anomalies meet: Post-Earnings Announcement Drift and

Value-Glamour Anomaly
Authors:
Zhipeng Yan and Yan Zhao
Source:
SSRN Working Paper
Link:
Summary
:
Value and growth stocks display very different drift pattern after
positive/negative earnings surprises. A double sorting strategy can generate
abnormal returns
Definitions:
Earnings announcement abnormal returns (EAR) is the three-day [-1,
+1] abnormal returns
EAR does not equal earnings surprises
in the same direction
in the opposite direction
For the rest observations, the earnings surprises are equal or
close to zero (0 or less than 0.001)
Segmenting stocks
First sort stocks into value and growth stocks
Next sort value/growth stocks into six categories according to sign of
the most recent quarterly earnings surprise (+/-/0) and the direction
of the most recent earnings announcement EAR (+/-).
Value stocks are less volatile than growth stocks around earnings
announcement dates
When EARs are positive, growth stocks have larger positive EARs than
value stocks
When EARs are negative, growth stocks have larger negative EARs
than value stock
Stocks with
positive
earnings surprises
and
positive
EAR
Stocks with
negative
earnings
surprises and
negative
EAR
Value stocks
(Segment I): much

larger
drift
(Segment II): much

smaller drift
Growth stocks
(Segment III): much

smaller drift
(Segment IV): much

larger
drift
Different sensitivities to positive/negative earning surprises and EAR

A strategy that is long stocks in Segment I (value stocks with both
positive earnings surprises and positive EAR) and short stocks in
Segment IV (growth stocks with both negative earnings surprises and
negative EAR) generates annualized size-adjusted returns of 18%
with an annualized Sharpe ratio of 0.97
High hit ratio: about 80% of quarters produce a positive return
Most of the return comes from the long side
Robustness:
Data
Comment
s:
The finding is robust when different value measures are used:

book-to-market ratio (BM), earnings-to-price ratio (EP), cash
flow-to-price ratio (CP) and past growth in sales (SG)
The finding holds for stocks from different exchanges
The correlation of strategy returns with quarterly S&P 500 Index
returns is -0.06
June 1984 through December 2008 stock price and accounting data
Earning related data (The mean analyst forecasts, quarterly earnings
per share (EPS), earnings announcement dates and actual realized
EPS) are taken from I/B/E/S
Paper
Type:
Working papers
Date:
2009-10-15
Categor
y:
Title:
Authors: Andrea S. Au, Robert Shapiro

Source:
SSRN working papers
Link:
Summar
y:
Thispaperfindsthatfrommid2007to200903,correlationbetweenvalue/momentum,
betweenvalue/beta,andbetweenmomentum/betahavegreatlydeviatedfromhistoric
norm.
Portfoliomanagerneedstobeawareoftheunintendedbetsonmarket(beta)in
constructingcompositemodels
Marketconditionshavepushedthecorrelationbetweenvalueandmomentumfactorstoan
extremeinpast30years(Exhibit1)
Correlation
betweenvalue
andmomentum
Correlation
betweenvalue
andbeta
Correlation
between
momentum
andbeta
Historicalpattern
Correlation
betweenvalue
andmomentum
ranksat
4050%
Highvalue
stocksare
less
risky
(typically
havealsolow
beta)
High
momentum
stocksare
morerisky
(typically
havealso
highbeta)
Mid200720090
3
Correlation
betweenvalue
andmomentum
ranksat
70%
Thatis,
high
rankinvalue
factoralmost
surelylowrank
inmomentum
factor
Highvalue
stocksare
more
risky
(typically
havehighbeta
)
High
momentum
stocks are
less
risky
(typica
lly have low
beta )
Thecorrelation(value/beta,momentum/value)isafunctionofrecent6monthmarket
performance
Followingperiodsofextendedmarketunderperformance,thebetacorrelationsare
morelikelytoexhibitabnormalrelationships
Source:thepaper
Implicationsforbalancingvalue/momentumincompositemodel
Therecentperiodshaveseenanunusualmarket
Momentummeanslowerbeta:sotoomuchmomentumweightwillproducethe
unintendedbetagainstthemarket
Valuemeanshighbeta:sotoomuchweightinvaluewillproducetheunintended
betofbettingonthemarketrecovering
Data
December1978throughMarch2009Russell3000stockvalueandmomentum
loadingsarefromBarra
Comme
nts:
Paper Type:
Journal papers
Date:
2009-10-14
Category:
value, EVA, market timing
Title:
EVA: The bubble years, meltdown and beyond
Authors:
James Chong, Drew Fountaine, Monica Her and Michael Phillips
Source:
Link:
0094a.html
Summary:
The objective of this study is to examine whether information, if

any, is indeed embedded in economic value added (EVA) that
would prove useful in creating wealth, and in minimising risk, for
the investor during bull and bear market environments. Should
this be so, then past EVAs should contain information that aids in
the creation of stock portfolios with favourable future risk-return
structure.
EVA-based stock portfolios
were found to be similar to
the S&P500 Index, but yet
produced positive alphas across
sub-samples
, an indication that EVA contains information
beneficial to increasing shareholder wealth, even in bear
markets. On closer examination of the EVA-based stock
portfolios, it was suggested that i
n times of market upswings,
one should construct a portfolio based on lower EVA ranked
stocks, while switching to higher EVA-ranked stocks during
market downturns.
Comments:
Paper
Type:
Working papers
Date:
2009-10-14
Category:
Novel Strategies, Value, Growth, Style Timing, Insider Trading
Title:
Style Timing with Insiders
Authors:
Heather Knewtson, Richard Sias and David Whidbee
Source:
SSRN Working Paper
Link:
Summary:
Onecanuseaggregateinsidertradingtoimprovevalue/growthstyletiming.Ahigh
levelofinsiderbuying(selling)leadstoalower(higher)valuepremium
Definitionsandbackground
Aggregateinsiderdemandisdefinedforeachstockasthenormalizedexcess
demandofinsiders
Aggregateinsiderdemand=(#insiderpurchases#insidersales)/(#insider
purchases+#insidersales)
Valuepremiumisthereturnonthevalueportfoliolessthereturnonthegrowth
portfolio
During197808200405period(310months),valuepremiumaverages35
basispointspermonth,withlargevolatility(288basispointspermonth)and
negativein44%ofthemonths
Intuitionofusinginsiderdemandsforstyletiming:growthstocksmoresusceptibleto
mispricing
Growthstocksaremoresensitivetoinvestorsentiment
Insidersdetectsuchsentimentdrivenmispricingandtradeagainstit
Hencehigherinsiderdemandsforgrowthstocksindicatesthatgrowthstocks
areundervaluedandwilloutperform
Consequently,insidertradingpredictsthefuturereturnsofgrowthstocks
PerTable3,insidertradingdoesnotpredictreturnsofvaluestocks
Insiderpurchaselevelscanpredictmarketreturns(Table5)
Aggregateinsiderdemandforecastsmarketreturns
Themonthlymarketreturnaverages1.628%followinghighinsiderdemand
Bycontrast,followinglowinsiderdemand,themonthlymarketreturnisonly
0.203%
Butsuchpredictingpoweronlyworksongrowthportfolios
Aggregateinsiderdemanddoesnotforecastsubsequentvaluestockportfolio
returns
Valuestocksoutperformsthegrowthportfolioby1.122%inmonthsfollowing
lowinsiderdemand
Growthstocksoutperformvaluestocksby0.440%inmonthsfollowinghigh
insiderdemand
Ahigherlevelofinsiderbuying(selling)predictsalower(higher)valuepremium
Aonestandarddeviationincreaseinaggregateinsiderdemandforecastsa53
basispointdecline(6.54%annualized)intheexpectedvaluepremium
Howtodetectcurrentdemandlevelishigh/low/medium:aninvestorcandefine
thelow,medium,andhighbreakpointseverymonthbasedoninsidertradingin
thepriorfiveyears
Inthemonthfollowinglowinsiderdemandsignals,valuestocksoutperform
growthstocksby1.156%(14.8%annualized)onaverage
Inthemonthfollowinghighaggregateinsiderdemand,growthstocks
outperformvaluestocksby0.44%(5.4%annualized)
Monthlyreturns
Lowinsider
demand(year1,
year6)
Mediuminsider
demand(year1,
year6)
Highinsider
demand(year1,
year6)
Marketreturn(t)
0.27%
2.10%
1.31%
Valuereturn(t)
1.06%
2.08%
0.99%
Growthreturn(t)
0.09%
2.02%
1.42%
Value
premium(t)
1.16
0.06%
0.44%
Robustness
Thisfindingisrobusttothevaluespread,whichistherelativevaluationof
growthandvaluestockportfolios.Itiscalculatedasthe(median
booktomarketratioforvaluestocks)/(medianbooktomarketratioforgrowth
stocks)
Alsorobusttosubperiods(197901199109and199110200406)and
momentum
Data
SECownershipReportingSystemandThomsonFinancialsValueAdded
InsiderDataFeedareusedforinsidertradingdata
CRSPandCOMPUSTATareusedforstocklevelvariablesforthesample
periodof19782005
Comments
:
Paper
Type:
Working papers
Date:
2009-10-14
Category:
Title:
Authors:
Andrea S. Au, Robert Shapiro
Source:
SSRN working papers
Link:
Summary: This paper finds that from mid-2007 to 200903, correlation between
value/momentum, between value/beta, and between momentum/beta have
greatly deviated from historic norm.
Portfolio manager needs to be aware of the unintended bets on
market(beta) in constructing composite models
Market conditions have pushed the correlation between value and
momentum factors to an extreme in past 30 years (Exhibit 1)
Correlation
between value
and
momentum
Correlation
between
value and
beta
Correlation
between
momentum
and beta
Historical
pattern
Correlation
between value
and
momentum
ranks at
-40-50%
High value
stocks are
less risky
(typically
have also low
beta )
High
momentum
stocks are
more
risky
(typicall
y have also
high beta )
Mid-2007-20
0903
Correlation
between value
and
momentum
ranks at
-70%
That is,
high
rank in value
factor almost
surely low
rank in
momentum
factor
High value
stocks are
more
risky
(typicall
y have high
beta )
High
momentum
stocks are
less
risky
(typicall
y have low
beta )
The correlation (value/beta, momentum/value) is a function of recent

6month market performance
Following periods of extended market underperformance, the beta
correlations are more likely to exhibit abnormal relationships
Implications for balancing value/momentum in composite model
The recent periods have seen an unusual market
Momentum means lower beta: so too much momentum weight will
produce the unintended bet against the market
Value means high beta: so too much weight in value will produce the
unintended bet of betting on the market recovering
Data
December 1978 through March 2009 Russell 3000 stock value and
momentum loadings are from Barra
Comment
s:
Paper Type:
Working papers
Date:
2009-08-31
Category:
Value, Novel strategies, enterprise values
Title:
Enterprise multiple factor and the value premium
Authors:
Tim Loughran and Jay Wellman
Source:
FMA Conference 2009
Link:
http://www.fma.org/Reno/Papers/empaper20090112.pdf
Summary:
Enterprise value multiple (EV/EBITDA) is a better predictor of

stock returns than commonly-used Book-to-market(BM)
After adjusting for January effects, the risk factor created with EV
multiple brings in 5.64% annual return compared to 3.6% when
using BM
Definitions:
Enterprise value (EV) is an economic measure reflecting
the market value of the company. EV is commonly used
to value a company for merger and acquisition purposes
Compared with book value, all the components of EV are
market, not book values
EV multiple = (Market value of common stock+ preferred
equity +debt-cash) /EBITDA
EV multiple succeeds where BM fails
BM factor fails for 60% largest stocks, which account for
the 94% of the total market cap. EM is a highly significant
effective in this segment
Per Table V, with larger stocks during the 1986-2007
subperiod (264 months), BE/ME becomes insignificant
with a coefficient of 0.02, while EV multiple is highly
significant with a coefficient of -0.36
Though 1963-1985, the two measures have very similar
results
EV multiple better captures the value effect than BM
EV multiple is better in explaining the 25 Fama-French
size and BM portfolios (Table 9)
EV multiple is better in explaining the mutual fund
performance (Table 10)
Constructing portfolio: long on high EV multiple stocks
and short on low EV multiple stocks
Brings 5.6% annual returns after controlling for

January effect (same return when January effect
not adjusted for)
By contrast, BM annual return is 3.6% after
controlling January effects (4.9% when January
effect not adjusted for)
Data
The data includes return data from CRSP and accounting

data from COMPUSTA and covers the time period 19622007
Comments:
aper Type:
Working papers
Date:
2009-05-08
Category:
Asset intensity, value, ROA
Title:
Asset-Intensity and the Cross-Section of Stock Returns
Authors:
Raife Giovinazzo
Source:
University of Chicago Paper
Link:
http://home.uchicago.edu/~rgiovina/Giovinazzo-asset-intensityand-stock-returns-2008-Jan.pdf
Summary:
Firms with heavy (light) asset-intensity have lower (higher)

subsequent stock returns
Definitions of asset intensity
Asset intensity is defined as operating assets/sales
Intuitively, asset intensity measures the amount of
investment required to grow sales (and indirectly profits)
High intensity means that firms are less effective
Higher asset-intensity, lower future returns
A zero-cost long/short portfolio based on this factor
generates risk-adjusted returns of 0.49%/month (6% per
annum)
Portfolio annually rebalanced in every July
Works better within growth stocks
Within the growth portfolio, such strategy earns a
.63% per month risk adjusted returns (7.5% per
annum, per Table IV)
Asset-heavy stocks miss consensus analyst earnings
forecasts 16% more often than asset-light stocks,
suggesting investor forecast error is the source of the

return difference
Robustness
The asset intensity factor works in different stock
segmentation methods (size, within industries)
It also works after controlling for investment, accruals,
and return on equity.
Concerns
Any thing new here besides a novel name? The definition
of asset intensity (operating assets/sales) looks a lot
like the commonly used sales/share
The difference may come from using operating assets
instead of total assets? Yet the new factor is robust after
controlling for accruals
Data
This study covers US stocks from 1963/07 to 2006/06.
ADRs, REITS, financials, and stock indexes are excluded.
All stocks must have at least a $25mm market value. All
the accounting variables are from Compustat.
Paper
Type:
Working papers
Date:
2009-05-08
Category: Quant factor performance momentum, value, size, P/E

Title:
Is there momentum in cross-sectional anomalies
Authors:
Jarkko Peltomaki and Emilia Peni
Source:
EFA-2009 conference
Link:
/S-2-30.pdf
Summary
:
Thepapershowsthereexistsmomentuminquantfactors(eg,Size,P/BandP/E)
1monthand3monthreturns.
TacticalAssetAllocation(TAA)basedonquantanomalies
Theauthorstreateachquantfactorportfolioasanassetclass
Factorportfoliosarelongshortzeroinvestmentportfolioswithrespectto
acertainfactor
TheTAAstrategyinvestsinthebestperformingfactorofpast1monthor3months
TAAstrategiesbasedon1monthand3month
TacticalHML,SMBandP/Egoeslong(short)ontheindividualfactorifthe
previousmonthsfactorreturnispositive(negative)
Performancesareevaluatedusinga5factormodel(Carhart4factorandP/E
factor)
Strategy
3monthwinner
1month
winner
Tactical
SMB
Tactical
HML
Tactical
P/E
monthly5factor
alphas
1970200
7
0.13%
0.26%
0.42%
0.31%
0.25%
1970199
0
0.14%
0.22%
0.49%
0.67%
0.01%
1990200
7
0.09%
0.27%
0.24%
0.23%
0.46%
Concerns
Giventhetransactioncostandrequiredturnover,wedoubttheimplementabilityof
TAAstrategies,particularlytheTacticalSMB/HMLandP/Estrategieslistabove
Butthefindingsheremayhelpquantmanagersdeterminetheirfactorweightings.
ItalsointerestingtonotethatP/Eisshowingmuchhighermomentumin
19902007thanothertwofactors
Data
Thesampleperiodcovers19702007
P/E,SMB,HMLandMomentumfactorreturnsaredownloadedfromKenneth
Frenchswebpage
Paper
Type:
Journal Papers
Date:
2009-04-20
Catego
ry:
value, investment
Title:
Interpreting the Value Effect Through the Q-Theory: An Empirical Investigation
Author
s:
Yuhang Xing
Source
:
Link:
http://rfs.oxfordjournals.org/cgi/gca?gca=21/4/1455&gca=21/4/1653&gca=21
/4/1689&gca=21/4/1767&sendit=Get+All+Checked+Abstract(s)
Summ
ary:
This article interprets the well-known value effect through

the implications of
standard Q-theory.
An investment growth factor, defined as the difference in
returns between low-investment

stocks and high-investment stocks, contains
information similar
to the Fama and French (1993) value factor (
HML
), and can
explain
the value effect about as well as
HML
. In the cross-section,
portfolios of
firms with low investment growth rates (IGRs)

or low investment-to-capital
ratios have significantly higher

average returns than those with high IGRs or
high investment-to-capital
ratios.
The value effect largely disappears after
controlling
for investment, and the investment effect is robust against
controls
for the marginal product of capital. These results

are consistent with the
predictions of a standard Q-theory model

with a stochastic discount factor.
aper Type:
Working Papers
Date:
2009-02-25
Category:
Title:
Authors:
Source:
SSRN Working Paper
Link:
Summary:

yields higher returns. In low-volatility stock index and
momentum stocks generate higher returns
regime-switching model (for the Carhart
four-factor model) based on Markov Chain Monte
Carlo Methods
In high volatility regime, the market volatility is
2.6 times higher than the low volatile regime
profitable
Data
1927-2004 data for index returns, the
high-minus-low (HML) factor, the small-minus-big
(SMB) factor, the momentum factor (UMD) and the
risk-free rate (RF) are from the Fama and French
data library
Paper Type:
Working Papers
Date:
2009-02-25
Category:
Title:
Authors:
Source:
SSRN Working Paper
Link:
Summary:

As an

beta, and alpha
Asset class beta
Style betas
Strategy beta
Alpha
and asset classes
Annualized
premium
Annualized
volatility
Sharpe ratio
Value
1.6%
8.3%
0.2
Size
0.6%
7.7%
0.08
Momentum
0.9%
10.3%
0.09
Credit spread
(long on Merrill
Lynch US
corporate (AAA)
and short on US
treasury )
0.3%
1.4%
0.18
Term spread
2.8%
7.3%
0.39
Merger arbitrage
(long on the
target stocks and
short on the
acquirer stocks)
3.2%
3.5%
0.92
Convertible
arbitrage (long
on the
convertible bond
2.0%
6.4%
0.31
Styles
Strategies
and short on the

underlying stock)
Asset classes
MSCI USA
3.4%
15.5%
0.22
MSCI Emerging
3.2%
24.6%
0.13
Bonds
1.7%
3.7%
0.46
Diversifying based on the risk premia of styles, strategies

and asset classes
The strategy is
equally
-weighted in all the styles,
strategies and asset classes in above table
There is monthly rebalancing between 1995 and
2008
The strategy is compared to the classical 60/40
strategy, which is 60% long on MSCI World and
40% long on Domestic US bonds
The strategy beats the classical 60/40 strategy in
terms of Sharpe ratio (0.94 vs. 0.26)
The strategy is also superior in extreme event
months such as Asian Crisis, LTCM, 9/11, etc.
(Table 7)
Data
The paper uses data for the period of 1995 to
2008. MSCI indices and Merrill Lynch Domestic
Master Bond Index are from datastream.
Paper Type:
Journal Papers
Date:
2009-01-30
Category:
Title:
Authors:
Source:
Link:
Summary:
This paper explores

To

Paper Type:
Working Papers
Date:
2008-12-20
Category:

Title:

Authors:
Source:
SSRN working paper
Link:
Summary:

investment
strategy that combines Value and Momentum factors generates

positive returns with given tracking error. This investment
universe is the 177
in US, UK and Japan
Sharpe ratio is lower than the market index Sharpe
ratio, Table 1) and may display prolonged periods
of underperformance
Comments:
months returns.
the term structure (yield difference between 10
year and 3 month US t-bills)
the aggregate BM ratio of the market
structure, and value spread increases with BM ratio
(Table2)
costs.
1. Discussions
reported.
None of the returns are reported in a risk-adjusted
format. The paper only reports average absolute returns
and the return of the market portfolio.
From Table 13, this Black-Litterman framework adds
value when the tracking error is at 400bps and 500bps,
but not at 300bps
2. Data
dollar values.
Paper Type:
Working Papers
Date:
2008-11-05
Category:
Industry relative book/market ratio, value strategy
Title:
Competition, Productivity and cross-section of expected returns
Authors:
Robert Novy-Marx
Source:
Link:
http://faculty.chicagogsb.edu/robert.novy-marx/research/ROCat
XR.pdf
Summary:
The paper shows that stocks industry-relative

book-to-market ratio produces higher Sharpe Ratio (1.29
per year) than Fama-French factors together (0.99 per
year), and than the normal book-to-market ratio (0.54
per year)
The model proposed by the author suggest that
intra-industry variation in book-to-market is correlated
with expected returns while inter-industry variation is
not.
Stocks industry-relative book-to-market is simply defined
as (stocks B/M) / (industry average B/M)
The book-to-market effect is strong and monotonic within
industries, but weak and non-monotonic between
industries.
The intuition: the book-to-market effect depends on the
industries concentration and capital intensity. Firms
invest into new capital when the BM ratio in their

industries is increasing in industry concentration and
decreasing in capital intensity, hence the book-to-market
effect should be mostly an intra industry phenomenon.
Comments:
Paper
Type:
Working Papers
Date:
2008-10-15
Category:
Momentum, value, market state, book-to-market profits
Title:
The Information in Book-to-Market Prots for Momentum
Authors:
Ryan McKeon
Source:
FMA Conference 2008
Link:
http://www.fma2.org/Texas/Papers/McKeon_value_momentum_interact.
pdf
Summary:
During August 1962 to July 2005, momentum profits tend to be lower if

they are preceded by changing market states, e.g., a shift from a "value
period" (where value stocks dominate growth stocks) to a "growth
period" (where growth stocks dominate value stocks).
State of the market measured as book-to-market profits
Change in the book-to-market profits identify changes in
market states
I.e., periods when low book-to-market ("growth") stocks
dominate and periods when high book-to-market ("value")
stocks dominate
Reasons why market states influence momentum profits
If people overvalue some securities during the portfolio
construction period and correct for this error during the
holding period, we would observe momentum throughout
the evaluation period and also throughout the holding
period. But across periods, we would see reversals, i.e.,
low momentum profits.
Also, changes in expected returns due to changing market
conditions can lower momentum profits.
A driver of the book-to-market effect is value stocks

whose market values increase dramatically and so become
growth stocks, and growth stocks whose values decrease
and become value stocks" as quoted from Fama and French
(2008), i.e., book-to-market effect is partially driven by
momentum
Lower momentum profits following changing market conditions
Methodology: Regress momentum portfolio returns over
absolute change in book-to-market portfolio returns from
short term (2 months) to long term (6 to 18 months prior).
The results indicate that the absolute HML-change is
strongly negatively related to future momentum profits
(Table 3).
For periods after a state change, the 6-month momentum
profits is 2.5% lower.
Comments:
Paper Type:
Working Papers
Date:
2008-10-15
Category:
momentum, value, Fraud Detection Model, Stock Over-valuation
Title:
Identifying Overvalued Equity
Authors:
M. D. Beneish, D. Craig Nichols
Source:
SSRN working paper
Link:
papers.ssrn.com/sol3/papers.cfm?abstract_id=1134818
Summary:
This paper finds that stocks that are detected as overvalued by

PROBM, a model of overvalued equity, experience an annual
abnormal return of -9.2% over the next 12 months.
This paper also defines an overvaluation score (O-Score)
that
boasts one-year-ahead abnormal return of -27%. The O-score
combines factors include
1. earnings overstatement (PROBM, defined below)
2. prior merger activity (the firm has engaged in an acquisition in
the prior five years)
3. excessive stock issuance
4. manipulation of real operating activities (cash flow from
operations to total assets)
Proposed reason: managers tend to destroy value for

overvalued firms
Based on agency theory of overvalued equity
The authors draw on Jensens (2005) agency
theory of overvalued equity, which states that
managers react to overvaluation in a way to
destruct value which results in a fall in stock price
subsequently.
Definition of PROBM
It uses 8 financial statement variables capturing
manipulation of earnings, incentives related to
meeting benchmarks, and earnings overstatement
Specifically, per Table1, PROBM = -4.84 +
.920*DSR + .528*GMI + .404*AQI + .892*SGI +
.115*DEPI - .172*SGAI + 4.679*ACCRUALS
-.327*LEVI
They include the change of receivable/sales,
change of (gross margin)/to sales, change of
(selling, general, and administrative
expense)/(sales), change of sales, change of
(depreciation/depreciable base), change of
(non-current assets other than PPE)/(total assets),
change of (income before extraordinary itemsoperating cash flows)/( total assets), change of
(long-term debt +current liabilities)/(total assets)
High PROBM scores, low abnormal returns and robust to
known alpha factors
Table 3 reports the "hedge" portfolio returns on
PROBM and other variables associated with
overvalued equity. Sample stocks are first grouped
into ten deciles based on these variables. Then,
hedge portfolio returns are defined as long decile 1
portfolio and short decile 10 portfolio.
Table 3 Panel B: There is more variation within
deciles of accruals, momentum, and B/P
conditional on high PROBM
The performance of the flagged subsample (i.e.,
stocks with high PROBM = high likelihood of
earnings management) is systematically worse
than its not-flagged counterpart in each of the 60
deciles.
O
v
e
r
v
a
l
u
a
t
i
o
n
v
a
r
i
a
b
l
e
s
P
R
O
B
M
A
c
c
r
u
a
l
s
M
o
m
e
n
t
u
m
B
o
o
k
V
a
l
u
e
/
P
r
i
c
e
Comments:
High PROBM score with merger activity, low abnormal

return
For firms with high PROBM scores (predicted as
potential frauds), those that have merger activity
in the prior five years experience poorer
one-year-ahead abnormal returns (-11.55%).
This performance worsens if the merger includes
public targets (-12.67%), and if the acquisitions
were paid in stock (-13.31%)
High PROBM score with excessive stock issuance, low
abnormal return
High PROBM along with excessive stock issuance
and manipulated operating activities better
predicts overvaluation.
1. Discussions
If anything, the whopping -27% return spread of O-score only
make people question how realistic the papers findings are. It
seems too big to be true, and we guess it may well have large
small cap biases in it.
Anything new here? The 8 ratios included in the PROBM definition

(see above) do not seem to be based on any new data items.
2. Data
All firms that are in Compustat files for the period 1993 to 2004,
except for financial services firms and small firms (less than
$100,000 in sales or in total assets or with market capitalization
of less than $50 million). Additional to the financial statement
data from Compustat, the paper uses stock return data from
CRSP.
Paper Type:
Working Papers
Date:
2008-08-13
Category:
statistic methodology,value, Expected return estimation and

corporate bond yields
Title:
Expected Returns, Yield Spreads and Asset Pricing Tests
Authors:
Murillo Campello, Long Chen and Lu Zhang
Source:
Review of Financial Studies
Link:
http://rfs.oxfordjournals.org/cgi/reprint/hhn011?ijkey=A3wwgpv
qXFZc5Vm&keytype=ref
Summary:
The paper estimates expected equity returns using firm-specific

corporate bond yields and uses them instead of realized returns
in asset pricing tests.
The forward-looking nature of the risk premium
embedded in yield spreads are used to estimate expected
stock returns.
With estimated expected returns, market beta is
significantly priced in the cross-section of expected
returns and there is no evidence of positive momentum
profits.
Size and book-to-market factors are significantly positive
and counter-cyclical.
Comments:
Paper
Type:
Working Papers
Date:
2008-07-20
Category:
Value Investing and Market Cycle
Title:
Variation in Signal Effectiveness: Sources of Return, Sources of Risk
Authors:
Peter Rathjens
Source:
Link:
http://www.arrowstreetcapital.com/pdf/Variation_in_Signal_Effectiveness.p
df
Summary:
Value strategy profits demonstrates medium-term momentum,

long-term reversal
A regression model based on past returns shows value
strategy shows momentum in the medium-term (past 12
months) and reversal in the long-term (13 through 48
months prior)
But implementation based such finding may be vulnerable to high
turnover
One caveat mentioned in the paper is that the
implementation of such a strategy can be costly enough to
wipe out profits.
The costs may accrue from periods of high turnover when
strategy based trades could have a significant market
impact.
Unclear methodology
Note that the paper doesnt explain the sample used in
empirical analysis, nor does it explain the regression model
used, how the value style metric was constructed and the
data source used in the analysis.
Comments
:
Paper
Type:
Working Papers
Date:
2008-07-20
Category:
Value, small cap stocks, emerging markets, Global markets
Title:
Consistency of the Value Premium across Asset Classes
Authors:
Yijie Zhang
Source:
Link:
http://www.arrowstreetcapital.com/pdf/Consistency_of_the_Value_Premiu
m.pdf
Summary:
Comments
:
Definition of value premium:

Value premium defined as return of a portfolio that is long
value stocks and short growth stocks (VmG portfolio). Value
and growth stocks are determined based on some common
screens as book to price ratio, the earnings yield, and the
dividend yield.
Value premium do exist in other asset classes
Including small stocks and emerging markets.
The value premium is present both in large and small stocks,
and both in developed and emerging markets. The global
annual value premium is 2.15%.
Expanding value strategy to other asset classes can lower risks
Including these asset classes in a portfolio reduces the
variation (risk) in value premium.
Value premiums tend to be positively correlated among asset
classes and markets. The correlations are weaker in emerging
markets than in developing markets.
Variation in value premiums can be reduced by restricting the
global VmG (long value and short growth) portfolio beta. This
also reduces the correlation between asset classes.
The analysis is based on data that covers 1996 through March 2008.
Paper Type:
Working Papers
Date:
2008-06-27
Category:
Title:
Authors:
Source:
Link:
Summary:

issuance effect.
1% critical level
5% critical level
Jump Frequency
60% (45% positive

+ 15%
negative )
68% (51%
positive +
17% negative )
Average positive
jump Size
19.89%
19.42%
Average negative
jump Size
-19.82%
-19.08%

jumps
negative jumps)
Portfolio Return
(per annum)

continuous returns
(t-stats)
high-low spread
with jump
returns (t-stats)
Size
3.20% (1.28)
-8.90% (-9.71)
Liquidity
0.32% (0.15)
7.57% (14.46)
Book to market
3.27%(4.19)
6.65% (2.48)
Comments:
1. Discussions
),
multiple levels.
2. Data
Paper
Type:
Working Papers
Date:
2008-06-08
Category:
Value, industry-relative B/M ratio
Title:
Productivity and the Cross Section of Expected Returns
Authors:
Robert Novy-Marx
Source:
University of Chicago Working paper
Link:
http://www.anderson.ucla.edu/Documents/areas/fac/finance/ROCatXR.pdf
Summary:
The paper documents that a stocks industry-relative book-to-market

(B/M) ratio can better predict stock returns than the normal B/M ratio,
and value industries do not provide higher returns than growth industries.
Industry-relative B/M ratio is defined as
Industry-relative B/M ratio = BM
ij
/BM
i
where BM
ij
is the B/M ratio of firm
j
in industry i
. BMi is the B/M
ratio of industry
i.
Cross all stocks, industry relative B/M portfolio produces high

Sharpe ratios
The strategy is to long (short) stocks with high (low)
industry-relative book-to-market ratio
The portfolio has a Sharpe ratio of 0.738.
A strategy that rank B/M within industries works better than the
normal B/M strategy
The strategy is within each industry, long (short) stocks
with high (low) B/M ratio
The portfolio has a higher Sharpe ratio compared to the
normal book-to-market high-low portfolio (0.583 vs. 0.081),
but lower than the industry-relative B/M strategy (0.738)
Value industries do not provide higher returns than growth
industries.
The strategy is to long high B/M industries and short low
B/M industries
Suggesting book-to-market does not work on Industry level
Robustness: the firm level book-to-market is decomposed into
industry relative book-to-market and industry level
book-to-market. As implied by the model the latter one is
insignificant on the cross-section of stock returns (Table 3).
The paper develops an alternative book-to-market measure that is
superior to classical B/M ratio. Our concern is that we can not find
sufficient discussion regarding the reason behind the findings.
2. Data
Monthly returns are taken from CRSP and book-to-market values are
created using COMPUSTAT for the time period 1973-2007.
Paper Type:
Working Papers
Date:
2008-05-20
Category:
Value effect, industry competitiveness/concentration
Title:
Real and financial booms and busts
Authors:
Gerard Hoberg, Gordon Philips
Source:
Oxford University working paper
Link:
http://www.finance.ox.ac.uk/NR/rdonlyres/E899C154-7731-4E9A
-8D85-6056F445AFDB/0/20070522GordonPhillips.pdf
Summary:
It has been documented that higher valuation (industry boom)

leads to higher investment and subsequent lower stock returns
(industry bust).
This paper finds that at industry-level, such value
effect (i.e., low P/B, low investment firms outperform) is much
stronger in competitive industries than in concentrated industries.
The reason: company management tends to investment
more when firms valuation is higher, and firms in
competitive industries are more likely to suffer from
over-competition. Consequently, a higher investment in
these industries is more likely to cause vicious competition
and lower returns.
Competitiveness/concentration is measured as the
proportion of total sales for top 1/3 firms (adjusted for the
number of employees per firm in that industry)
Within competitive industries,
yields a 4% lower risk-adjusted return (size, value,
beta, momentum) than lower-valued industries.
At stock level, the difference is monotonic and is
10%+.
Similar pattern for operating cash flows: higher
valuation, lower operating cash flows.
Similar pattern for industries with declining
concentration
Within concentrated industries,
yields a <2% lower risk-adjusted return than lower
valued industries
At stock level, the difference is not monotonic.
Both stock returns and cash flows are low following high
industry valuation, high industry investment and new
industry financing
Comments:
1. Discussions
The conclusion here should be helpful for building sector-level
model and for refining the value components of industry
selection/rotation strategies.
2. Data
Firm fundamental data and stock price data are obtained from the
merged Compustat-CRSP database. The time-series sample
covers 1972-2004.
Data for industry concentration is obtained from Compustat,
Commerce Department (Herfindahl data) and the Bureau of Labor

Statistics (BLS). A Herfindahl-Hirschman index (HHI) is calculated
and industries in the highest (lowest) tercile of HHI are classified
as concentrated (competitive).
Paper Type:
Working Papers
Date:
2008-04-09
Category:
Value, order imbalances
Title:
Book/Market Fluctuations, Trading Activity, and the Cross-Section

of Expected Stock returns
Authors:
Amber Anand, Avanidhar Subrahmanyam
Source:
UCLA working paper
Link:
http://www.s1ubra.org/bmrchg3.pdf
Summary:
The paper finds that for stocks migrating from growth to value
(ie, large increase of B/P), those that experience negative small
order imbalances generate 4.2% higher annual returns. This
suggests that small traders tend to over-sell loser stocks and
their behavior can be used as contrarian sign.
Small order imbalances can predict stock returns when
combining with B/P changes.
Stocks that shift from growth to value (large
increase of B/P) and that experience negative small
order imbalances (ie, a strong net selling by small
traders) have significant future returns of 0.35%
per month (4.2% annually)
Meaning small traders tend to over-sell loser stocks
Large order imbalance and book -to-market changes dont
have a predictive power on future average returns
meaning that trades initiated by institutions dont
convey information on future returns
Firms that shift from value to growth (ie, undergo
extreme book-to-market decreases) have lower
initial market capitalizations. Firms shift from
growth to value (ie, undergo large book-to-market
increases) have higher initial market capitalizations
This may be attributed to effects of temporary
mis-pricing of the market
Comments:
1. Discussions
This paper studies the so-called "style migrants", (stocks with
large changes in their style characteristics,
size/book-to-market/momentum) from a different angle. We
covered several related papers before, eg, Style Migration and
the Cross-Section of Average Stock Returns,
(
),
which found that such stocks seem under-valued as they exhibit a
covariance with the style cohort. In one other paper, Style
Migration in the European Markets
(
), it is shown that style
migrants yields highest raw and risk adjusted returns, and stocks
One question we cannot answer is, why there is only systematic
result for book-to-market increases and but not for
book-to-market decreases.
2. Data:
The sample includes all the common stocks listed on NYSE
between the years 1983 and 2005 as well as NASDAQ stocks for
the years 1993-2005.
Return and market values are taken from CRSP while the book
value is calculated from COMPUSTAT. Intraday tick data is taken
from ISSM and TAQ databases. Institutional ownership data
comes from 13-f filings in Thomson Financial database.
Paper Type:
Journal papers
Date:
2008-03-10
Category:
Value and Growth Strategies
Title:
Risk-Adjusted Performance of Value and Growth Strategies: The

Effect of Monetary Policy
Authors:
TeWhan Hahn; Michelle ONeill; Judith Swisher
Source:
THE JOURNAL OF INVESTING, Fall 2007
Link:
http://www.iijournals.com/JOI/default.asp?Page=2&ISS=24190&
SID=694767
Summary:
Active money managers provide returns through two types of
activities: stock selection and market timing. This study gives

new insights into both, which can improve portfolio returns as
well as client understanding of investment performance. We
measure the sensitivity of stock returns to several
macroeconomic factors and examine the risk-adjusted return
performances of four popular value and growth investment
strategies. Sensitivity to the macroeconomic factors differs across
the strategies, depending on how value (or growth) is defined.
Thus, not all value (nor all growth) portfolios will perform the
same under a given set of macroeconomic conditions. Also,
sensitivity to a given macroeconomic factor differs, varying from
positive to negative to non-existent, depending on monetary
policy. So a particular macroeconomic risk factor does not
consistently affect portfolio performance. Last, how value or
growth strategies perform relative to the general market also
depends on monetary policy: after controlling for several
we find that all four (only two) value
portfolios earn positive risk-adjusted returns under expansive
(restrictive) monetary policy regimes and growth and growth
portfolios earn negative riskadjusted returns only under
expansive monetary policy regimes.
Comments:
Paper Type:
Journal papers
Date:
2008-03-10
Category:
Value Premium, Growth
Title:
The Anatomy of Value and Growth Stock Returns
Authors:
Eugene Fama and Kenneth French
Source:
Financial Analysts Journal, Winter 2007
Link:
http://www.cfapubs.org/page/upcomingArticles?journalCode=faj
Summary:
We break average returns on value and growth portfolios into

dividends and three sources of capital gain
, (i) growth in book
equity primarily due to earnings retention, (ii) convergence in
price-tobook ratios (P/B) due to mean reversion in profitability
and expected returns, and (iii) upward drift in P/B during
1927-2006.
The capital gains of value stocks trace mostly to
convergence:
P/B rises as some value firms become more
profitable and move to lower expected return groups. Growth in
book equity is trivial to negative for value portfolios, but it is a

large positive factor in the capital gains of growth stocks.
For
growth stocks, convergence is negative:
P/B falls because growth
stocks do not always remain highly profitable with low expected
returns. Relative to convergence, drift is a minor factor in average
returns
Comments:
Paper Type:
Journal papers
Date:
2008-03-10
Category:
Value Effect, Q-Theory
Title:
Interpreting the Value Effect Through the Q-Theory: An Empirical

Investigation
Authors:
Yuhang Xing
Source:
Review of Financial Studies, September 28, 2007
Link:
http://rfs.oxfordjournals.org/cgi/content/abstract/hhm051v1
Summary:
This article interprets the well-known value effect through the

implications of standard Q-theory. An investment growth factor,
defined as the difference in returns between low-investment
stocks and high-investment stocks, contains information similar
to the Fama and French (1993) value factor (HML), and can
explain the value effect about as well as HML. In the
cross-section, portfolios of firms with low investment growth rates
(IGRs) or low investment-to-capital ratios have significantly
higher average returns than those with high IGRs or high
investment-to-capital ratios. T
he value effect largely disappears
after controlling for investment, and the investment effect is
robust against controls for the marginal product of capital
. These
results are consistent with the predictions of a standard Q-theory
model with a stochastic discount factor.
Comments:
Paper Type:
Journal papers
Date:
2008-03-10
Category:
Value, Peg Ratios
Title:
Understanding the PEG Ratio
Authors:
Mark A. Trombley
Source:
The Journal of Investing, Spring 2008
Link:
http://www.iijournals.com/JOI/default.asp?Page=2&ISS=24559&
SID=701953
Summary:
The price-earnings-to-growth, or PEG, ratio is widely used by

both individual investors and professional portfolio managers.
This article explores the relationship between the PEG ratio and
its determinants. The main conclusions are that (1) higher PEG
ratios are consistent with correct valuation for firms with
relatively low growth, for firms with more persistent high growth,
and for firms with low cost of capital, and (2) PEG ratios
frequently should exceed the conventional 1.0 benchmark for
correctly valued firms, especially those with low cost of capital.
The article recommends against using PEG as a tool to choose
among different types of firms and concludes that the best use of
PEG is for within-industry screening
when firms are likely to have
similar cost of capital and similar growth prospects.
Comments:
Paper Type:
Working Papers
Date:
2008-02-18
Category:
Title:

Authors:
Source:
SSRN working paper
Link:
Summary:


value strategies.
value strategies yield produce annualized returns of
7.4%, 5.0% and 4.4%, respectively.
transaction costs.
Comments:
1. Discussions
2.Data
Paper Type:
Working Papers
Date:
2007-10-29
Category:
Style transition, relative performance of growth and value
Title:
Growth at Parity to Value
Authors:
Credit Suisse research
Source:
Bloomberg terminal
Link:
on Bloomberg terminal, type NSN JQFK1S3PWT1F <go>
Summary:
Currently growth stocks are cheap compared with value

stocks when measured by valuation gauges such as
price/earning and price/cash flow.
As economy looks slowing down, we are likely witnessing a
style transition from value to growth, so growth is likely to
lead value stocks.
In fact, "this year, we saw the ending of the value cycle as
growth outperformed value across all
capitalizations. This
marked an end to the longest value cycle since 1977. "
Comments:
Paper Type:
Journal papers
Date:
2007-09-05
Category:
Market P/E Ratio, value
Title:
The Market P/E Ratio, Earnings Trends, and Stock Return

Forecasts
Authors:
Robert A. Weigand; Robert Irons
Source:
The Journal Of Portfolio Management, Summer 2007
Link:
http://www.iijournals.com/JPM/default.asp?Page=2&ISS=24026&
SID=690610
Summary:
This is an analysis of periods characterized by high price/equity

ratios, using measures of the market P/E based on both one-year
trailing earnings and ten-year smoothed earnings.
High P/E
periods are preceded by accelerating equity returns and declines
in both nominal interest rates and stock market volatility.
Stock
returns following a high P/E period are marginally higher when
earnings growth remains strong and interest rates continue
falling. Even when these mitigating factors are in place, however,
real returns are appreciably lower for decades following high
levels of the market P/E ratio.
The worst case scenario for future
equity returns occurs when P/E ratios expand during periods of
strong earnings growth. Once earnings growth slows, equities are
left profoundly overvalued, which leads to prolonged periods of
low and sometimes negative real returns.
The findings suggest
that U.S. equities are currently priced to deliver real returns that
are positive, but well below their historical average.
Comments:
Paper
Type:
Working Papers
Date:
2007-08-23
Category:
Style timing, value, growth
Title:
The Profitability of Style Rotation for Value and Growth Stocks Along Their
Earnings and Momentum Life Cycle
Authors:
Ron Bird, Lorenzo Casavecchia
Source:
Link:
Summary: This paper proposes a strategy

to rotate portfolio between value and growth
stocks in European markets.In essence, this strategy

combines
timing the cycle of each stock by its market sentiment (momentum)

and financial health
(based on Principal component analysis of several
accounting variables)
timing the macro
cycle by
selecting various macroeconomic variables.
Sales-to-price
price is used to define value and growth portfolios. The macro
factors used are
monthly unexpected inflation (UI)
difference in yield to maturity between Baa and Aaa corporate bonds
(Baa Aaa)
monthly dividend yield on European markets ex Financials (EuroDY)
monthly change in the spread between 10 year Government Bond
and 3 month Treasury Bill yield(YTM)
month Treasury Bills returns less the monthly rate of inflation (RTB)
the monthly variation in the value premium
Key results:
When use only macro factors, this style rotation strategy generates
22%+ annually, which almost doubles that of the value portfolio.
When combined with momentum, the style rotation strategy
generates 32%+ annually.
When combined with momentum and financial health factor, he style
rotation strategy generates 44%+ annually.
Comment
1. Why important
s:
All quant strategies are more or less functions of macro factors. This paper
provides a nice framework to incorporate macro economic factors in quant
modeling. If proven reliable, this should be a high capacity strategy.
2. Data
1990 2004 data for non financial stocks from 15 European countries
(France, Italy, The Netherlands, Germany, Spain, United Kingdom, Belgium,
Portugal, Ireland, Austria, Greece, Norway, Sweden, Denmark, and Finland)
are from 1.) Compustat Global Vantage (accounting data) 2.) DataStream
and GMO UK(Data for stock indices, other financial variables and macro
variables) 3.) Moodys Investor Services (the average monthly yield maturity
of corporate bonds with different ratings)
All of the data are in local currencies. The sample contains 1,800 stocks
each year.
3. Discussions
Our concerns:
1. Short history given the annual rebalance scheme : only 15 years
history available to support this annually rebalanced strategy
2. Total raw returns are used, as opposed to different risk factor(size,
beta, etc) and country/industry adjusted return. The momentum and
financial health factors may be of less use to quant managers who
already have them in their models
3. Extending the study to other markets, such as US, would be
interesting.
4.
Paper Type:
Working Papers
Date:
2007-08-08
Category:
Value, growth, style migration, European large cap stocks, Global

markets
Title:
Antti Pirjet, Vesa Puttonen
Authors:
Style Migration in the European Markets
Source:
HSE working paper
Link:
Summary:
Using a buy hold, no rebalance strategy, this paper finds that

during 2001/12-2006/12, among large
cap European stocks,
value outperforms growth, and the
combination of value and "return on invested

capital(= equity +
debt), ROIC) can greatly boost value strategy.

Key findings:
Comments:
During 2001/12 2006/12, value portfolio has 5%+ higher

raw returns and higher Sharpe ratios, though its volatility
and beta is also higher. Such out performance is not
correlated with market condition(whether market is going
up or going down)
Style migrants (stocks that change from value to growth)
yields highest raw and risk adjusted
returns, and stocks

Combination of value and "return on invested capital (=
equity + debt), ROIC)" can greatly boost
value strategy.
Value stocks have more volatile earnings, higher beta,

lower ROIC (return on invested capital), and
have been
greatly improving operating performance (profitability)
and return on invested
capital.
According to standard Portfolio theory, the MSCI Europe

benchmark index is not as efficient as a value strategy
based on P/BV.
1. Why important
Figure 5 is very telling in that it shows the evolution process of
value/growth stocks for the past 5 years. It's interesting (and
surprising) to see that during the past five years, it's value firms
(not growth firms) that have been greatly improving operating
performance (profitability) and return on invested capital. They
also have higher beta. Growth companies seem not live up to
their "growth" name.
2. Data
2006 data on 500+ largest European stocks are from Thomson
Datastream and WorldScope. MSCI Europe Index is used as
benchmark.
3. Discussions
Migration is an interesting topic. We earlier covered a related
paper, "Style Migration and the Cross Section of Average Stock
Returns
(
)
which studies "style migrants", i.e. stocks with large changes in
their style characteristics (size/book-to-market/momentum) in
the past years. It is found that such stocks seem under valued as
they exhibit a higher return compared with other stocks, and a
higher covariance with the style cohort.
Paper Type:
Working Papers
Date:
2007-08-08
Category:
Value, growth, optimal tilts
Title:
Optimal Value and Growth Tilts in Long Horizon Portfolios
Authors:
Luis M. Viceira
Source:
Harvard Business School working paper
Link:
http://www.hbs.edu/research/pdf/06-012.pdf
Summary:
This paper proposes a solution to allocate styles (value/growth)

for both short term and long term investors. Key findings:
Long-term investors should tilt away from value stocks
,
given their higher risk at long horizons.
Short-term investors should tilt toward value and away
from growth
, regardless of the investor's risk aversion.
Investors should dynamically rebalance their portfolios
given time varying risk premia, interest rates, and
expected inflation
Comments:
Paper
Type:
Working Papers
Date:
2007-07-22
Category: ROIC, productivity and stock returns, value premium

Title:
The Productivity Premium in Equity Returns
Authors:
David Brown Bradford Rowe
Source:
SSRN working paper
Link:
Summary
:
This paper finds that firm productivity (measured as return on invested

capital, ROIC) can significantly
predict returns, particularly for value stocks
.
Key findings:
Higher (lower) productivity, higher (lower) return.

A value weighted
portfolio that is long (short) stocks with the highest (lowest) quintile
of productivity yields risk adjusted value and size return of 6% per
year (0.5% per month) in excess of risk free rate
It seems to be a robust factor: ROIC factor works
within different sectors (with average excess return of 4%)
within value, blend and growth universes.
within most sub-periods (except for 1990 s)
ROIC factor works especially well in value universe
, a two way sort of
stocks by value and ROIC yields a value and size adjusted return of
8.4% per year (0.7% per month) in excess of risk free rate
The anomaly mainly comes from stocks that are not "correctly"
valued by value and ROIC measures
Value stocks
Growth stocks
high
productivity
Strong ROIC effect
Little ROIC
effect
low
productivity
Little ROIC effect
Strong ROIC
effect
ROIC is defined as the ratio of operating income to invested capital (debt

plus equity minus cash from the balance sheet). Value (growth) companies
are measured as those with high (low) CTEV, the ratio of invested capital
(book value of equity plus debt minus cash) to enterprise value (market
value of equity plus debt minus cash).
Comment
s:
1. Why important
This paper is interesting since the new ROIC measure may help quant
professionals improve their value factors. It also helps people to understand
the role productivity plays in value premium.
2. Data
1970 2005 monthly stock price and accounting data for the 1,000 largest
U.S. companies are from CRSP/Compustat
3. Discussions
At the first glance, productivity looks to be a double edge sword in the sense
that, it may leads to higher return since high productivity companies will
generates higher return; on the other hand, it may also leads to lower return
since they are more likely growth companies. This paper confirmed the
latter. This said, it perhaps not surprising that the two way sort (by value
and ROIC) yields higher return.
We note that the portfolio is constrained to the 1,000 largest U.S.
companies, which can remove some of the small cap bias usually found in
most academic papers.
The findings here echoes a related paper we reviewed before, Firm
Productivity and Expected Returns,
http://www.people.hbs.edu/hyang/Papers/productivity.pdf
),
where it is
found that when productivity is measured as (Capital Assets, or total assets
growth, or ROA, productivity positively forecasts returns, though this is not
true when productivity is measured as value (log of book over market).
Paper
Type:
Working Papers
Date:
2007-07-06
Category:
Title:
Authors:
Source:
Link:
Summary: This paper explores the role of industry in explaining the cross section of
stock returns.
Key findings:
1. when decompose size and BM into within and cross industry components:
On average, BM premium is a within industry phenomenon. (a
portfolio ranking B/M within industry should generate higher return
than that ranking across industries)
Size premium exists both within industry and cross industry
January plays an important role. BM premium is on average
significant, but not in January months after 1981 (table 2) the size
effect is mostly attributed to the out performance of small firms in
January months (table 6).
2. Within industries, firms with lower than industry mean (size and B/M)
have higher (size and B/M) risk premium.
Size premium exists only for firms performing below averages, but
not above.
BM premium exists for firms with B/M both above and below industry
average. But after removing the extreme 5% observations, it exists
only for below average firms.
explanatory power beyond the commonly accepted size and (book to
market) BM factors. The authors run the following Fama Macbeth regression:
Rit = b
MV
- 1 + b
BM
- 1 + e
0t +
b
1t
it+ b
2t
it
3t
it
it
Where
(industry
implied
return)
is
a
normalized measure of the
it
covariance of returns of the stock i with its own industry.
4. Firms with a ROE (returns on equity) higher than industry average yield
higher expected returns.
Comment
s:
1. Why important
This paper finds that industry returns has explanatory power beyond the
commonly used size and BM factors. They also show that within industries,
firms which earn lower than the median size or B/M have higher risk
premium.
The asymmetric findings in the paper may be of use to quant managers. If
the results are confirmed, then one may profit from a portfolio that rank
stocks with size or B/M below the industry medians.
In terms of methodology, this paper re minds us of the importance of
extreme stocks: whether or not stocks with 5% extreme values (size, B/M)
are removed can have a big impact. Table 8(extreme stocks not removed)
and Table 9(extreme stocks removed) is a great example
2. Data
1963 2002 US stock data (ordinary common equities of all firms listed on
the NYSE, AMEX, and NASDAQ) are from CRSP/COMPUSTAT database.
3. Discussions
It is interesting to see the different results when the authors remove stocks
with 5% extreme values (size,B/M). On one hand, it does yield insights in
terms of the role of the extreme stocks. On the other hand,ideally the two
scenarios (with and without extreme stocks) give similar results, as either of
them just tells part of the bigger picture.
Also it would be interesting to control of other known factors: concentration
of the industry as shown by Robinson (2003), momentum, etc.
Paper
Type:
Working Papers
Date:
2007-07-06
Category: Valuation models, Value relevance

Title:
Value Relevance of Book Value, Retained Earnings and Dividends: Premium

vs. Discount Firms
Authors:
Mark Aleksanyan
Source:
SSRN working paper
Link:
Summary
:
Using 1987 2005 UK stock data, this paper finds that

When a firm trades at a premium to book value (book/market 1), earnings
have a more important role in equity valuation,
When a firm trades at a discount (book/market 1), book value has a more
important role in equity valuation.
The result is based on the following regression:
Market value = 1 * (book value) + 2 * (retained earnings) + 3 * (ordinary
dividends) + 4 (pay dividend or not) + error term
firms trading at a
premium to book value
(book/market < 1)
firms trading at a
discount to book
value(book/market > 1)
profitable
firms
Factors that can explain

firm value:
Earnings
Dividends
Factors that can not
explain firm
book value

firm value:
book value
explains 43.1%
of the from Table
2)
explain firm value:
retained earnings
dividends explain
only 1.8%
loss
making
firms

firm value:
book value (albeit
very weak)
explain firm value:
Earnings
Dividends

firm value:
book value
explains 60.2%)
The proposed explanation:
Compared with firms with negative (or extremely low positive)

earnings, a firm with positive earning is much more likely to trade at
a premium to book value
Positive earnings provide much more meaningful information than
book value about the firms abnormal earnings opportunities (i.e.,
firms unrecognized valuable assets) which will be reflected in stock
prices and firm value
On the contrary, negative (or extremely low positive) earnings are
expected to transitory (i.e., earnings is expected to turn positive
some time soon). Otherwise, the firm is not projected to continue to
operate. The negative earning is thus not as informative to measure
the firms values. The book value, in contrast, will provide at least
partially useful information, as it reflects the value of the recognized
net assets.
Comment
s:
1. Why important
This paper points out two important controlling factors which need to be
included for equity valuation models: the sign of earnings (profitable firms vs
loss firms) and the premium/discount of Book market ratios. Market
obviously priced these two groups of stocks different.
These results may lead to profitable strategies. Two possibilities are
discussed below.
2. Data source
1987 2005 data for all UK non financial companies listed on the London Stock
Exchange (pooled, cross section/time series) are from Extel Company
Analysis Database. Financial companies are excluded because their financial
reporting standards are different from those of the rest of the sample.
To minimize the impact of outliers on regression results, the authors exclude
the top and bottom one percent of data ranked on the three factors stated
earlier. The remaining sample includes 21,624 firm year
3. Discussions
For practitioners, an interesting follow up study will be to test whether one
can build a robust profitable strategy based on the findings.
For loss making firms and profitable firms trading at a discount, one
should long stocks with higher book value and short stocks with lower
book value regardless of earnings and dividends.
For profitable firms trading at a premium, one should long firms with
better relative earnings and while shorting the lower earnings and
dividend firms irrespective of the book value of both groups.
This paper provides yet another example of conditioning one quant factor on
other factors.
Paper
Type:
Working Papers
Date:
2007-06-20
Category: IPO/SEO, Value vs Growth

Title:
Growth to Value: A Difficult Journey for IPOs and Concentrated Industries
Authors:
Gerard Hoberg, Lily Qiu
Source:
University of Michigan Mitsui Research Center
Link:
http://www.bus.umich.edu/FacultyResearch/ResearchCenters/Centers/Mitsui
/Hoberg-GrowthtoValue-Oct2006.pdf
Summary
:
The paper is built on the following observations:

Firms going public in concentrated industries have the flexibility to do
so at the optimal time of their choosing (i.e., when the firm is
transitioning from growth to value
In contrast, IPO issuers in competitive industries have little flexibility
because their IP O decision is more likely to be forced by exogenous
innovation shocks requiring quick financing, or by venture capital
financiers demanding quick exit.
Consequently
IPO in concentrated industries
underperforms since it reveals
transition from growth to

value. Yet the same decision in a competitive
industry is uninformative.
A profit can be made by
long (
short) stocks in less (more)
concentrated
industries within different stock

universes.
From Table II,

the annual
return
spread between most competitive

and least competitive firms
are 10.1%
within IPO firms , 9.3% within Non IPO firms in IPO industries, 6.8% within
all stocks, 1.3% among firms in Non IPO Industries
Industry concentration is measured using average Herfindahl Hirschman
Sales Index, and a higher index means that large companies collectively
control a higher share of total industry aggregate
Comment
1. Why important
s:
This paper presents an interesting strategy with large abnormal returns. It

allows one to understand and measure the premium of concentration in an
industry , and it also can be used to measure the value added by VCs in the
IPO process of the firm.
2. Data source
2004 Issue specific IPO data are from the Securities Data Company (SDC)
U.S New Issues Database. Stock performance data and firm financial data
are from CRSP and COMPUSTAT, respectively.
3. Discussions
This is an interesting paper that combines industrial organization (IO)
research with asset pricing and corporate finance. The authors almost use
Herfindahl-Hirschman Index as a factor, which has been widely used in IO
papers.
Our concern is that t he strategy will be biased in several ways:
By definition it has an industry bias.
It may have a strong size bias as companies in concentrated
industries tend to be larger ones. This being the case, the profit on
paper can not be taken at face value due to transaction cost
It may also have value/growth bias: one would imagine that more
concentrated industries tend to be those stable industries, or value
industries. It would be interesting to do a 2 way sort by concentration
and book/market.
Paper Type:
Working Papers
Date:
2007-05-17
Category:
Value premium, irm productivity, business cycles
Title:
Firm Productivity and Expected Returns
Authors:
Halla Yang
Source:
Link:
http://www.people.hbs.edu/hyang/Papers/productivity.pdf
Summary:
This paper studies the relationship between firm productivity and

stock returns. Key findings:
1.
When productivity is measured as Capex/Assets, or total
assets growth, or ROA, productivity positively
forecasts returns
though this is not true when productivity is measured as value

(log of book over market cap)
2.
The value premium is pro
cyclical with at least one measure of
ex ante
aggregate
productivity
, contradicting the classic
productivity models
3.
The value premium is not related to measures of
industry
productivity
, ie, the risk premium earned by low productivity
firms is not greater when industry level productivity is low
Comments:
1. Why important
The performance of most quant factors is a function of macro
factors or broad stock market conditions. This paper is important
for managers who are conditioning their value strategies on
macro, business cycle related factors. If the findings are
confirmed, then managers can adjust their value exposure by
aggregate productivity.
2. Data
1962 2005 US stock pricing and accounting data are from
3. Discussion
The definitions for a few key variables are vague and/or
incomplete. It would be nice if further information was provided
(examples or references) for the following variables:
1. Productivity and its variants (especially aggregate productivity
and idiosyncratic productivity)
2. Investments and its variants (especially irreversible
investments and reversible investments)
Explaining value premium using productivity theory is perhaps
something new for some quant managers In simp le words, high
productivity firms usually have higher investment level, and their
firm value is more dependent on near future output. In this
sense, high productivity firms are less risky and people demand a
premium for lower productivity firms (value companies)
Paper Type:
Working Papers
Date:
2007-04-01
Category:
Growth and value mix
Title:
The Ideal Blend of Growth and Value
Authors:
Andrea Au and Tony Foley
Source:
The Journal Of Investing
Link:
Summary:
To test whether diversified style based portfolios (invest in

separate growth and value funds) is better than neutral core
portfolio, the authors find that
style-based diversification in the
U.S. does not generate superior performance.
A style neutral core
portfolio is likely yield higher return than comparable growth and
value portfolios.
Internationally,
value/growth
portfolios
outperform core funds,

but this is based on a
rather short history
Comments:
Paper
Type:
Working Papers
Date:
2007-03-18
Categor
y:
Timing of value and momentum strategy
Title:
Style Timing in Emerging Markets
Authors: Stphanie Desrosiers, Mohamed Kortas, Jean Franois L\\\'Her, Jean Franois
Plante,
Source:
Cass Business School seminar paper
Link:
http://www.cass.city.ac.uk/emg/seminars/Papers/Desrosiers_Kortas_L\\\'Her
_Plante_Roberge.pdf
Summar
y:
This paper proposes a style timing strategy in emerging markets:

Use value strategy after market downturn
Use momentum strategy after market rally
This strategy consistently generates better risk adjusted profits than value or
momentum strategies. The psychological theory is that prior results affect
investors subsequent risk taking behavior.
Paper Type:
Working Papers
Date:
2007-02-01
Category:
Value measures, technology sector, sector-specific
Title:
Multiples and Their Valuation Accuracy in European Equity

Markets
Authors:
Andreas Schreiner and Klaus Spremann
Source:
SSRN working paper
Link:
Summary:
For stocks in Dow Jones STOXX 600 and S&P500 during

1996-2005,
P/E
(two-year forward earnings estimates
has best
predicting power
For technology
stocks,
earnings
should be adjusted
to
include
R&D
costs
to get better earning predicting power
U.S. results are similar
Comments:
Paper Type:
Working Papers
Date:
2007-01-16
Category:
Value investing, price-earnings ratio decomposing
Title:
Decomposing the Price Earnings Ratio
Authors:
Keith Anderson, Chris Brooks
Source:
2006 European Financial Management Symposium paper
Link:
http://efmaefm.org/EFM06/09-EFM06%20-%20Anderson%20-%20
Decomposing%20the%20PE.pdf
Summary:
This paper
proposes a modified P/E ratio that doubles the profit of
the conventional P/E strategy in UKmarket

. The modified P/E ratio
incorporates the impacts of
Companys historical P/E
Sector average P/E
Market capitalization
Idiosyncratic effects
Here idiosyncratic effects are the difference between actual P/E and
the expected P/E given year, sectorand market capitalization.
Weights of these four factors are based o n their power in predicting
returns.
Comments:
1. Why important
This paper offers a nice framework to improve the price/earning
ratio. The concept of historical ranking and sector ranking is thought
provoking and may be tested in other quant factors as well. People
can easily expand the same framework to other markets.
2. Data
2003 data for all UK stocks are from the London Business Schools
London Share Price Database (LSPD) and Datastream.
3. Discussions
This paper echoes a paper we reviewed earlier which shows that
value strategy performs much better whenstocks are ranked within
sectors. (Peer Pressure: Industry Group Impacts on Stock
Valuation Precision andContrarian Strategy Performance,
http://mason.wm.edu/NR/rdonlyres/A342731C-DE50-444B-AF0B-8
478E1ED4484/0/Peer_Pressure_JPM.pdf
The use of market capitalization invites the question of why other
factors are not used. But if other factors are indeed used, people
may wonder whats the difference between this new factor vs a
more comprehensive quantitative model.
We hope that practitioners will benefit from the methodologies
discussed in this paper, but we do question the empirical testing
results presented in the paper:
We would be surprised if the large profit reported in Table 7
can be realized in real world.
The underperformance of this modified factor from 2000
2003 in signal-stocks is troubling.
Financial sector stocks are excluded in the study, and we are
curious what might be the reason.
Paper Type:
Working Papers
Date:
2006-12-17
Category:
Value, momentum, financial health
Title:
Sentiment and financial health indicators for value and growth

stocks: the European
Authors:
Bird Ron, Casavecchia Lorenzo
Source:
Link:
Summary:
This paper is based on the findings of an earlier paper ( Value

Enhancement using Momentum Indicators:
The European Experience,
http://www.fma.org/Siena/DSS/Style_InvestingforSiena.pdf
),
where it is found
that:
Most value stocks
under-perform the market
The profit of the value strategy comes from few value

stocks
Price momentum acceleration can best improve value
strategy (we covered Acceleration Strategies in previous
issue,
http://www.fma.org/SLC/Papers/Acceleration_Strategies.p
df
This paper extends the previous study and finds that the
momentum is more powerful than financial health indicators in
enhancing the widely used value strategy. But both momentum
and financial health indicators can help picking growth stocks.
Comments:
1. Why important
Value + momentum perhaps is not something new. We find this
paper interesting since it shows that the 8020 rules (for many
phenomena 80% of consequences stem from 20% of the causes)
applies for value strategy as well. This indicates the potential of
value strategy and also the importance of combining value with
other factors.
This is a study on European market, we think it would be
interesting to test in any universe that you are interested in.
2. Data
2004 stock data for 15 European markets are from Worldscope
database.
3. Discussions
We are not sure whether timing factor is the right word for
momentum and financial health indicators.Given the authors
finding that most value stocks will underperform, what one needs
is some factor that can identify
which stocks
have high potential
(from a large pool of value stocks , not
when
to buy all the
valuestocks. The fact that momentum helps most shows that
(fundamental) investors on average are starting to realize the

value in those value stocks. In other words, the behavior of other
(fundamental) investors serves as an indicator of the potential of
stocks.
Paper Type:
Working Papers
Date:
2006-12-03
Category:
Value strategy, industry neutrality
Title:
Peer Pressure: Industry Group Impacts on Stock Valuation

Precision and Contrarian
Authors:
Turan G. Bali, K. Ozgur Demirtas, Armen Hovakimian and John J.

Merrick, Jr
Source:
College of William & Mary working paper
Link:
-8478E1ED4484/0/Peer_Pressure_JPM.pdf
Summary:
Value strategy can be significantly improved when implemented

in an industry
neutral fashion
(i. e.ranking stocks within

industries, not across the whole universe). This is true for
different valuenamely market, cash flow market and earnings
market ratios
Comments:
1. Why important
This paper may be of help to practitioners who are measuring
value ratios across their investment universe.
2. Data
2002 Stock monthly returns, prices are from CRSP monthly file.
Accounting data are from COMPUSTAT annual files. Industry
group is defined using the SIC industry definition scheme.
3. Discussions
If we decompose return of value strategy into two parts,
profit (value strategy) = profit (within industry strategy) + profit
(cross industry
then this paper suggests that the industry value strategy (long
value industry short growth industries) will not be profitable.
Interestingly, this is in direct contrast to a similar discussion on

the industry effect of momentum strategy ("Do Industries Explain
Momentum?" Moskowtiz and Grinblatt, Journal of Finance,54,
1249-1290), where it is claimed that momentum is mainly an
industry level effect, and within industry momentum strategy
doesn't yield significant profit.
What might be the reason? Our guess is that momentum
investors generally pick industry first (they perhaps subscribe to
the theory of buying winning stocks in winning industries),
whereas value investors are relatively less sensitive to industry
selection.
Paper Type:
Working Papers
Date:
2006-11-18
Category:
Value, Growth, funds
Title:
Do Investors Capture the Value Premium?
Authors:
Todd Houge, Tim Loughran
Source:
Link:
www.biz.uiowa.edu/faculty/thouge/Style_Benchmarking_Paper.pdf
Summary:
This paper juxtaposes 4 facts:

In back testing
value stocks significantly outperform
growth stocks, as shown in various researches
yet value
mutual funds
dont outperform growth funds:
from value and growth fund return are 11.4% vs 11.3%(for
large cap funds); 14.1% vs 14.5%(for small cap funds
yet value
index
doesnt outperform growth index: from
1975 large cap value index (S&P outperform growth index
~1%, same for all cap index (Russell 3K)
In regression, value premium only shows up in small cap
universe, not in large cap.
Conclusion: over long horizon, value premium is hard to capture
due to
transaction costs
in
small-cap universe
(though value
does
perform better in the

2000s so far
Comments:
1. Why important
To us, these findings serve as a reminder that our back testing
results may be distorted Past back testing result does not
guarantee (even) past realized The question is: what is a robust
back testing methodology? What is a robust anomaly?
By providing three interesting (yet somewhat surprising) results,
this paper makes us think about the nature of the value premium.
It is true that in the 2000s value performs far better, but in a
longer time horizon its returns are comparable to growth for
practitioners
2. Data
2001 mutual funds data are form CRSP Survivor Bias Free U.S.
Mutual Fund Database, stock data are from CRSP/Compustat.
3. Discussions
Table IV is a great example of how a lump sum regression can be
misleading. The author shows that although (in all stock universe)
value factor is significant after controlling for size, this impact is
gone when we limit the regression within large cap stocks. This is
true for size effect as well. In our view, the key is that the stock
market data we have are far from being normal/random. A robust
back testing system should go beyond and look into patterns
within different segments.
Paper Type:
Working Papers
Date:
2006-11-03
Category:
Title:
Authors:
Source:
Link:
Summary:
investors (i.e. buy near-term options in value indexes), and sell it
to growth investors (i.e. sell near term options in growth indexes)
is profitable. This is because
So growth investors are willing to pay more for risk

(proxied by option volatility premium)
Comments:
1. Why important
http://www.simon.rochester.edu/fac/zhang/ValRisk05JFE.p
df
), where value stocks are fundamentally riskier than
growth stocks.
than growth, but they do get better returns. Why will there be
such systematic gap? Can this pattern be used to generate stock
strategies?
This said, we think the clientele theory makes sense, and hope
that this option strategy can help some quant managers enhancing
their portfolio.
2. Data
used
3. Discussions
calculated (The paper "...uses the midpoint of the bid ask spread
and use this to calculate payoffs for our trading strategies"). The
bid ask spread can easily be 5 10% even for a liquid index options
like SP500.
The figures in the appendix give us a nice picture of the behavior
of investor clientele. For example, figure2 shows that growth
investors are more likely to be momentum investors (the higher
the returns, the lower the risk aversion).
Paper Type:
Working Papers
Date:
2006-11-03
Category:
Title:
Authors:
Source:
Link:
Summary:
investors (i.e. buy near-term options in value indexes), and sell it
to growth investors (i.e. sell near term options in growth indexes)
is profitable. This is because
So growth investors are willing to pay more for risk
(proxied by option volatility premium)
Comments:
1. Why important
http://www.simon.rochester.edu/fac/zhang/ValRisk05JFE.p
df
), where value stocks are fundamentally riskier than
growth stocks.
than growth, but they do get better returns. Why will there be
such systematic gap? Can this pattern be used to generate stock
strategies?
This said, we think the clientele theory makes sense, and hope
that this option strategy can help some quant managers enhancing
their portfolio.
2. Data
used
3. Discussions
calculated (The paper "...uses the midpoint of the bid ask spread
and use this to calculate payoffs for our trading strategies"). The
bid ask spread can easily be 5 10% even for a liquid index options
like SP500.
The figures in the appendix give us a nice picture of the behavior
of investor clientele. For example, figure2 shows that growth
investors are more likely to be momentum investors (the higher
the returns, the lower the risk aversion).
Paper Type:
Working Papers
Date:
2006-10-20
Category:
Value, Institutional Ownership
Title:
Institutional Ownership and the Value Premium
Authors:
Ludovic Phalippou
Source:
SSRN working paper
Link:
Summary:
This paper finds that value premium is mainly driven by stocks

least held by institutional investors. Within the 10% least held
stocks, the r adjusted, value weighted value premium is
1.9%/month (Table 7), whereas stocks most held by institutional
investors show -0.7%/month value premium.
Comments:
1. Why important
This paper may help quant managers improve their value
strategies. Though few are investing only in those10% least held
stocks, the monotonous relationship between value premium and
institution ownership(Graph 1) shows that one may get more
alpha by applying value strategies to less owned stocks.
This paper is also helpful in revealing the sources of value
premium: it implies that value premium may be partially created
by individual investors.
2. Data
2001 stock data are from CRSP/COMPUSTAT. Analyst coverage
data are from the I/B/E/S Historical Summary File
3. Discussions
Transaction cost (illiquidity) and short selling cost can lower the
profit in reality, as discussed in the paper The question is whether
there is still money left to be made, knowing that we will be
dealing with less liquid stocks. Unfortunately no quantified results
are presented.
Paper Type:
Working Papers
Date:
2006-10-20
Category:
Size, value
Title:
Does Noise Create the Size and Value Effects?
Authors:
Robert Arnott, Jason Hsu, Jun Liu and Harry Markowitz
Source:
UCSD working paper
Link:
http://rady.ucsd.edu/faculty/directory/liu/docs/size-value.pdf
Summary:
This paper builds a model where stock price is composed of a true

(random walking) value and a mean reverting noise. Key
conclusions
High price stock tends to be relatively over valued, since
the noise tend to be positive (and vice versa)
It is the noise that leads to size and value premium, not
riskiness.
The author seem to reinforce the fundamental weighted index
proposed by the first two authors (the key idea is that, an index
weighted by fundamental factors, e.g., sales, will outperform a
cap weighted index like SP500).
Comments:
1. Why important
When Harry Markowitz talks, everyone listens (though not
necessarily always agrees).
The idea behind this model seems to be the fundamental
weighted index that is being aggressively marketed. It is surely
very meaningful if the authors can show that this new index does
add value to investors, and is not just a combination of existing
style biased indices.
2. Discussions
We are a little cautious about how people make their assumptions
in behavioral models, especially after reading Stephen Ross
critique
(http://www.law.yale.edu/cbl/papers/Ross_roundtable.pdf). Ross
key points that behavior models tend to make an assumption that
is virtually the result of the model.
The conclusion that value stocks is no riskier than growth is
debatable, as shown in previous papers that were viewed (see,
e.g. Is Value Riskier Than Growth?,
http://www.simon.rochester.edu/fac/zhang/ValRisk05JFE.pdf).
Paper Type:
Working Papers
Date:
2006-10-06
Category:
Title:
Authors:
Source:
SSRN working paper
Link:
Summary:

curve is inverted.
Comments:
1. Why important
2. Data
from DataStream.
3. Discussions
Paper Type:
Working Papers
Date:
2006-10-06
Category:
Title:
Authors:
Source:
SSRN working paper
Link:
Summary:

curve is inverted.
Comments:
1. Why important
2. Data
from DataStream.
3. Discussions
Paper
Type:
Working Papers
Date:
2006-09-22
Category:
Value, industry
Title:
The Relationship between the Value Effect and Industry Affiliation
Authors:
John C. Banko, C. Mitchell Conover, Gerald R. Jensen
Source:
2005 FMA annual meeting
Link:
http://www.fma.org/Chicago/Papers/ValueEffectPaperFMA.pdf
Summary:
This paper finds that value effect exist at both cross-industry and
within-industry level (i.e., firm level), and stronger at within-industry level.
Value industries display a stronger within-industry effect than growth
industries. Compared with growth stocks, value stocks have higher returns
but also substantially higher risk in terms of earnings uncertainty, leverage,
and distress risk.
Comments
:
1. Why important
This paper helps us understand what causes value effect by demonstrating
the impact of industry affiliations. For managers who keep their portfolios
neutral on sectors/industries, this paper shows that they do sacrifice some,
but not majority, of the value effect.
We find the study on the temporal consistency of the industry BE/ME ratios
ranking very intriguing. The paper shows that an industrys value ranking
may move drastically from year to year: a value industry may migrate to
growth industry the next year.
2. Data
1968 200 stock data are from CRSP and COMPUSTAT. Firms are ranked by
BE/ME. Standard Industrial Classification (SIC) codes are used to identify
industries.
3. Discussions
For most quant managers, more than one value measures (BE/ME,
Price/Earning, Price/Sales, Price/Cash flow, to name a few) are used.
Different value measures work differently. For example, Price/Cash flow can
better predict returns when the spread of Price/Earnings is very narrow. It

would be very interesting to extend this study to other value measures
using more recent data.
The authors concludes that the value stocks are riskier in terms of
earnings uncertainty, leverage, and financial distress risk. While the
methodology seems logical, this conclusion contradicts with the other paper
we mentioned in previous letters. (Is Value Really Riskier Than Growth?,
http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID891707_code597556.pd
f?abstractid=891707&mirid=1
) which studies risky-ness by comparing the
performance of value/growth stocks in bull/bear markets.
This paper also echoes the results of the widely-debated Moskowitz and
Grinblatt (1999) paper, where it is shown that much of the momentum
profit is at industry level.
Paper
Type:
Working Papers
Date:
2006-09-22
Categor
y:
Title:
Authors
:
Source:
Link:
http://inquire.org.uk.loopiadns.com/inquirefiles/Attachments/inquk06/Harris/B
ababamento&Harris.pdf
Summar
y:

Black-Litterman portfolio construction framework. When applied to US, UK and
Japan national industries, this strategy generates 1.3-1.7% over benchmark
(0.3-0.7% after transaction cost)
This model can solve many practical issues faced by quant managers: it can
be easily programmed to track benchmark within a specific risk tolerance, and
under various constraints (e.g., full investment, long only, or beta neutral).
Comme
nts:
1. Why important
When most quant managers are using similar factors, the way these factors
are combined in portfolio plays an important role. In our view, this paper may
be helpful since it incorporates the value/momentum combination with
Black-Litterman model. The Black-Litterman model is mathematically elegant
and far more user-friendly than the mean-variance model. As we all know, the
portfolios based on mean-variance framework are highly input-sensitive and
can be highly concentrated.
2. Data
The Morgan Stanley Capital International (MSCI) national industry indices (59
industries for US, UK and Japan indices) are used. The time period covered is
1995-2004.
3. Discussions
One of the key challenges is to forecast security expected returns (equilibrium
returns, or ). The methodology used in the paper looks rather naive on the
first glance; it uses US term spread (the difference between the 10-year US
treasury bond yield and the US T-Bill three-month rate) to forecast
momentum returns, and US market aggregate book-to-market spread to
forecast value return. We know that the value premium and momentum
premium are believed to be linked with stock market returns, volatility as well
as macro-economy factors. A refined forecast model may yield better results.
Paper Type:
Working Papers
Date:
2006-09-08
Category:
Title:
Migration
Authors:
Source:
SSRN working paper
Link:
Summary:

Comments:
1. Why important

segments:
growth managers and signal-managers. It will be of great interest
to study their contribution and other characteristics.
2. Data
3. Discussions
Paper Type:
Working Papers
Date:
2006-09-08
Category:
Title:
Authors:
Source:
NBER working paper
Link:
Summary:

Comments:
1. Why important
delisting, etc.
average.
2. Data
3. Discussions
Altmans Z-score, Ohlsons O-score, and Shumway hazard model.
In our view, this paper adds value by presenting a model that can
more accurately predict risk at both short and long horizons. At
least part of the power is in its details - some commonly used
factors are modified (e.g, income and leverage scaled by asset
market value rather than book value) and also some are added
(e.g. cash holdings)
Paper Type:
Working Papers
Date:
2006-09-08
Category:
Strategy, value, growth, risk
Title:
Is Value Really Riskier Than Growth?
Authors:
Soosung Hwang and Alexandre Rubesam
Source:
AFA 2007 Chicago Meetings Paper
Link:
Summary:
No, value is not riskier than growth, but value is more sensitive to
downside/upside betas and higher moments.
Comments:
Paper
Type:
Working Papers
Date:
2006-08-24
Category: Value, growth, asset allocation

Title:
Optimal Value and Growth Tilts in Long-Horizon Portfolios
Authors:
Jakub W. Jurek, Luis M. Viceira
Source:
Wharton seminar paper
Link:
http://finance.wharton.upenn.edu/department/Seminar/2005Fall/microFall20
05/viceira-micro-090805.pdf
Summary
:
An (very) analytical solution to the dynamic portfolio choice problem for an

investor who can chose between value and growth stock portfolios, bills and
bonds.
Comment
s:
Paper Type:
Working Papers
Date:
2006-08-10
Category:
Title:

Asset Growth Effect
Authors:
Source:
Link:
Summary:
Comments:
1. Why important
2. Data
from CRSP/COMPUSTAT
3. Discussions
Paper Type:
Working Papers
Date:
2006-07-27
Category:
Strategy, value, style, order imbalance
Title:
The Anatomy of Fluctuations in Book/Market Ratios
Authors:
Source:
UCLA working paper
Link:
http://www.anderson.ucla.edu/documents/areas/fac/finance/14-0
6.pdf
Summary:
This paper studies the process by which a stock swings from a

value stock to a growth stock, or from growth to value. The
interesting finding is that stocks with large price decrease (b/p
increase) and positive order imbalance tend to strongly reverse.
Comments:
1. Why important
A big challenge for quant managers is how to avoid the value
trap - when a stock price plunges, it may easily fall into the
value category in most quant models. We are interested in
knowing what stocks are more likely to reverse themselves, and
this paper seems to provide a new angle.
2. Data
Transactions data are from the Institute for the Study of
Securities Markets (ISSM, covers 1988-1992) and the NYSE
Trades and Automated Quotations (TAQ, covers 1993-2002)
databases.
3. Discussions
The author argues that BMO (the product of order imbalance and
the book/market ratio in calendar year
n
) is predicative of stock
price reversals. This result suggests that, the stocks that are not
"value trapped" are those experienced large price decrease AND
large positive order imbalance (i.e., being bought by other

investors). In other words, if in the past year price decreased and
large investors are buying, this stock is more likely to reverse the
price drop. This sounds like the combination of momentum and
value, although one cannot tell until doing the research on the
stocks.
We are not sure of the authors explanation of the result. Market
makers tend to have a shorter balance horizon, most of which
presumably take little, if not zero inventory, on daily basis. The
conclusion of this paper is based on monthly stock returns, and
we are not sure whether order imbalance is still relevant at this
time horizon (though papers like Chordia and Subrahmanyam
(2004) predicts that autocor elations in imbalance may lead to
greater inventory buildups and later reversals).
Only regression results were given in the paper. It would be ideal
if the author can provide the profit for a simulated zero-financing
portfolio. Another concern is that most of the numeric results
covers only the period of 1988/01 - 1998/12.
Paper Type:
Working Papers
Date:
2006-07-13
Category:
Title:
Authors:
Source:
SSRN working paper
Link:
Summary:
This paper studies "style migrants", i.e. stocks with large changes
in their style characteristics (size/book- to-market/momentum) in
the past years. Such stocks seem under-valued as they exhibit a
covariance with the style cohort.
Comments:
1. Why important

2. Data
necessary data.
3. Discussion
(size/book-to-market/momentum) can all be driven by large price
changes. Is the "high style risk" merely another name for "high
price volatility stocks"? A quant manager would also need to look
at the Sharpe ratio and recent performance (given the changing
volatility environment these past 3 years).
Paper Type:
Working Papers
Date:
2006-06-15
Category:
Strategy, trader composition, momentum, earnings, value
Title:
Trader Composition and the Cross-Section of Stock Returns
Authors:
Tao Shu
Source:
SSRN working paper
Link:
Summary:
This paper proposes a measure to estimate a stocks trader

composition (ie, how much trading is generated by retail
investors vs. institution investors), based on the fraction of
institutional trading volume (FIT) in the total trading volume. The
author claims and empirically confirms that stock mis-pricing
anomalies (momentum, value, earning surprise) are stronger in
the stocks with low FIT. The behavioral theory is that institutions
are better informed and their trades correct stock mis-pricing.
Comments:
1. Why important
We think this new FIT measure may potentially improve the
institution ownership breadth measure, and may also help
practitioners refine existing momentum and value strategies. One
insight we learnt from this paper is that "trader composition
could have stronger impact on stock market than does
shareholder composition, because trading stocks is a much more
effective way to move stock prices than holding stocks." This
claim is supported by the empirical finding that trader
composition predicts market anomalies better than does
2. Data
Quarterly institutional data is from the CDA/Spectrum
Institutional (13f) database. Stock data are from
CRSP/COMPUSTAT. Analyst coverage data are from IBES.
3. Discussions
We think that the impact of FIT on existing mis-pricing anomalies
should be studied in a setting where FIT is at least size-adjusted.
This is because FIT shows a close relationship with size and the
old institution ownership breadth. For this reason, we question
the validity of the authors conclusion since the impact of FIT on
anomalies is intertwined with size effect.
We do not necessarily agree with the authors discussion on the
impact of investors inertia on stock return. The auto-correlation
in traders composition shows that collectively there are little net
trade between institutions and individuals, but not necessarily
less trade volume. If anything, many previous researches has
shown that the investors are too active, and their frequent
trading has cost them dearly.
Is the authors behavioral theory a sound one? The notion that
institutions are more sophisticated and their trades can correct
market mis-pricing is also inviting questions. At least for US large
cap stocks, institution managers on average are proven not able
to add value.
Paper
Type:
Working Papers
Date:
2006-06-02
Category:
Strategy, value, UK, Global markets
Title:
Dimension and Book-to-Market Ratio Again: The English Case
Authors:
Pedro Rino Vieira, Jos Azevedo Pereira
Source:
Link:
http://www.fma.org/Stockholm/Papers/DimensionnBooktoMarketRatioAgain
.pdf
Summary:
Applying the Fama-French model to UK stock market, this paper found that
the book-to-market effect work the opposite in UK than in US, and the
market factor (beta) of Fama-French model is the only factor that can
explain the UK stocks returns. It also finds that in US higher volatility will
lead to lower return.
Comments
:
1. Why important
Free lunch in UK! Thats our first impression after reading this paper. We
find it intriguing since it directly tests a classic model in UK market and
presents rather surprising results - and quant researchers like to be
surprised by such findings. The result of the paper seems to show that in
UK those stocks with higher return do not necessarily bear higher risk.
2. Data
The UK stock data are from DataStream and covers the period of December
1982 to June 2002.
3. Discussions
To support the efficient Market Hypothesis (EMH), Fama-French (1993)
(had to) state that size and book- to-market are proxies of risk.
Book-to-market was claimed to proxy companies distress-ness. The higher
this ratio, the riskier a stock is since it is more sensitive to certain business
cycle. If this logic is right, then it should be applicable to stocks worldwide,
which is shown clearly not the case in UK. The evidence presented in this
paper reminds us that we still need to know more about the risk-return
relationship in stock markets.
Can we build a profitable strategy based on this paper? Assuming that the
documented patterns will repeat themselves, then two obvious possibilities
are: 1.) long (short) UK stocks with low (high) book-to market 2.) Long
(short) US stocks with low (high) volatility.
We should note that the assumption above is a bold one, especially for
people with a shorter term focus. Year 2003 is a great example where all
stocks with high volatility outperform their low-volatility counterparts. This
said, a quant manager, like it or not, needs a macro-level view of the stock
market to help enhance next month or next quarters performances.
Paper Type:
Working Papers
Date:
2006-05-19
Category:
Strategy, value
Title:
The Limits of Arbitrage: Evidence from Fundamental

Value-to-Price Trading Strategies
Authors:
K.C. John Wei, Jie Zhang
Source:
European Financial Management Symposium 2006
Link:
http://efmaefm.org/EFM06/99-EFM06%20-Zhang-The%20Limits
%20of%20Arbitrage.pdf
Summary:
This paper presents a value strategy that works well even in

internet bubble time. It claims that when exclude those stocks
with high arbitrage risk (as measured by firm maturity, earnings
quality, investor sophistication, idiosyncratic return volatility,
etc.), the Vf/P value strategy (Vf is an estimate of fundamental
value based on a residual income model that uses analyst
earnings forecasts.) performs markedly better, even in the
Internet bubble time when common value strategies fail.
Comments:
1. Why important:
Although the purpose of this paper to study limit of arbitrage, it
may potentially help quant managers to improve the widely-used
value strategy.
2. Data
The 1982/01 to 2004/12 data of stocks in NYSE, AMEX and
NASDAQ are from CRSP/COMPUSTAT. The earnings data are from
I/B/E/S.
3. Discussions
In our view, quant managers are facing two major challenges
when using value strategies, namely, 1.) how to avoid value trap
(eg., buying Enron immediately before its bankruptcy) and 2.)
how to devise a strategy thats less correlated with overall stock
market return(a value strategy tend to work better when stock
market is going sideways, but not when the market is rallying to
junk, like what we seen in 2003).
The merit of this strategy is that it helps solving the first
challenge by screening out stocks with low price and bad
fundamental characteristic. We would be very interested to see
whats the performance of this strategy is in year 2003, when

most quant managers were hurt badly by the traditional value
factor.
For quant managers who care less about "limit of arbitrage", this
paper confirms that the Vf/P strategy has limited correlation with
other strategies based on arbitrage risk measures (i.e., firm
maturity, earnings quality, investor sophistication, divergence of
opinion, idiosyncratic return volatility, liquidity, and institutional
ownership). Of these measures, investor sophistication sounds
less familiar, which is proxied by the number of analysts following
a stock as well as the number of institutional investors. This is
interesting because we have seen another report showing that,
ceteris paribus, higher analysts coverage doesnt bode wel for
stock price returns in large cap universe.
Paper Type:
Working Papers
Date:
2006-05-05
Category:
Value, Stock valuation models
Title:
The P/B-ROE Valuation Model Revisited
Authors:
Jarrod W. Wilcox, Thomas K. Philips
Source:
SSRN working paper
Link:
Summary:
The P/B-ROE stock valuation methodology is a two-stage model first

developed in 1984 by Wilcox. In this paper the authors enhance the
model to better predict returns of individual stocks as well as market
indices.
Comments:
1. Why important
The stock valuation model in this paper is based on the concept that,
any growth company will charge a lower b/p before its b/p goes up
as growth slows down. We like the fact that the model adjusts ROE
for investment time horizon, and that it is simple for estimating both
individual stocks and market indices.
2. Discussions
We suspect that a strategy based on this model (long undervalued
stocks as suggested by the model, short other wise) will have a
strong correlation with the plain-vanilla value strategy. Whether this
model can add extra alpha is still a question mark. This paper
reminds us of the model proposed in "Stock Valuation and
Investment Strategies"
(
http://icf.som.yale.edu/working_papers/papers/2001/Chen06A.pdf
)
,
where the stock-valuation model is shown to pick up GARP stocks
with good measurement on value and momentum.
Like any of the stock price valuation models, we believe that this
one, though mathematically simple and intuitive, works only for the
long term (1-2years if not longer).
Paper Type:
Working Papers
Date:
2006-04-21
Category:
Strategy, Value, growth
Title:
The Value Premium and the CAPM
Authors:
Eugene F. Fama, Ken eth R. French
Source:
Journal of Finance, forthcoming
Link:
Summary:
This paper claims that large stocks have similar level of value
premium as small stocks, and also that beta thats not related
with size and B/M are not rewarded with excess returns.
Comments:
The first conclusion is less intuitive. If one subscribe to

over-investment theory (value premium is due to the fact that
growth companys management tend to over-invest and destroy
shareholder value), then this paper shows that small growth
companies tend to be as good investors as their large cap
counterparts. When accounting for the much higher transaction
cost for small cap stocks, their managements investment
capability seems even better.
The second conclusion actually illustrates the drawback of the
most-widely used regression methodology: no correlation
between independent variables is addressed, consequently the
regression results can not be clean. Recent paper by
Petersen(2005) may help.
Paper Type:
Working Papers
Date:
2006-04-07
Category:
Value, Tangible information
Title:
Market Reactions to Tangible and Intangible Information
Authors:
Kent Daniel, Sheridan Titman
Source:
Link:
Summary:
To answer "why value stocks outperform", this paper decomposes

a stocks return into two parts: a tangible return component
which is correlated with past business performances (as
measured by earning growth), and an intangible return
component which is not correlated with (orthogonal to) firms
past business performances. It shows that the intangible
component has a strong negative correlation with a stocks future
performance.
Comments:
1. Why important
Its now the sixth consecutive year that value stocks outperform
their growth counterparts. Its certainly important to understand
the reasons behind to evaluate whether this phenomenon will
repeat itself.
2. Discussions
Using similar logic proposed by the paper, one can see that stock
prices are made up of two parts which are determined
respectively by 1) realized business performances 2) expected
business performances. The second part is far uncertain
compared with the first one. The authors present one interesting
observation about stock price reversal: intangible return reverses
itself but the tangible return does not. This seems to tell a story
that the second part is hard to guess, and that investors
systematically keep over-estimating stocks future performances.
We notice that the intangible returns are based the regression of
past returns on stocks business performance. In reality such
regression may lead to very dispersive estimation of the two
components, though we do not see any related discussion in the
paper.
Paper Type:
Working Papers
Date:
2006-03-09
Category:
Strategy, value, leverage
Title:
The Book-to-Price Effect in Stock Returns: Accounting for

Leverage
Authors:
Stephen H. Penman, Scott A. Richardson,
Source:
Link:
http://finance2.wharton.upenn.edu/~rlwctr/papers/0505.pdf
Summary:
This paper decomposed book-to-price (b/p) ratio into an

enterprise b/p and a leverage b/p, and show that contrary to
theory, the leverage b/p is negatively correlated with stock
return.
Comments:
1. Why important
This paper sheds new light on the most widely used book-to-price
ratio. By revealing the negative and puzzling correlation between
leverage and stock returns, the paper may improve classic value
strategy that's being used in many quantitative research groups.
2. Data sources
Stock accounting and pricing data are from COMPUSTAT and
CRSP.
3. Next steps
Can we enhance the performance of the traditional value strategy
based on this paper? One possible strategy is to long stocks with
low leverage/high enterprise b/p and short otherwise. This
strategy may be correlated with the conventional value strategy.
After all, we are looking at the two components of b/p ratio. The
author claims that the negative correlation between the leverage
b/p and stock return exists after controlling for the usually
factors. A back-of-envelope calculation on the two-way sort on
b/p and leverage (Table 4, panel D) implies that the strategy may
add 5-6% extra alpha annually, which is encouraging.
Paper Type:
Working Papers
Date:
2006-02-23
Category:
Strategy, momentum, value
Title:
Firm-Specific Attributes and the Cross-Section of Momentum
Authors:
Jacob S. Sagi, Mark S. Seasholes
Source:
Link:
http://faculty.haas.berkeley.edu/sagi/momentum_vC20_all.pdf
Summary:
Long companies with high momentum and high revenue growth

volatility, low cost of goods sold/total assets and price/book, and
short otherwise. This strategy is shown to outperform traditional
momentum strategy by 5% annually.
Comments:
1. Why important
Ask any quant portfolio manager and they will tell you they use
value and momentum. This paper is important since it may
improve the widely-used momentum strategy. Using accounting
data is a smart way to differentiate good/bad momentum stocks.
2. Data sources
Data are from CRSP/Compustat
3. Next steps
Of the three firm-specific factors (revenue volatility, cost of goods
sold/total assets, and price/book), price/book seems to make
most intuitive sense. In other words, momentum works better in
growth stocks. Revenue volatility is a bit puzzling - its obviously
correlated with stock price volatility. So one would expect lower
momentum profit for high volatility stocks, for which past return
is less informative (i.e., a high past return more likely to be
caused by chance) compared with a more stable stock.
In our view there are two challenges to improve momentum
strategy:
a.) whats the relationship between momentum profit and market
macro indicators (like market return), and how do we devise the
strategy to minimize such correlation.
b.) how to identify/avoid high momentum stocks that will reverse
themselves, i.e., those glamorous stars that experienced price
rally but eventually fall. It would be interesting to test whether
certain financial health indicators (leverage, debt coverage,
over-investment spending, etc) will take this old strategy further.

Paper
Type:
Working Papers
Date:
2015-08-30
Categor
y:
Implied volatility, VIX
Title:
Godot Finances Mojito 3.0 Strategy
Author
s:
Volatility Made Simple
Source: Volatility Made Simple

Link:
http://volatilitymadesimple.com/godot-finances-mojito-3-0-strategy/
Summa
ry:
Trading based on comparing a shorter-term measure of implied volatility to a

longer-term measure yields significantly higher returns than buying and
holding XIV
Intuition
There is a tendency to overestimate future volatility when the VIX
complex is in its normal contango state
As a result, it is beneficial to go long or short the VIX when the
difference between a shorter-term and a longer-term measure of
implied volatility is sufficiently large
Implied volatility term-structure (IVTS) = VIX spot price / 45-day
constant maturity price of VIX futures
Trading strategy
Near the close, calculate the 5-day median value of the IVTS
At the close:
Go long XIV (inverse of VIX) when the 5-day median value is <
0.91
Go long VXX (long VIX) when the 5-day median is > 1.10
Else use cash
Strategy delivers significant outperformance compared to XIV buy-and-hold
Source: The paper

Better returns, higher Sharpe ratio and lower maximum drawdown:
Source: The paper

Similar strategies include
Comparing first vs second month futures
VIX vs front month futures
VIX vs 1-month CM
VIX vs VXV
Data
V&Ms VIX:VXV ratio

QTs VXV:VXMT ratio
Evolution Capitals strategy
The IVTS strategy might be more robust due to considering many of the
key data points across the VIX complex together (rather than two
particular data points alone)
Paper
Type:
Working Papers
Date:
2015-05-03
Categor
y:
Low risk anomaly, idiosyncratic volatility, return seasonality
Title:
A Tale of Two Anomalies: Higher Returns of Low-Risk Stocks and Return

Seasonality
Author
s:
Christopher Fiore and Atanu Saha
Source: Compass Lexecon

Link:
http://www.olemissbusiness.com/financialreview/documents/Forthcoming%20
%28No%20Issue%20Yet%29/Fiore%20Saha%2
02014%20A%20Tale%20of%20Two%20Anomalies.pdf
Summa
ry:
Riskier stocks earn lower returns during summer months. A strategy of

investing in low beta-low idiosyncratic volatility stocks during summer months
and switching to high beta-high volatility stocks during non-summer months
can yield an annualized return of 17.2%
Intuition
There is evidence of a higher market-wide risk aversion during the
summer months
There is also evidence of an underperformance of high beta and high
volatility stocks
If the summer effect dominates the high beta (volatility) anomaly, it is
possible that the latter is not present during non-summer months
Beta (MKT) and idiosyncratic volatility (standard deviation of t) are
calculated from the Fama-French three-factor model using monthly data
over the previous five years:
Summer is from May through October, and non-summer is November

through April
Portfolio formation
Each month, separately sort stocks into quintiles by beta and
Go long into stocks in the highest (lowest) quintile of both
characteristics during nonsummer (summer) months
Strategy outperforms buy-and-hold as well as other switching strategies
Non-summer
portfolio
Summer
portfolio
Annualized
returns, %
Volatility
,%
All stocks
All stocks
12.94
19.28
Low beta stocks
Low beta stocks
13.35
16.06
Low beta & low

volatility stocks
Low beta & low

volatility stocks
12.13
9.59
High beta stocks
High beta stocks
10.65
26.81
High beta & high

volatility stocks
High beta & high

volatility stocks
9.33
31.97
All stocks
Treasury Bills
14.48
13.43
All stocks
Low beta & low

volatility stocks
16.35
14.83
Low beta stocks
Low beta & low

volatility stocks
15.73
13.59
High beta stocks
Low beta & low

volatility stocks
16.74
19.41
High beta & high

volatility stocks
Low beta & low

volatility stocks
17.19
23.88
Buy-and-hold
strategies
Switching
strategies
Strategy yields average annualized return of 17.19% (Table 6)

The results are similar when stocks are sorted based on total volatility
instead of beta and idiosyncratic volatility (Table A1-1)
Data
The results are robust to using different sub-periods or including only

500 largest stocks (Tables A1-2, A1-3)
Portfolios can be rebalanced bi-annually to reduce transaction costs and
retain similar returns (Table A2-2)
Data on Fama-French risk factors from Kenneth Frenchs website
Paper
Type:
Working Papers
Date:
2015-05-03
Category
:
Title:
Timing (And Trading) Implied Volatility
Authors:
Trading The Odds
Source:
Link:
http://www.tradingtheodds.com/2015/01/timing-and-trading-implied-volatilit
y/
Summar
y:
A three-day and 10-day mean reversion VIX strategy yields significant returns
Five strategies evaluated
(1) VIX with 10d EMA vs. 10d SMA: blue line
(2) VIX with 3d EMA vs. 10d SMA: grey line
(3) VIX before 1/1/2008, VXMT after 1/1/2008 with 3d EMA vs. 10d
SMA: red line
(4) 120% of VIX | 20% of VXMT with 3d EMA vs. 10d SMA: black line
(5) 120% of VIX | -20% of (VIX + 10%) with 3d EMA vs. 10d SMA:
green line
The 10-day EMA | 10-day SMA mean reversion strategy can be
boosted by utilizing a 3-day EMA instead of a 10-day EMA (grey line)
Even better works a mixture of 120% VIX minus 20% of VXMT,
regularly (artificially) reducing the index value (black line)
Source: the paper

VIX trading is more about limiting loss
Note that the curves below shows the respective Summation Index,
getting an index move right: +1 ; getting it wrong: -1
The red line has been winning small and losing big, though the number
of winning rates are similar to others
VIX trading is less about the percentage of being right or wrong
(means getting the direction right), but all about magnitude of
winning/losing trades (effectiveness)
Source: the paper
Paper Type:
Working Papers
Date:
2015-03-26
Category:
Momentum crash prediction, volatility of momentum returns,

drawdowns
Title:
Momentum Crash Management
Authors:
Mahdi Heidari
Source:
SSRN
Link:
Summary:
Change in momentum volatility is predictive of momentum
crashes, and can be used to construct better momentum

strategies with lower drawdown
Intuitions and known predictors
Momentum suffers from well-documented crash periods
There are 60 crash periods (those months with
momentum returns -10% or worse) out of 1044
total months
Such crashes happen in times of market stress and
market rebound, thus the variables that capture these
episodes, can be used as momentum predictor
Various predictors of momentum crashes have been
studied: momentum volatility (M-MomVol) and market
volatility(M-MktVol), state of the market(M-Mkt), market
illiquidity
These predictors can be improved
They weight winner/loser stocks according to the
momentum volatility
They unnecessarily changes the portfolio weights
in normal period, though it did correctly change
the weights in crash period
It also has high portfolio turnover that leads to
higher transaction cost
Three new momentum predictors: 1) cross sectional
dispersion of stock returns (M-Disp), 2) change in market
return (M-MktChg), and 3) change in momentum volatility
(M-MVolChg)
Two groups of variables:
Group1 (broad market related): past return (Mkt),
change in the market return (MktChg), volatility of
the market (MktVol), cross sectional dispersion of
stock returns (Disp) and market illiquidity (Illiq)
Group2 (momentum time series based):
momentum return volatility (MomVol), change in
momentum volatility (MVolChg)
Define state dummy for each predictor to distinguish
between crash and normal periods: define predictor Xs
dummy equal to 1 if its less than 90 percentile of prior
5-year range, and 0 otherwise
Only when state dummy is 0 (when predictor is more
than its 90 percentile range), then dynamic strategy
closes all of the positions in static momentum strategy
MVolChg works best in predictive regressions
In uni-variable regression, MVolChg has the highest R2
and t statistics on stand-alone basis
Though all seven predictors have significant beta
with negative sign (Panel A in table 6)
MVolChg better than MomVol: in predicting one

month ahead momentum return, MVolChg has t
statistics of -12 and R2 of 12%, which is four
times larger than R2 of M-MomVol
When all of the predictors are included in the regression,
MVolChg is the most important predictor, with lower
correlation with other predictors (Panel B in table 6)
Only MktChg, MomVol and MVolChg stay
significant
Within Group1 predictors, MktChg has higher predictive
power than other variables
Most of the predictive power comes from loser portfolio
prediction, not winner portfolio (Table 9)
Use stand momentum portfolio when the state dummy of
specific variable is equal to 1
Invest in cash when the state dummy is 0
Improved performance when using MVolChg
Sharpe ratios are 1.1, compared with 0.68 in the standard
Much better drawdown when using dynamic strategies
(Table 8)
Source: the paper

Comparable turn-over: turnover are between 84 to 104
percent of static momentum strategys turnover (Table
10)
Works in subperiods of 1927-1955, 1956-1984 and
1985-2013): MVolChg has significant negative coefficient
in all subsamples (Table 12)
Data
Jan 1926 - Dec 2013 stock data are from CRSP
The Fama and French (1993) factors as well as returns on
portfolios formed on size and book-to-market are from
Kenneth French
Paper
Type:
Working Papers
Date:
2015-02-17
Category: Return sign predictability, volatility, Google search volume index (SVI)
Title:
Information Demand and Stock Return Predictability
Authors:
Dimitris K. Chronopoulos, Fotios I. Papadimitriou, Nikolaos Vlastakis
Source:
SSRN Papers
Link:
Summary
:
Including Google search index improves the accuracy of forecasting of

volatility and the sign of stock index returns
Intuition
There is a link between demand for information (DOI, or investor
attention) and financial market activity such as volatility
Including DOI variable in volatility models should improve forecasting
accuracy
Christoffersen and Diebold (2006, C&D model) demonstrate that the
sign of asset returns can be predictable even if the expected returns
are not, provided that their volatility is
In this study, improved volatility forecasts of S&P500 can lead to
better sign forecasts of stock index returns, resulting in profitable
investment strategies
February 20, 2015 Copyright 2005 - 2014 AlphaLetters, LLC Page 10
In this study, DOI is proxied by the daily Google search volume index
(SVI) of the key words S&P 500
Excess returns on S&P 500 index are calculated as index returns
minus the risk-free rate
The main variable, SVI, is measured using changes in the Search
Volume Index: SVI=SVIt SVIt-1
The probability of a positive return on the S&P 500 index is estimated
through volatility forecasts (C&D model)
Including SVI improves forecasting of volatility and the sign of daily stock
returns
Forecasting improvement is evident through lower model errors and
superior performance (Tables 2, 3)
Robust for full sample and sub-periods (2005 2007 and 2008
2013) (Tables 2, 3)
Portfolio formation
Use C&D model to predict the sign of the next periods index return
Switch from the stock index into the risk-free asset whenever
negative returns are predicted
Better annualized strategy performance when SVI is included in the model
Source: The Paper
Returns are calculated net of transaction costs (3bp for each one-way
trade)
Similar performance for the two sub-periods (Tables 6, 7)
Data
Daily prices of S&P 500 index from The Center for Research in
Security Prices (CRSP)
Monthly Treasury bill rates from Ibbotson and Associates (Kenneth
Frenchs website)
Data on the bond yields from the St. Louis FEDs FRED database
Pap
er
Typ
e:
Working Papers
Date
:
2015-01-16
Cate
gory
:
Time series momentum, volatility, futures
Title
:
Time Series Momentum and Volatility States
Aut
hors
:
John E. Pettersson
Sour
ce:
Hanken School of Economics working paper
Link
:
Sum
mar
y:
Time series momentum is most profitable in futures with declining or low volatility
Definitions
An asset is in Low(high) volatility state if the current period (at time t - 1)
volatility is lower(higher) than the historical level volatility
Volatility is calculated as a weighted sum of squared returns with the mass
center about 60 days back in time
The volatility level is calculated as an average of past volatilities for the last
120, 250 and 500 days
Construct portfolios
If the excess return during the evaluation period is positive (negative), the
strategy takes a long (short) position in the instrument
Position size is inversely relative to the current (at time t-1) volatility
The first month following the investment decision is not excluded
Significant short-term profits
Significant excess returns are found for holding and evaluation periods of
up to 256 days
The highest t-statistics are for strategies with a holding period around one
month and an evaluation period around 12 months
iven by long leg: significant returns only in the long leg of each volatility
portfolio (Figure 6)
Driven by low volatility instruments: similar for both long horizon and short
horizons (Table 2, 4, 7, Figure 6)
Using monthly data and conditioning time series momentum on
volatility states, Sharpe ratios is 0.22 for the low volatility portfolio,
vs 0.06 for the high volatility state portfolio (Table 5)
Similar patterns when using both daily and monthly data (Table 2,
4)
Crash proven: low volatility portfolio lacks the large negative return periods
found in the high volatility state portfolio (Figure 7)
Robustness: robust for shorter frequency volatility measures, for
conditional volatility, and when using squared returns as a proxy for
volatility
In the graph above, TSML, TSMH, and TSMA are the low-, high-, and all
volatility portfolios
Source: the paper
Data
Data for 26 equity index futures (for the markets in North and South
America, Europe, Asia and the Pacific) for the period of April 1982 to
November 2013 from Factset
Paper
Type:
Working Papers
Date:
2014-12-03
Categor
y:
Title:
Trading The S&P 500 Index (via Implied vs. Historical Volatility)
Authors
:
Trading The Odds
Source:
Link:
http://www.tradingtheodds.com/2014/11/trading-the-sp-500-index-via-implie
d-vs-historical-volatility/
Summar
y:
An improved Volatility Risk Premium (VRP) strategy yields significant returns

with Sharpe Ratio of 1.6 during 2003-2014
When no leveraged used, VRP strategy with 2-day historical volatility (HV)
yields best results
Three Volatility Risk Premium (VRP) Strategies
DDN VRP strategy: Long S&P 500 when 5-day average of [VIX
(10 -day historical volatility of SPY * 100)] > 0, Short S&P 500
when 5-day average of [VIX (10 -day historical volatility of
SPY * 100)] < 0
VRP strategy with 2-day HV: Long S&P 500 when 5-day average
of [ VXMT ( 2-day historical volatility of S&P 500 * 100)] > 0,
Short S&P 500 when 5-day average of [ VXMT ( 2-day
historical volatility of S&P 500 * 100)] < 0
VRP strategy with 2-day HV yields best results, with Sharpe Ratio 1.05
and -30% drawdown
From 3/25/2004 to 09/2008, all strategies were close
Most outperformance occurs mostly during the 2009 financial crisis

periods
DDNs VRP Strategy flattened out 1.5 year ago, due to a subpar 10-day
historical volatility
Source: the paper

In a leveraged version, the VRP (trading VXX and XIV) works best
Note the graph below show equity curves that have been leveraged by
factor of four
Four strategies tested
VRP (trading VXX and XIV) - VXMT index version with a 2-day
historical volatility - (black line)
VRP (trading the S&P 500 index, in combination with the S&P
500 2-day RSI): Long S&P 500 when [ 5-day average of [VXMT
- (2-day historical volatility of S&P 500 * 100)]> 0 OR S&P 500
RSI(2-day) < 1 ] AND S&P 500 RSI(2-day) < 95, Short S&P 500
otherwise (blue line)
VRP (trading the S&P 500 index) - VXMT index ve with a 2-day
historical volatility (red line)
VRP (trading VXX and XIV) yields Sharpe Ratio of 1.6, but with a high
drawdown of 46% (Image IV)
Source: the paper
Pap
er
Typ
e:
Working Papers
Dat
e:
2014-10-22
Cat
ego
ry:
Volatility anomaly, short interest
Titl
The long and short of the vol anomaly
e:
Aut
hor
s:
Bradford D. Jordan and Timothy B. Riley
Sou U.S. Securities and Exchange Commission

rce:
Lin
k:
http://harbert.auburn.edu/binaries/documents/finance/2014/fall/VolAnomaly.pdf
Su
mm
ary
:
High volatility stocks on average underperform. But high volatility stocks with low
short interest outperform. A long/short strategy yields a monthly alpha of 1.67%
Intuition
On average, stocks with high prior-period volatility underperform those with
low prior-period volatility
However, both positive and negative misvaluation exists among these highly
volatile stocks
Short sellers are arguably adept at identifying those valuation errors
As a result, high volatility stocks can experience significant positive or
negative future abnormal returns depending on the level of short interest
The level of short interest is proxied by Days to Cover (DTC) and Short
Interest Ratio (SIR)
DTC = (the level of short interest in month t) / ( the average daily trading
volume in month t)
SIR = the short interest level / shares outstanding
Portfolio formation
Volatility sort
In month t, sort stocks into quintiles based on idiosyncratic volatility
in month t-1
Short interest sort:
In month t, sort stocks into quintiles based on their short interest
(SI) in month t-1
Long strategy: buy high volatility stocks with low short interest
Long/short strategy: buy high volatility stocks with low short interest, short
high volatility stocks with high short interest
Both long and long/short strategies yield significant monthly alphas
Source: the paper
Robust to execution costs (illiquidity, share turnover, and institutional
holdings) (Table 6)
Robust to momentum (large, positive alpha remains regardless of prior
returns) (Table 7)
High vol/low SI portfolio performs well during turbulent markets (the
dot-com bubble and the recent financial crisis) (Table 8)
Source: the paper

Data
Short interest data from Compustat augmented with data supplied by
NASDAQ
Data range: 1991 - 2012
Pap
er
Typ
e:
Working Papers
Dat
e:
2014-10-22
Cat
ego
ry:
Futures, momentum, volatility
Titl
e:
Risk-Adjusted Time Series Momentum
Aut
hor
Martin Dudler, Bruno Gmur, Semyon Malamud
s:
Sou SSRN
rce:
Lin
k:
Su
mm
ary
:
When trading futures, the risk-adjusted time series momentum (RAMOM) strategies
outperform the standard time series momentum (TSMOM)
Intuition
The classic momentum strategy is based on averages of past realized
returns
Ignoring the noise associated with fluctuating stochastic volatility
Normalizing past returns by realized volatility removes at least partially the
impact of volatility
This results in lower turnover, lower associated trading costs and much more
stable trading signals, improving the overall strategy performance
Volatility is the exponentially weighted moving average (EWMA()):
o Where 1 = 0.94, 2 = 0.87, 3 = 0.50 correspond to approximately

30-day, 15-day and 5-day realized volatility, respectively
Equally weight securities
Portfolio formation
At date t-1, compute the sign of security is risk-adjusted returns over the
chosen look-back period (1, 3, 6, 9, 12, 24 months)
Add up those signs and normalize the total size of the position by the
current realized volatility measure i,t-1(0.94)
Hold this position for one day until the returns ri,t are realized and repeat
the procedure
RAMOM momentum systematically outperforms TSMOM when using a 12-month
holding period
Cumulative performance of both strategies with a 12-month holding period
Source: the paper

Not much value-added when using a 1-month holding period:
Source: the paper
Higher RAMOM strategy Sharpe ratio for full sample and two sub-periods
(1984-1998, 1999-2013) (Table 9)
The outperformance of RAMOM is not large for any given asset class and is
most significant across classes (Tables 11 15)
RAMOM allows investors to gain significant exposure to Fama-French factors
without actually trading the (very large) stock universe (Tables 19 23)
Much lower turnover: even though RAMOM strategy is adjusted daily
(compared to monthly TSMOM adjustment), turnover is reduced by about
40-50% (Table 16)
Robust to trading cost: assuming transaction costs of 5 basis points per
dollar traded, only RAMOM Sharpe ratios remain positive in both sub-periods
(Table 17)
Further adjusting RAMOM returns by the volatility of momentum returns
increases Sharpe ratio by ~20% (Table 24)
Source: the paper

Data
Data on futures contracts from CSI (commercial market data provider) and
Bloomberg
Sample: 64 liquid futures contracts (15 stock index futures, 25 commodity
futures, 13 bond futures, 5 interest rate futures, and 6 currency futures)
Data range: 1984 - 2014
Paper
Type:
Working Papers
Date:
2014-01-07
Category
:
Volatility trading, VIX ETPs
Title:
Trading Volatility: At What Cost?
Authors:
Robert Whaley
Source:
SSRN Working Paper
Link:
Summar
y:
VIX ETPs are virtually guaranteed to lose money through time, hence not
suitable for buy-and-hold. Best returns are provided by VIX ETPs that are 1)
provide interest accrual and 2) based on the VIX mid-term futures index
rather than short-term
Background
Exchange-traded products (ETPs) linked to the CBOE Market Volatility
Index (VIX) have attracted investors in recent years
30 VIX ETPs are listed with an aggregate market value of $4 billion,
with a daily trading volume of $800+ million
Why ETPs lose money: VIX futures indexes (and, consequently, VIX
ETPs) are watered down and noisy versions of VIX
If VIX moves upward by 1% on a given day, the VIX
short-term futures will rise by slightly <0.5%, and VIX
mid-term futures index responds by <0.25% (Table 5)
Positions in the futures indexes would need to be levered
upward to achieve the same price action as VIX, with
consequent leveraging of the effects of contango
ETPs is prone to contango trap
Contango trap is when VIX futures prices are systematically
drawn downward toward the level of the VIX index
Surprisingly, 23% of investment in VIX ETPs is institutional ownership
given the poor returns
VIX ETPs yield poor returns
VIX futures index provided a holding period return of 38.5% with a
compound annual growth rate (CAGR) of 5.3%
VIX Short-term futures index (ST TR) fell by 93.2% since inception
(CAGR: -34.8%); VIX medium-term (MT TR) rose 5.9% (CAGR: 0.9%)
Buy-and-hold strategy would lose more than 6% a month on
average, without leverage
Direct ETPs lost $3.89 billion, and Inverse ETPs lost $57.4 million since
December 2005
Below is the price and shares outstanding of VXX
Better (though still negative) returns from ETPs based on mid-term futures
index, and ETPs with interests accruals
ETPs based on mid-term futures index (instead of short-term) lowers
losses occurring due to absence of contango trap
VIX futures market is usually in contango
The term structure is upward sloping for nearly 81% of the VIX
futures history (`Table 4)
Effect is particularly pronounced for short-term maturities
(30-days: slope = 0.0230), and minimal at medium maturities
(150-days: slope = 0.0041) (Table 4)
ETPs with interest accrual avoids paying an additional, albeit implicit,
management fee
Data
December 2005 - March 2012 daily VIX futures data from CFE website
Daily VIX options data are from CBOEs Market Data Express
VIX ETPs data are from Bloomberg
Paper
Type:
Working Papers
Date:
2013-11-03
Categor
Novel Strategy, Asset Pricing, Jump Risk, Volatility Risk
y:
Title:
Aggregate Jump and Volatility Risk in the Cross-Section of Stock Returns
Author
s:
Martijn Cremers, Michael Halling, David Weinbaum
Source: SSRN
Link:
Summa
ry:
Stocks with high sensitivities to jump and volatility risk have low expected
returns, because they hedge against the risk of significant market declines. A
two-standard deviation increase in jump (volatility) factor loadings predicts a
3.5-5.1% (2.7-2.9%) lower annual returns
Stocks with high volatility sensitivities hedge against the risk of
significant market declines, e.g., the recent financial crisis
Hence stocks with positive loading on jump risk would likewise
be attractive and require lower expected returns
A strategy that is market neutral, gamma neutral, but vega positive is
insulated from jump risk and only subject to volatility risk
A strategy that is market neutral, vega neutral, but gamma positive is
only subject of jump risk
Both strategies can be implemented using investable options
For each stock, the factor loadings are estimated using
Where MKTt is market return on day t, and Xt is the return on either the
jump or the volatility risk factor mimicking portfolio
High jump and volatility loadings predict low expected returns
The value-weighted long-short portfolio earns a raw return of -4.6% per
year (t-statistic -4.37) and a risk-adjusted return of -2.7% per year
(t-stat -2.40) (Panel B Table 3)
I.e., jump and volatility risk both carry negative market prices of risk
Significant at the 1% and 10% level, respectively (Table 1)
Jump and volatility are distinct effects (Figure 1 and 2)
Returns on the two strategies are essentially uncorrelated (0.09)
(Panel B Table 1)
Similar findings when using Fama-MacBeth regressions (Table 6)
Robust to size, downside beta, conditional skewness and
kurtosis, idiosyncratic volatility, and idiosyncratic skewness
Data
January 1998 - December 2011 daily S&P500 futures options data are
from Chicago Mercantile Exchange
Stock return data are from Center for Research in Security Prices
Paper
Type:
Working Papers
Date:
2013-10-03
Category:
Title:

Options Markets
Authors:
Source:
Link:
f
returns
diffusions
small (large) OIVG
OIVG
Data

momentum outperforms
A)
month (Table 4)
(Table 4)
A.0.7)
Paper
Type:
Working Papers
Date:
2013-08-02
Category: Risk, return, value, liquidity, volatility

Title:
Risk and Return Within the Stock Market: What Works Best?
Authors:
Roger G. Ibbotson and Daniel Y.-J. Kim
Source:
Zebra Capital Management Working Paper
Link:
http://www.zebracapm.com/files/Risk%20and%20Return%20Within%20the
%20Stock%20Market%206-27-2013.pdf
Summary
:
When grouping stocks into quartile by quant factors (beta, volatility, size,
value, liquidity, momentum, etc.), the winning quartile tend to have lower
risk and lower volatility
Background
Prior studies have show the excess returns when group stocks by
various characteristics such as beta, volatility, size, value, liquidity,
and momentum, etc
This study shows that stocks in winning quartiles have lower risks
In other words, popularity (i.e., high risk stocks) underperforms
Each year, sort stocks into quartiles by beta, volatility, size, value,
liquidity, momentum, Fama-French betas, and factor betas
Hold for one year
Limit the universe to a maximum of 3,000 stocks
Every winning quartile sees higher returns and lower risks
Using value and momentum as an example (Table 5 and Figure 3, 5),
the graph below shows that winning stocks (low growth stocks,
winner momentum stocks) yield higher returns and lower risk
Source: the paper
Value
Data
Note that high-growth companies tend to be newsworthy hot

companies. In this sense, popularity predicts underperformance
Same pattern for each of every factors studied
factors generate highest returns
On raw return basis, value works best (Figure 8)
Low volatility, low beta, and low turnover portfolios see highest
risk-adjusted returns
These portfolios not only outperform, but also are less risky than the
universe equally weighted portfolio (Figure 8)
1971 - 2011 U.S. stock data are from CRSP/Compustat
Paper Type:
Working Papers
Date:
2013-06-02
Category:
Volatility trading strategies, volatility risk premium
Title:
Easy Volatility Investing
Authors:
Tony Cooper
Source:
2013 Wagner Award paper
Link:
Summary:
Volatility trading strategies generate high Sharpe Ratios and low

correlations with S&P 500 index. It is recommended to shift 10%
allocation to volatilities (55% equities, 35% bonds, and 10%
volatility)
Background
Stock market volatility and VIX are more predictable than
returns (Figure 1)
Volatility changes are negatively correlated with market
price changes (Figure 1)
Investors are willing to pay a Volatility Risk Premium (VRP)
to offload the volatility risk
However VRP is not a free lunch: it is mostly positive but
sometimes negative (Figure 3, 5)
ETNs that earn the VRP from VIX Futures
Four ETNs that are identical in structure, but differ in
leverage and term length
VXX is the S&P 500 1-Month Volatility Index. XIV is
the inverse of VXX
VXZ is the S&P 500 VIX Medium Term Futures (4-7
months), and ZIV is the inverse of VXZ
Statistics for the four ETNs
XIV returns have a Sharpe Ratio (SR) between 2-3
for long intervals of time
XIV/VXX have higher returns and volatility than
ZIV/VXZ
Large drawdowns
Constructing five volatility trading strategies

Strategy1: Buy and Hold XIV
Strategy2 (Momentum): long one of the four ETNs with the
best return over the last 83 trading days if that return is
positive. Stay out of market if that return is not positive
Strategy3 (Contango-Backwardation Roll Yield): Long XIV

when VIX term structure is in contango and VXX when the
term structure is in backwardation
Strategy 4 (VRP): Long XIV if VRP > 0, else long VXX
VRP = current VIX 5-day moving average of
prior 10-day volatility
Strategy 5 (Hedging): Long one of the two beta-neutral
strategies (roll yield arbitrage) using ETN (XVIX or XVZ)
For all strategies, ignore trading frictions and rebalance
daily, and assume returns are zero when out of the market
High Sharpe Ratios, low correlations with S&P500, though high
drawdowns
Paper
Type:
Working Papers
Date:
2013-04-30
Categor
y:
Mean-reversion, low-volatility stocks
Title:
Short-term Mean-Reversion in SPLV (Low Vol) vs SPHB (High Beta)
Authors
:
Scott Daly
Source:
Marketsci blog
Link:
http://marketsci.wordpress.com/2013/04/17/short-term-mean-reversion-in-s
plv-low-vol-vs-sphb-high-beta/
Summar
y:
Popular short-term mean-reversion indicators (e.g., RSI(2)) have lost most of

their effectiveness, but it is still working for ETF of lowest volatility stocks
Background
SPLV tracks the 100 stocks from the S&P 500 with the lowest volatility
over the previous 12 months
SPHB tracks the 100 stocks from the S&P 500 with the highest beta
over the previous 12 months
Strategy
Long SPLV at the close when SPLV closed down for the day, otherwise
to cash
Ignore transaction costs, slippage, and return on cash
Similar patterns hold for SPHB (see comments following the blog)
Comme
nts:
Paper
Type:
Working Papers
Date:
2013-01-31
Catego
ry:
Momentum, residual return momentum, volatility, correlation
Title:
Some Simple Tricks to Boost Price Momentum Performance
Author
s:
Andrew Lapthorne, Rui Antunes, John Carson, Georgios Oikonomou, Charles

Malafosse and Michael Suen
Source
:
SG Americas research report
Link:
http://gallery.mailchimp.com/6750faf5c6091bc898da154ff/files/117108.pdf
Summ
ary:
Momentum profit can be enhanced by using residual return (those return that
are unexplained by classic risk factors), by scaling such returns by its volatility,
and by avoiding distressed stocks
Intuitively, the return unexplained by risk factors is a better measure of
idiosyncratic forces that drives momentum
Distressed stock may hurt momentum profit
Such stocks are likely to appear in the short side of a
conventional momentum portfolio
Yet they may recover sharply
Definitions
Four versions of residual returns
IMOM: stock returns unexplained by market beta, based on
rolling 36-month historical regressions
IMOM/VOL: IMOM scaled by return volatilities over the ranking
interval
FFIMOM: Stock returns unexplained by market beta, sizes and
book-to-market ratios, based on rolling 36-month historical
regressions
FFIMOM/VOL: FFIMOM scaled by stock volatilities over the ranking
interval
Define stocks distress level as the percentage by which a stocks current
price is below its rolling lagged 12-month high
Distressed stocks are those stocks that are at least 50% below
their respective 12-month highs
Much better performance when using returns residual
E.g, gross annual return of IMOM more than doubles that of a
conventional momentum strategy, while lowering volatility by almost half
Sharpe ratio is 0.69, much higher than for conventional momentum
strategy (0.05)
Scaling by return volatilities (IMOMVOL) further boosts gross annual
Sharpe ratio to 0.84
Source: the paper

Avoiding distressed stocks helps
Excludes stocks that are at least 50% below their respective 12-month
highs
Compared with stand-alone IMOM strategies, volatility decreases from
16.2% to 9.1% (table on page8)
Yielding Sharpe ratio 1.51, much higher than the conventional strategy
(0.05), and stand-alone IMOM strategies (0.63-0.84)
Sensitive to the cut-off line: when exclude fewer stocks (stocks lower
than 60%, 70%, 80% or 90% below their 12-month highs), the result is
weaker
Source: the paper

Data
June 1993 through September 2012 data for FTSE World Index stocks
are covered in this study
Paper
Type:
Working Papers
Date:
2013-01-31
Catego
ry:
Title:
Generalized Momentum and Flexible Asset Allocation (FAA): An Heuristic

Approach
Author
s:
Source
:
SSRN Working Paper
Link:
Summ
ary:
An asset allocation strategy based on assets relative momentum, absolute

momentum, volatility and correlation greatly outperforms traditional momentum
strategy
Intuition
relative
returns)
is infamous for its large drawdown
absolute
momentum can help reducing drawdown
Funds volatility and correlation can be used to further reduce portfolio
risk
Trade 7 assets
3 global stocks (VTSMX, FDIVX, VEIEX) covering US, EAFE and
EM regions
2 US bonds (VFISX) (VBMFX) covering short- and mid-term
horizons,
Calculate momentum, volatility and correlation based on prior 4 months
data
Choose 3 (out of 7) funds to build an equally weighted (EW) portfolio
Return momentum (R): rank funds based on lagged total returns.
Long/short funds with higher/lower returns
R+Absolute momentum(A): when winner funds have a negative
momentum, replace them with cash
R+A+Volatility momentum (V): to lower risk, further rank funds
by volatility (standard deviation of daily returns). Lower is better
R+A+V+Correlation momentum (C): to diversify, rank funds by

their average pair-wise correlation of daily returns and lower is
better
Optimized portfolio: Change weights on (relative momentum,
volatility, correlation) from (1, 0.5, 0.5) to (1, 0.8, 0.6)
Leveraged and optimized portfolio: apply 2x leverage to match
that of S&P 500 index, add transaction costs (0.1% per
transaction) and interest costs of leverage (3% annual)
Use simple linear functions to combine volatility and correlation with
return momentum ranking
Benchmark portfolio is the equal-weighted all 7 funds, rebalanced
monthly
Data
Robust to look-back months of 1-12 months, with 4 months performing

the best (Figure 8)
Paper
Type:
Working Papers
Date:
2012-09-30
Categ
ory:
Time-Series momentum, volatility estimation, managed futures
Title:
Improving Time-Series Momentum Strategies: The Role of Trading Signals and

Volatility Estimators
Autho
rs:
Akindynos-Nikolaos Baltas and Robert Kosowski
Sourc
e:
SSRN Working Paper
Link:
Summ
ary:
This paper proposes an improved time-series momentum strategy by inversely

weighting futures by volatility
Background
Time-series momentum is based on the assets own price history. It is
long assets that have positive recent returns
By contrast, cross-sectional momentum is based on the relative
price of assets
Usually in time-series momentum strategies, trading signal is based on
only the sign of the past return
Hence only provides a rough indication of a price trend, without
information of the price path itself
This paper proposes a new time-series momentum strategy by inversely
weighting assets by volatilities
Using intra-day 30-minute quotes of 12 futures contracts, the
authors find a more efficient way to estimate volatilities
Methodology
Volatility estimation
Using the dataset includes 48 30-minute intra-day data points per
contract, estimate running volatility at the end of each trading day
Among five volatility estimators, YZ estimator (Equation (21)) is
the best, with smallest bias and lowest turnover (Table 2 and
Figure 3)
Use YZ ex-ante volatility estimate with a rolling window of 30 days
Five competing momentum signals
Return Sign (SIGN): long (short) when past return is positive
(negative)
Moving Average (MA): long (short) when past J-month price
moving average is below (above) past 1-months moving average
of daily prices
EEMD Trend Extraction (EEMD): decompose prices into an
oscillating component and a residual long-term trend. Long (short)
when price trend is upward (downward)
Time-Trend t-statistic (TREND): long (short/neutral) when the

t-statistic of the slope from fitting a linear trend on past prices is
more than 2 (less than -2 / otherwise)
Statistically Meaningful Trend (SMT): a stricter version of TREND
(Equation (31))
Inversely weight assets by volatility
Where M is the number of available assets

Xi (t-J, t) is either -1(short), 0 or +1(long), and is the trading signal
for the ith asset which is determined during the lookback period
The scaling factor 10% is used to achieve an ex-ante volatility of
10%
(t; D) is an estimate of volatility of the ith asset, using a window of
the past D trading days
Ri(t,t+k) is the return of assets in coming K days
Trend-related signals (SMT and TREND) works best
All five momentum strategies are strong for the first 12 months and start
to reverse subsequently (Figure 5)
SMT and TREND have higher returns, higher downside-risk Sharpe ratio
and lower turnover
Works best for lookback period of 6 to 12 months and a holding
horizon of 1 to 3 months (Table 4)
For example, SMT yields a (6,1) momentum profit of 28% (Table
4)
They also generate the lowest turnover among all signals
Data
Data spans from 11/1/1999 to 10/30/2009 (2610 days)

Dataset consists of intra-day price quotes for 12 future contracts, which
include 6 commodities (Cocoa, Crude Oil, Gold, Copper, Natural Gas and
Wheat), 2 equity indices (S&P500 and Eurostoxx50), 2 FX rates (US
Dollar Index and EUR/USD rate) and 2 interest rates (Eurodollar and
10-year US Treasury Note
Paper
Type:
Working Papers
Date:
2012-08-26
Catego
ry:
Novel strategy, volatility of option-implied volatility
Title:
Unknown Unknowns: Vol-of-Vol and the Cross Section of Stock Returns
Author
Guido Baltussen, Sjoerd Van Bekkum and Bart Van Der Grient
s:
Source
:
Link:
http://www.efa2012.org/papers/s2g1.pdf
Summ
ary:
The volatility of option-implied volatility (vol-of-vol, or VoV) can predict stock

returns. High VoV stocks underperform low VoV stocks by 10% per year. Such
pattern persists for more than 18 months
Intuition
VoV captures the variation in investors expectations about return
volatility
VoV representing second-order beliefs about stock returns, i.e.,
unknown unknowns.
Compared with VoV, options implied volatilities (IV) measures the
risk-neutral expectation of a stocks future volatility
It gauges the perceived risks to investors regarding expected
stock returns
I.e., such risks are known unknowns
Definition of VoV
VoV is the standardized volatility of daily option implied volatility over the
past month
For each stock each day, calculate the VoV for stock i on day t as follows
Where
implied volatility -formula- is calculated as the average
implied volatility of the ATM call option and ATM put option
High VoV stocks have higher beta, higher idiosyncratic volatility, higher
past month maximum returns, and a more positively skewed and
leptokurtic return distribution (Table 1)
Higher VoV, lower future returns
Sorts stocks by VoV into value-weighted quintile portfolios
Low VoV stocks earn 0.59% per month, high VoV stocks earn -0.26%
The hedged return is -0.85% per month (Panel (a) of Table 3)
I.e., about 10% per year
Consistent performance through the years (figure 4)
Source: the paper

Hold up to 18 months: excess returns and alphas continue to
accumulate (at a slowly decreasing rate) for up to than 18 months
(figure 3)
60% hit ratio: the VoV effect is present in around 60 percent of the
months (figure 4)
Robust to 20+ known risk factors
When adjusted for size, book-to-market, and momentum, the hedged
long-short portfolio earn the four-factor alpha of -0.69% a month
Double sort VoV and 20 other known risk factors (table 4, panel a to f)
Canonical
characteristics
Size, beta, book-to-market,

momentum and short-term
reversal
Return
distribution
characteristics
Idiosyncratic volatility, past

months maximum return,
skewness, and kurtosis;
Liquidity
characteristics
Stock turnover, Amihuds stock

liquidity
Option-based
characteristics
Changes in call and put implied

volatilities, implied-minus-realized
volatility spread, call-minus-put
implied volatilities
Data
E.g., kurtosis focuses on fat tails in the return distribution, therefore

seems related to VoV. Yet per panel b, it is not subsumed by VoV
Similar findings in regressions (table 5)
1996 - 2009 option data are from OptionMetrics database
Such data include daily implied volatilities, closing bid and ask prices,
option strikes and maturities, options volume and open interest
Pape
Working Papers
r
Type:
Date: 2012-07-29
Categ
ory:
Enhancing low-volatility strategy, value
Title:
Enhancing A Low-Volatility Strategy Is Particularly Helpful When Generic Low

Volatility Is Expensive
Auth
ors:
Pim van Vliet
Sourc
e:
Robeco white paper
Link:
http://www.robeco.com/images/enhancing-a-low-volatility-strategy.pdf
Sum
mary
:
Adding valuation and sentiment factors improves a generic low-volatility strategy

by up to 6% per year. Such enhancement is particularly helpful given that
low-volatility stocks are getting expensive and the generic low-volatility strategy
tends to underperform
Background
Historically, low volatility stocks yield higher return with lower risk
Sharpe ratio is 0.71 vs. 0.50 of market index during 1920-2010
(page1)
Historically, low volatility stock are more like value stocks
Slightly lower price-to-book ratio (1.61 vs. market index of 1.66
(page1)
Higher dividend yield (page 1)
Recently however, low vol stocks valuation has jumped
P/B ratio has gone up relative to index
Enhancing by adding value and sentiment factors

This paper does not give details of how to construct value and sentiment
factors
The improved strategy is still mostly low vol strategy: only allocate 20%
tracking error to value/sentiment factors
The enhanced strategy can increase return from 10.1% to 13.7%, and
Sharpe Ratio from 0.71 to 0.88
The selected stocks are more value: average P/B is 0.17 lower than
generic low vol stocks and the dividend is 0.6% higher
Source: the paper

Such enhancement is particularly helpful in current environment
As currently low vol stocks have high P/B (growth)
In such growth environments, low-volatility strategy underperforms
index (Table on page 4)
The enhanced version, however, outperforms market index
Increasing return and alpha by up to 6 percentage points (Table on
page 4)
Paper Type:
Working Papers
Date:
2012-06-25
Category:
Momentum, reversal, volatility, large-cap stocks
Title:
Short-Term Momentum and Reversals in Large Stocks
Authors:
Jason Zhanshun Wei, Liyan Yang
Source:
SSRN working paper
Link:
ownload=yes
Summary:
Within large stocks and for up to six months, low-volatility stocks

exhibit reversals, and high-volatility stocks experience
momentum
Previous studies show that momentum exist in short-term
(1-3 year) and reversals exist in longer term (3-5 years)
This study differentiate the returns of high/low volatility
stocks
Why low volatility stocks reverse: per the Moderated
confidence theory, investors systematically bias a
signals reliability toward the unconditional mean
That is, people overestimate the reliability of
unreliable information and underestimate the
reliability of reliable information
Information of large-cap/low-volatility stocks tend
to be un-reliable
Step1: calculate stock volatility based on daily returns of
past 1, 2, 3, 6 and 12 months
Step2: each month, sort stocks first into large/small
halves, and then in each half into 5x5 segments by
realized past returns and volatility
Step3: equally weight and hold for up to 12 months
Low(high) vol large cap stocks demonstrates reversal (
momentum)
When the evaluation period is 1 or 2 months, momentum
and reversals coexist for a holding period of up to six
months
I.e., low(high) volatility demonstrates reversal (
momentum)
For large stocks with low volatility, significant reversal for

evaluation period (J) and holding periods(K) that sum to
seven or eight (table 2)
The reversal weakens as the holding period becomes
longer, and momentum prevails when K=6
Such return reversal/momentum are monotonic with past
returns
In other words, such three-way sorts restore the
monotonic ordering of portfolio returns
By contrast, all small stocks exhibit momentum
regardless of the volatility level. (left panel, table 2)
Such reversals among low volatility stocks are not the widely
documented monthly reversals
Since the month-by-month (as opposed to holding period)
returns prevail well beyond the first month (table 3)
Momentum doesnt start until the 4th month after
portfolio formation
Even for a holding period of 6 months, the 2nd month still
sees a reversal (albeit insignificant), and a statistically
significant momentum doesnt start until the 5th month
Within the high volatility stocks, by contrast,
momentum exists for all evaluation- and holding-period
combinations
Robustness
Such findings are robust to market beta, size and B/M
(table 4), and January effect (table 5)
Similar findings when sorting by idiosyncratic volatilities
Similar findings in different sub-periods: 1965-1978,
1979-1993, and 1994-2008 (table 6)
The effect is much weaker when group stocks by other
firm characteristics: age, cash flow volatility, leverage,
book-to-market (table 9)
E.g., when replacing firm size by cash flow
volatility as the first sorting variable, reversals
occur for a holding period of up to only two
months
Data
January 1, 1964 to December 31, 2009 daily data for US
stocks are obtained from CRSP
Stocks with a price of $5 or lower on the portfolio
formation day are excluded
Paper
Type:
Working Papers
Date:
2012-06-25
Catego
ry:
Low volatility anomaly, international markets
Title:
Low Risk Stocks Outperform within All Observable Markets of the World
Author
s:
Nardin L. Baker and Robert A. Haugen
Source
:
SSRN Working Paper
Link:
Summ
ary:
Low volatility anomaly exists worldwide: low risk stocks consistently outperform
high risk stocks in each of the 33 markets covered in this study
Earlier studies have shown that in US market, higher volatility predict
lower future returns
This study extends the pattern to 21 developed and 12 emerging
markets
The methodology is designed to be simple, transparent, and
easily replicable
Intuition: fund managers more likely to buy volatile stocks
Due to the compensation structures and internal stock selection
processes at asset management firms
E.g., managers/analysts tend to recommend stocks that are
noteworthy, with high media attention and consequently higher
than average volatility
Consequently, the capitalization-weighted portfolios are sub-optimal as
they are dominated by relatively volatile and over-valued stocks
Constructing the portfolios
Step1: each month, compute the volatility (standard deviation) of
monthly total return for each stock in each country over the previous 24
months
Step2: sort stocks by volatility, and then calculate total return for each
decile portfolio in each country
Step3: compute differences of returns, risks (volatilities), and Sharpe
ratio between the lowest and highest volatility portfolios
Low vol stocks enjoy higher returns and lower risk across all markets
Past volatility predicts future volatility: past low (high) volatility stock
continue to show low (high) volatility
In each of the 33 markets, low volatility stocks have higher future
returns from 1990-2011 (figure 1 and 4)
Relatively consistent performance
In the recent 20 years, decent returns in most years except for

1997-99 and 2002-05
Similar results when using different rolling windows
Higher Sharpe ratio: low volatility stocks have a much higher
Sharpe ratio than high volatility stocks
Data
Reasonable turnover: the annual turnover averages 84% for the U.S.
and 96% for the All Countries Universe
Results are similar for the 21 developed countries (Figure 1) and for the
12 emerging countries (Figure 4)
The data contain monthly returns from 1990 to 2011, covering the
stocks in 21 developed countries and 12 emerging markets
The database includes non-survivors and 99.5% of the capitalization in
each country
Paper Type:
Working Papers
Date:
2012-05-21
Category:
Beta, idiosyncratic volatility (IV)
Title:
Beta Is Still Alive!
Authors:
Yexiao Xu, Yihua Zha
Source:
Chongkong University working paper
Link:
http://www.ckgsb.com/Userfiles/doc/BetaIdioVtyexiao.pdf
Summary:
After controlling for idiosyncratic volatility (IV), beta can predict

future expected return
Beta may change greatly from month to month
The average autocorrelation < 25% ( Panel A,
Table 5)
Such instability is unlikely due to change of
time-varying fundamental risk
The reason: speculative investors chase some hot
stocks with high IV
Such stocks tend to have low future returns from
overpricing
Such stocks have distorted higher beta, since
aggregate speculative trading will move the
market
Therefore, IV can predict changes in beta and a
IV-controlled beta may predict returns
In other words, a beta controlled for IV can restore
CAPM
For each stock, define monthly beta using individual stock
daily returns in prior month
For each stock, define IV as the sum of daily four-factor
regression residual square in prior month
In portfolio analysis, predicting power of beta depends on IV
Double sort stocks first by rolling beta measure (Beta-r)
and then by IVd
When IV is low, beta positively predict returns (Table 2)
Return monotonically increase with beta, as
predicted by the CAPM
The monthly return spread between the low/high
beta portfolio is a significant 0.43%
When IV is high, beta negatively predict returns (Table 2)
The monthly return spread between low beta/high
beta portfolio is significant 0.64%
Regression analysis show similar findings (Table 3)
Regress monthly stock returns on Beta, IV, and an
interaction term between beta and IV
Such interaction term captures the possible future
beta change due to the instability of the beta
IV is subsumed by the interaction term and is no longer
significant
I.e., the negative predicting power of IV is limited
to stocks with large beta
Beta works in the subgroup of stocks with low beta and low IVs
(Table 4)
After deleting 10% of the stocks with the largest beta and
Such stocks account for 5% of the market
capitalization
So the simple CAPM model holds for 90% stocks
(95% of the market capitalization)
Beta positively and significantly predict returns for the 25
size and book-to-market sorted portfolio (Panel A of Table
4)
Suggesting a small group of hot stocks likely
caused the failure of beta
Robustness
Robust to different measures of beta and IV (Table 6, 7)
Robust to different subsamples 1963 - 1986 and 1987 2010 (Table 8)
Robust to known risk factors such as book-to-market
ratio, illiquidity, momentum, and return reversal
Data
July 1963 - December 2010 stocks traded on the NYSE,
AMEX, and NASDAQ exchanges are from CRSP)
Factors returns are obtained from Kennneth Frenchs
website
Accounting data are from Compustat
Paper Type:
Working Papers
Date:
2012-04-22
Category:
Novel strategy, uncertainty, implied volatility
Title:
Uncertainty and Stock Returns
Authors:
Guido Baltussen, Sjoerd Van Bekkum, and Bart Van Der Grient
Source:
SSRN Working Paper
Link:
Summary:
Volatility-of-volatility (vol-of-vol) is a feasible measure of

uncertainty. A portfolio that is long (short) lowest (highest) 20%
uncertainty stocks yields an annualized return of 9%. Such
pattern is stronger for larger stocks and persists for more than
12 months
Intuition
Options-implied volatilities (IV) are primarily driven by
expected stock price volatility
Higher IV indicates higher risks perceived by
investors about future stock returns
A good proxy for expected uncertainty is the time
variation of such perception
Such variation reflects the extent to which
investors dont know what they dont know, or
unknown unknowns
Define volatility-of-volatility (vol-of-vol): vol-of-vol =
(standard deviation of IV) / (average IV over the past
month using daily data)
Where IV = average IV of the at-the-money (ATM)
call option and ATM put option, measuring the risk
perceived by investors about future price movements
of a stock
High vol-of-vol stocks have larger market cap, higher
beta, and lower momentum (Table 1, 3)
Extreme levels of vol-of-vol tend to persist: 33% (32%)
of the stocks in the lowest (highest) vol-of-vol quintile
stay in that quintile during the next period
Construct vol-of-vol portfolios
At the end of each month, sort all stocks into quintiles by
a one-day lagged vol-of-vol
Buy(sell) stocks with highest (lowest) quintile vol-of-vol
Value-weight stocks and holding for one month
Higher vol-of-vol, lower future returns
High-Low value-weighting portfolios earns a significant
(t=-2.5) monthly return of -0.77%
Of which -0.21% (0.56%) is from High (Low)
portfolio
Fama-French-Carhart alpha (4F alpha) is -0.62% per
month with t-stat of -2.14 (Panel (a) of Table 2)
Portfolio returns decrease monotonically from quintile 1
(Low) to quintile 5 (High) (Figure 2)
Robust to known risk factors, per portfolio double sorts
and firm-year regressions
Vol-of-vol effect is not explained by size, beta,
book-to-market, momentum, short-term reversal,
idiosyncratic volatility, maximum return,
skewness, kurtosis, leverage, short sale
constraints or liquidity-, option-,
uncertainty-related variables (Table 4, 5)
Stronger effect for the largest stocks
Data
Evident in large cap stocks, but absent among the

firms in the two smallest size quintiles (Panel (a)
of Table 4)
Vol-of-vol effect holds across different sub-periods (Figure
3)
Return persistent beyond 12 month after portfolio
formation (Table 7 and Figure 4) for longer holding
periods (3, 6, 9, 12, or 24 months after portfolio
formation)
January 1996 until October 2009 option data (daily
implied volatilities, closing bid and ask prices, option
strikes and tenors, and information on options volume
and open interest) are from OptionMetrics
Stock returns, stock characteristics, and market
capitalization data are from CRSP
Paper Type:
Working papers
Date:
2011-03-29
Category:
Variance risk premium (VRP), forecast index returns, options,

selling volatility
Title:
Stock Return Predictability and Variance Risk Premia: Statistical

Inference and International Evidence
Authors:
Tim Bollerslev, James Marrone, Lai Xu and Hao Zhou
Source:
SSRN working paper
Link:
Summary:
Variance risk premium (VRP, defined as the difference between

options-implied and actual market volatility) can predict stock
index returns in future 2-4 months, not just for US index, but
also for French CAC 40, the German DAX 30, the Japanese Nikkei
225, the Swiss SMI and the UK FTSE 100 indices
VRP is defined as difference between the options-implied
and actual market volatility
The implied volatility is based on VIX levels, the
actual market volatility is based on S&P 500 Index
daily returns
VRP is calculated by subtracting past 20-day S&P

500 daily return variance from the square of VIX
So the VRP is a measure of disagreements across equity
market investors
Likely between the stock investors and option
investors
It may also be interpreted as a measure of aggregate risk
aversion in financial markets
Higher VRP, higher future market returns
Methodology: regress future months returns on VRP in
Significant predictive power in different countries (table
4)
Results for France, Germany, Japan, Switzerland
and the UK all show a significant predictability,
with t-stat ranges from 3.86 (UK) and 1.80(Japan)
Highest predict power at a 4-month horizon
US has the strongest predictive power (table 4)
By comparison, regression on SP500 indices show
a t-stat of 8.80
Suggesting that selling volatility has been profitable on
average over the last decade
A Global VRP works better than individual VRPs
Defined as a market capitalization weighted VRP of
U.S. accounts for more than half of the weight,
with Japan a distant second
Methodology: regress future months returns on the global
VRP (instead of individual VRPs)
Global VRP can predict returns in all countries, better than
individual VRPs
With a t-stat over 5.0 (compared with 1.80-3.86
when using individual VRPs) (table 5)
Again the highest predictability is at 4-months
horizon
Global VRP can better predict returns than 1) implied
volatility, 2) realized volatility and 3) other traditional
predictor variables, including the P/E ratio, dividend yields
and consumption-wealth ratios
Discussions
A related study,
The variance risk premium around the
World
, studies VRP in 8 countries from 2000 - 2009. It
shows that VRP is positive for all counties, but do not
predict local equity returns in countries other than in the
US
Data
February 1996 - December 2007 S&P 500 Index returns

and volatilities are from CRSP. VIX data are from CBOE
January 2000 - December 2010 data for France (CAC 40)
are from Euronext, the German DAX 30 are from
Deutsche Borse, the Japanese Nikkei 225, the Swiss SMI
and the U.K. FTSE 100 are from Datastream)
Paper Type:
Working papers
Date:
2010-09-24
Category:
Novel strategies, volatility portfolios, moving average
Title:
A New Anomaly: The Cross-Sectional Profitability of Technical

Analysis
Authors:
Yufeng Han, Ke Yang, Guofu Zhou
Source:
SSRN Working papers
Link:
Summary:
A trading strategy that switches between volatility-sorted stocks

and t-bills based on 10-day price moving average yields
statistically significant annual returns, from 5.17% to 18.55%
Constructing the volatility decile portfolios
Step1: sort stocks into 10 portfolios based on their
standard deviations of daily returns within the year. Such
volatility portfolios are re-calculated at the end of each
year
Step2: calculate portfolio index (weighted average prices)
and returns every day. The 10-day Moving Average (MA)
on day t is the average of the last 10 day prices
Trading rule: Buy (or continue to hold) the portfolios
today when yesterdays price is above its 10-day MA
price, otherwise invest the money into the risk-free asset
(the 30-day Treasury bill)
Positive returns vs buy-and-hold strategies on the decile
portfolios
Define MAP as the return difference between moving
average strategy and the buy-and-hold volatility-based
portfolios
The 10 MAP returns are positive and increase with
volatility
Ranging from 5.17% (annualized) to 18.55%
CAPM risk-adjusted or abnormal returns are also strictly

increasing with volatility
Ranging from 6.17% to 20.56%
The Fama-French model risk-adjusted returns also vary
monotonically
Ranging from 7.49% to 21.38%
Similar average holding days across portfolios, though
somewhat higher for low and high-volatility portfolios
(Table 7)
Turnover (the fraction of trading days) ranges from 13%
to 18%. Average holding period rises and turnover falls
when moving average measured over higher lags (as
does the profitability of the trading strategies)
Robustness
Robust to alternative lag lengths of L = 20, 50, 100 and
200 days
Magnitude decreasing over the lag lengths, but still
economically significant as it remains 5%+ when L
= 200
Robust to weighing scheme: similar profitability when use
the equal- or value-weighted size decile portfolios
Robust to alternative sets of stocks (NYSE/Amex, Nasdaq)
Robust to transaction costs: a cost of 25 basis points each
trade, those on the last 5 decile portfolios are
~10%(Table 8)
25 basis points transaction costs amounts to 63%
(252 .25) annual trading costs if one trades
every trading day
Assuming no cost trading t-bills
Profits fall, but returns still economically and
statistically significant except for the lowest two
volatility deciles
Size bias: MAP profits are more profitable for smaller
stocks. Theres a drastic change from Size 9 to Size 10.
(Table 6)
Limited correlation with momentum factor though both are
trend-following
Correlation between momentum factor and the MAPs
range from 0.0375 (the lowest decile MAP) to 0.1513 (the
highest decile MAP)
So MAPs do not have any significant exposure to
momentum
Default risk has a significant negative impact on
momentum, but not on volatility portfolios
Liquidity is not important for momentum profits, but it
decreases the profits for volatility portfolios, especially
the high volatilities
Data
July 1 of 1963 to December 31 of 2009 stock data are

from CRSP
Paper Type:
Working papers
Date:
2010-09-24
Category:
Title:
Authors:
Source:
SSRN
Link:
Summary:

next month
underlying
volatilities
PVOL
Other time-series and cross-sectional measure
considered, and results are similar
statistically significant raw monthly return of
0.97%

returns (Table 8)
characteristics
CVOL increases
month
measure of skewness
horizon
Data
OptionMetrics
and calls
This paper uses at-the-money call and put options
implied volatilities with a delta of 0.5 and an expiration of
30 days
CRSP/COMPUSTAT
Comments:
Paper Type:
Working papers
Date:
2009-12-30
Category:
Title:
Authors:
Source:
SSRN working paper
Link:
Summary:
This paper proposes a new value-to-price ratio which

incorporates shareholders option to liquidate the company when
business prospect looks bad. This new value measure can better
predict stock returns than the classic book-to-market ratios and
the residual-income-based ratios
Intuition
company)
sustainable
model
Volatility: the standard deviation of asset price for the
past five years
quintile of IV
Long high IV stocks in the top Vo/P quintile, shorts high
IV stocks in the bottom Vo/P quintile
significant 48%

the book value. In such case, the hedged return in
highest IV is 55% (panel C, table 4)
Robustness
The pattern is the same when measuring returns based
on 1- and 2-year returns (table 6) instead of 3 years
The pattern holds when measuring abnormal returns
using Fama-French factors, and when measuring IV over
the past 1- or 2- years instead of past 3 years
Discussions
Data
1976 2006 accounting data are from the 2009 version
of Compustats combined industrial annual data files;
stock prices, monthly returns, and monthly size-decile
returns from the CRSP database
Analyst earnings forecasts from the I/B/E/S database,
and institutional ownership data from the CDA/Spectrum
Paper
Type:
Working papers
Date:
2009-08-03
Catego
ry:
Novel Strategies, volatility, Options
Title:
Asymmetric Volatility and the Cross-Section of Returns: Is Implied Market

Volatility a Risk Factor?
Author
s:
Jared Delisle, James Doran and David Peterson
Source
:
FMA Meetings 2009
Link:
http://www.fma.org/Reno/Papers/Is_Firm_Sensitivity_to_Implied_Market_Volat
ility_Really_a_Risk_Factor.pdf
Summ
ary:
The paper develops a trading strategy based on stocks different sensitivity to

positive/negative changes of the VIX.
Such strategy works well when VIX is increasing and generates a risk-adjusted
return of 6% for the period of 1986-2007
Intuition:
When volatility increases, investors expects higher risk and are willing to
pay a higher premium for stocks that do well historical in similar
situations
Calculating the sensitivity to VIX changes
To allow for sensitivity asymmetries, the paper adds a dummy variable
POS to the regression (POS is 1 for when VIX is increasing)
R(i) = a + beta(VIX) *change in VIX + theta(VIX) *POS*change
in VIX
54 months prior to current month are used to estimate the coefficients
The total exposure to changes in VIX is: Adjusted factor loadings ( AFL)
= beta(VIX) + theta (VIX) *POS
Sensitivity to changes in VIX negatively predict returns
Sorting stocks by their monthly exposures to changes in VIX in decile
portfolios
The portfolios show a monotonic decrease in future value-weighted
returns
Stocks show asymmetric responses to VIX changes
Each month, stocks are sorted by their Adjusted Factor Loading(ALF, see
definition above)
Only when VIX increases, sensitivity to VIX changes is a significant
return predictor
The findings are robust to liquidity, momentum, price, volume, and
leverage
Data
The monthly VIX index values are taken from Chicago Board Options
Exchange for 1986-2007
Stock returns and price data are from CRSP and COMPUSTAT data
Paper Type:
Journal Papers
Date:
2009-04-20
Category:
novel strategies, idiosyncratic volatility
Title:
Idiosyncratic Volatility and the Cross Section of Expected Returns
Authors:
Turan G. Bali and Nusret Cakici
Source:
The Journal of Financial and Quantitative Analysis
Link:
Summary:
This paper examines the cross-sectional relation between

idiosyncratic volatility and expected stock returns.
The results
indicate that i) the data frequency used to estimate idiosyncratic
volatility, ii) the weighting scheme used to compute average
portfolio returns, iii) the breakpoints utilized to sort stocks into
quintile portfolios, and iv) using a screen for size, price, and
liquidity play critical roles in determining the existence and
significance of a relation between idiosyncratic risk and the cross
section of expected returns.
Portfoliolevel analyses based on two
different measures of idiosyncratic volatility (estimated using
daily and monthly data), three weighting schemes
(value-weighted, equal-weighted, inverse volatility-weighted),
three breakpoints (CRSP, NYSE, equal market share), and two
different samples (NYSE/AMEX/NASDAQ and NYSE) indicate that
no robustly significant relation exists between idiosyncratic
volatility and expected returns.
Paper Type:
Working Papers
Date:
2009-04-14
Category:
Title:
Authors:
Source:
SSRN Working paper
Link:
Summary:
The higher the market volatility, the lower the momentum

profits. In other words, market volatility negatively predicts
momentum profits
momentum profit

Comments:
Discussions:
decades
Data:
CRSP
Paper
Type:
Working Papers
Date:
2009-04-14
Category:
Novel strategies, text analysis, semantic analysis, forecast volatility
Title:
Text-Based Portfolio Choice
Authors:
Shimon Kogan, Bryan R. Routledge, Jacob Sagi, Noah A. Smith
Source:
Carnegie Mellon working paper
Link:
http://beeks.tepper.cmu.edu/text/Present-Text-Econ-b-latest.pdf
Summary:
Frequency of certain key words in a companys SEC regulatory filings

(annual 10K filing) can be used to predict stock volatility in the 12 month
period following filing.
Background:
The Managements Discussion and Analysis(MDA) section
contains forward-looking views of the management.
After the passage of Sabine-Oxley Act in 2002, there is a
significant increase in average number of words in MDA
A related research proposal can be found at
http://www.q-group.org/research/files/recently_funded/2008_Tex
t-based_portfolio_choice.pdf
Details of text regression
Left-hand-side (dependent variable) : (log of) stock return
volatility
Right-hand-side(independent variable): weighted sum of log
frequency of key words in MDA Document.
Such key words are called Bag of words (BOW). Example of such
key words includes loss, income, rate, properties, unsecured,
concern, going, decrease, covenants, expenses,
Very strong predictability of BOW on stock return volatility ( page 14, 15)
70%-90% correlation between actual post-10k volatility and
actual volatility
Data
Extract MDA from 60,000 10K reports that are filed during 1995
2006.
Standard Deviation of stock returns from CRSP
Volatility is calculated using daily returns.
Paper Type:
Working Papers
Date:
2009-02-01
Category:
novel strategy, idiosyncratic volatility
Title:
Return Reversals, Idiosyncratic Risk and Expected Returns
Authors:
Wei Huang, Qianqiu Liu and S.Ghon Rhee
Source:
SSRN Working Paper
Link:
Summary:
The paper shows that lagged idiosyncratic volatility (IV) has positive
predictive power on the stock expected returns, after controlling for

return reversal
Conflicting evidence regarding the predictive power of IV
IV stands for the volatility of return that is not explained
by CAPM or Fama-French 3-factor model (FF3) factors.
Ang, Hodrick, Xing and Zhang (2006): Negative relation
between monthly realized idiosyncratic volatility
(estimated with daily returns) and next months
value-weighted portfolio returns
Malkiel and Xu (2002): Positive relation at firm or
portfolio levels (when idiosyncratic volatility estimated
using monthly returns)
After controlling for past month return, the negative

relationship (per Ang paper) disappears
There is negative autocorrelation in monthly stock
returns
There is also positive contemporaneous correlation
between idiosyncratic volatility and expected returns
Therefore if there is no control for last months returns,
there is a spurious negative correlation between
expected returns and lagged idiosyncratic volatility
To correct for the bias, the monthly idiosyncratic volatilities are
estimated using daily returns
Exponential GARCH model is used to model monthly
idiosyncratic volatilities by controlling for the return
reversals in monthly returns
The conditional idiosyncratic volatility estimates from the
model are shown to be positively correlated with
expected returns.
The monthly return reversals also cause value-weighted

portfolio returns to be lower than the equal-weighted ones
The reason is that the winner stocks in value-weighted
portfolios have higher weights and lower expected
returns due to return reversals.
In the case of equal-weighted portfolio returns current
winners dont have higher weights.
The fact that negative predictive power of lagged
idiosyncratic volatility only exists for value-weighted
portfolios also confirm the effect of return reversals
Data
Daily stock data for the time period 1963-2004 are from
CRSP and COMPUSTAT databases. Fama-French 3 factors
are from Kenneth Frenchs webpage

Paper
Type:
Working Papers
Date:
2009-01-12
Categ
ory:
Industry-Specific Human Capital, labor income growth, idiosyncratic

volatility(IV), novel strategy
Title:
Industry-Specific Human Capital, Idiosyncratic Risk and the Cross-Section of

Autho
rs:
Esther Eiling
Sourc
e:
SSRN Working paper
Link:
Summ
ary:
The paper shows that higher exposure to "industry specific human capital
returns" (i.e., industry average labor income growth) corresponds to higher
expected returns.
Such factor can explain the idiosyncratic volatility (IV) puzzle
and can greatly improve CAPMs ability to explain stock returns.
straight-forward, but we think that "industry average labor income growth" is an
interesting new factor because (1) it makes economic sense (2) the empirical
study in this paper show that it can predict stock returns.
Definitions
"Industry specific human capital returns" is defined as the growth
rate in labor income in a certain industry
Proposed reasons
Industry specific human capital returns affect investors optimal
portfolio choices
The labor income is important for the optimal portfolio choice of
individuals
The industries used in this study are goods producing,
manufacturing, service, distribution and government (as defined
by the Bureau of Economic Analysis.)
Previous study show that stocks with high IV have higher
expected returns
After controlling for labor income growth, the IV premium
disappears
In the table below, labor income beta is the coefficient of
regressing industry returns on labor income growth
Labor income growth improves 3 asset pricing models
Industry specific human capital returns increases the

cross-sectional R-squared values for all the models.
Data
CRSP and COMPUSTAT data are used for the sample period of
1959-2005
Labor income data are from National Income and Product
Accounts (NIPA) tables published by the Bureau of Economic
Analysis. Such labor income data are typically published with a
one-month delay
Paper
Type:
Working Papers
Date:
2008-11-05
Category:
Momentum strategy, volatility
Title:
Reversal Fear and Momentum
Authors:
Kevin Q. Wang
Source:
SSRN working paper
Link:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1099964#
Summary:
This paper proposes an improved momentum strategy based on reversal

fear measures(RFM, which measures how much prices deviate from
normal levels). Specifically, stocks with high RFM generate higher
momentum profits.
Intuition: RFM measures how much prices deviate from normal
levels
When prices deviate from their normal levels too much,
investors fear that this price shock is transitory and thus will
revert to the normal level.
This fear causes underreaction, which leads to continuation
in prices.
Thus stocks with high RFM may have higher momentums
Definition of RFM (denoted ): a mean-reversal-based measure
= (current stock price expected stock price based on
month (-66) to month (-6) regression) / (standard deviation
of past months forecast error)
Assuming normal distribution
Both high and low values of suggest great reversal fears
( bounded between 0 and 1). Smallest reversal fears are
associated with medium values (~0.5).
Higher momentum profits for stocks with very high and very low
RFM
Performing a two-way sort of stocks first on rfrom (past 6
months returns, i.e., formation period return) and then on
January excluded (Table 3 Panel A1)
There is a monotonous relationship (for both winner and
loser stocks) between the abnormal return and .
A fear-fading-away effect is observed
Some stocks may have been at unusually high/low price
levels (compared to expected stock prices) for some time,
and investors may get used to it
Combined Portfolio
Month
ly
alpha
Long: Winners with

high
Short: Losers with low
1.35
%
Long: Winners with low
Short: Losers with high
0.48
%
Alphas of stocks first sorted on then on the absolute value

of rform (low absolute value of past 6 month return means
investors have got used to the price)
Absolute
value
of
rform
Mon
thly
alph
a
High
1.04
%
Low
0.28
%
High
-0.1
0%
Low
-0.5
8%
Reason: low rform means absolute returns have been low,

i.e. prices have been sustained at their high/low levels,
which convinces the investors that such high/low price may
be normal
Robustness check
Not firm-size driven: high and low portfolio performances
significantly different for large stocks as well as small stocks
(Table 3 Panels C and D )
Not explained by Fama-French model: one way sort based
on generates significant alpha after adjusting for
Fama-French risk factors, suggesting that the model does
not explain returns fully (Table 3 Panel 4)
The model is intuitive, though not very straightforward to implement. Here
is what we think may be a simplified version. The definition of RFM can be
roughly viewed as a classic momentum scaled by the stocks volatility, i.e.,
momentum = (past 6 month return)/volatility
instead of just momentum = (past 6 month return). It would be
interesting to test whether this simplified definition yields similar results.
2. Data
Monthly data from January 1963 to December 2005 for stocks that
are traded on New York Stock Exchange, American Stock
Exchange, and NASDAQ. Excluding stocks priced below $5 at the
end of the ranking period and stocks with market capitalizations in
the smallest decile.
Standard & Poors 500 composite index used for the market index
value.
Paper
Type:
Working Papers
Date:
2008-09-25
Categor
y:
Idiosyncratic Volatility, Global markets
Title:
Idiosyncratic Volatility and Stock Returns: A cross country analysis
Authors
:
Nuttawat Visaltanachotti, Kuntara Pukthuanthong-Le
Source:
FMA Working paper
Link:
http://www.fma2.org/Texas/Papers/IdiosyncraticRiskandStockReturnsACrossC
ountryAnalysis.pdf
Summa
ry:
This paper documents different idiosyncratic volatility (IV) premium in

different markets.
Positive risk-premium for IV (high IV, high returns): US and
Philippines
Nagative risk-premium for IV (high IV, low returns): Australia,
Canada, Finland, France, Hong Kong, India, Japan, Mexico,
Singapore and UK
Insignificant risk-premium for IV: the rest of the 38 countries
tested
Methodology:
For each country stock-specific IV is estimated using CAPM
model and the results are robust to Beta non-linearity problems.
Concerns:
The results do not control for other pricing factors such as size
and BM, or international factors such as exchange rate
exposure.
Paper
Type:
Working Papers
Date:
2008-08-13
Category:
risk, volatility, Credit default swap (CDS) index, information efficiency
Title:
Are the U.S. Stock Market and Credit Default Swap Market Related?
Evidence from the CDX Indices
Authors:
Hung-Gay Fung, Gregory E. Sierra, Jot Yau, Gaiyan Zhang
Source:
Journal of Alternative Investments, Summer 2008
Link:
http://www.caia.org/uploads/textWidget/wysiwyg/documents/JAI_SU_08_F
ung.pdf
Summary: This study finds that the

there is a short-term (1-3 day) interaction effect
between
high-yield credit default swap
(CDS) and the U.S. stock index
(S&P500) during 2001-2007, but no predicting power
for investment-grade
CDS.
Previous studies show that stock returns lead CDS spread changes
Norden and Weber [2004b]: within a sample of 58 firms,
individual stock returns lead CDS spread changes for 39 firms,
while CDS spread changes lead stock returns for 5 firms.
Comment
s:
Pena and Forte [2006]: stock returns lead CDS spread

changes in 24 of the 65 cases, while CDS spread changes lead
stock returns in 5 of the 65 cases.
Lead-lag relationship depends on credit quality
Between the stock market and the high-yield CDS market,
there exists significant mutual feedback of information in
terms of pricing and volatility
This means a change in high-yield CDS may leads stock
market index
Between the stock market and the investment-grade CDS, the
stock market leads the investment-grade CDS index in the
pricing process.
The reason: higher volatility of high-yield CDS attractive to informed
traders
Informed traders more likely to trade high-yield CDS given its
higher volatility (hence higher risk and higher expected
return) than in the stock market, so the CDS spread changes
may lead the stock prices.
Lead-lag relationship exists only in market downturn
The reason: A rising stock market infers a lower probability of
default of the
high-yield firms, resulting in a weaker feedback between the
stock and CDS markets.
CDS leads stock market in volatility
Volatilities of both the investment-grade and high-yield CDS
indices lead the stock market volatility
Closer relationship during the recent credit crunch period
Stronger relationship between investment-grade CDS and
stock than in usual markets
1. Discussions
This paper again confirms that lead-lag relationship between CDS and
stocks, if any, is a short term (1-3 day) effect. We have seen other studies
related to the predicting power of CDS, eg, Information Flow between
Credit Default Swap, Option and Equity Markets
(
https://www.andrew.cmu.edu/user/aostrovn/research/BeOs07.pdf
), which
shows that additional information first revealed in CDS is absorbed in option
price within 1-2 trading days.
2. Data
2004-2007 daily 5-year Investment Grade CDX index (CDX.NA.IG) and High
Yield CDX index (CDX.NA.HY) are from Dow Jones, 2001-2004 index data
are constructed by the authors. The single name CDS price data are from
Markit.

Type:
Working Papers
Date:
2008-05-20
Category
:
volatility, Option prices, skewness, kurtosis
Title:
Skewness and the Bubble
Authors:
Jennifer Conrad, Robert Dittmar, Eric Ghysels
Source:
Stanford seminar Paper
Link:
http://www.gsb.stanford.edu/facseminars/events/finance/documents/fin_04_
08_conrad.pdf
Summar
y:
This paper finds that:

the lower a stocks volatility, the higher the future returns
the higher a stocks skewness, the higher the future returns
the higher a stocks kurtosis, the higher the future returns
The reason why shape of stock returns distribution can forecast returns:
Skewness measures (lack of) symmetry: positive skewness means
that there is a greater-than-normal probability of a big positive return.
Kurtosis is a measure of whether the data are peaked or flat relative
to a normal distribution. High kurtosis means that some days the
stock has very high returns, and some days very low.
No intuitive explanation for the volatility findings.
When using daily estimates based on long maturity options, the annual profit
of a monthly-rebalanced portfolio is:
Annual raw return
Annual4 factor
adjusted return
Sort stocks by
volatility
6.6%
(0.55%/month)
2.9%
(0.23%/month)
Sort stocks by
skewness
5.6%
(0.47%/month)
4.8%
(.40%/month)
Sort stocks by
kurtosis
4.4%
(0.37%/month)
4.3%(0.36%/mont
h)
when using short maturity options, the profits are lower

When regressing on three Fama-French factors,
Volatility portfolios show insignificant -6% annual alpha
Skewness portfolios show slight significant 7.2% annual alpha

Kurtosis portfolios show significant 7.1% annual alphas
The importance of individual stocks return skewness persists after controlling
for differences in co-skewness (which is derived based on index options and
underlying index returns).
Commen
ts:
1. Disucssions
The shapes of stocks return distributions (volatility, skewness and kurtosis)
are intriguing topics. Previous academic research (Bates (1991)) shows
thatprior to the 1987 market crash, option prices showed that the market
already priced in a likely crash.
Our concerns for this paper:
Lack of strong intuition: does an average investor care about the
shape of return distribution when he/she makes decisions? The
formulas look too mathematic to us.
Correlation with volatility: volatility is negatively correlated to
skewness and kurtosis on the cross-section of individual stocks,
therefore the positive sign of skewness and kurtosis on future returns
can be caused by the strong effect of volatility on future returns.
Weak significance except for kurtosis: The weak statistical significance
of long-short factor mimicking portfolios built on volatility and
skewness damages the strength of empirical results documented in
the paper.
2. Data
1996-2005 daily option prices are extracted from Optionmetrics. The data on
individual stock returns are taken from CRSP tapes.
Paper Type:
Working Papers
Date:
2008-05-01
Category:
Option expensiveness, volatility spread
Title:
What Does Individual Option Volatility Smirk Tell Us about Future

Equity Returns?
Authors:
Xiaoyan Zhang, Rui Zhao, Yuhang Xing
Source:
SSRN working paper
Link:
Summary:
This paper finds that volatility smirks (defined as the implied

volatility difference between call and put options) can predict
stock returns.
Definition: Volatility smirks = (the implied volatilities of
at-the-money calls) (the implied volatilities of
out-of-the-money puts)
Reason to choose these options: at-the-money calls more
liquid than out-the-money calls, and out-of-the-money
puts are liquid and favored by high confidence investors
A weekly portfolio that is
long stocks with flattest smirks (ie, investors optimistic and bid
up call prices)
short stocks with steepest smirks (ie, investors pessimistic and
bid up put prices)
yields a 15% annual risk-adjusted returns (0.27% weekly)
Reason: investors with high confidence level (eg, those
with true insider information) tend to trade the high
leverage, high return albeit high risk options, and less
likely to trade stocks.
Long lasting effect: this return predictability exist for six
months and do not reverse
Usually call options imply higher volatilities (intuitively,
these options have unlimited upside, whereas put options
value is limited)
Correlation with earning surprises: stocks with steepest
smirks (higher put prices) tend to have bad earning news
next quarter.
Comments:
1. Discussions
This can be a very high turnover strategy, given that those
stocks with large volatility spread tend to be less liquid, and that
the strategy balances every week. The paper profit may be gone
after adjust for trading costs and price impact.
This paper is fairly similar to a related paper we covered earlier,
"Deviations from Put-Call Parity and Stock Return Predictability"(
),
where it is shown that relatively expensive calls (puts) predict
higher (lower) stock excess returns.
A weekly strategy that is long (short) stocks with relatively
expensive calls (puts) earns an riskadjusted weekly return of
0.51% from 1996-2005. Same reason: investors with true new
information like tend to use high-leverage, high-risk and high
return.
2. Data
1996-2005 US stock option data are from OptionMetrics. Returns
and accounting data are from
CRSP/COMPUSTAT, and earnings forecast data are from IBES.
Paper Type:
Working Papers
Date:
2008-03-16
Category:
Options prices, implied volatility
Title:
Deviations from Put-Call Parity and Stock Return Predictability
Authors:
Martijn Cremers and David Weinbaum
Source:
SSRN Working Paper
Link:
Summary:
This paper shows that stocks with relatively expensive calls

outperform stocks with relatively expensive puts by 51 bps per
week.
The main intuition is that if informed investors choose to
trade in options, the expensive call (put) option prices can
indicate positive (negative) information of future returns.
The expensive-call (put) stocks show positive (negative)
abnormal returns, after adjusting for the market, size,
value and momentum factors.
The deviation from the put-call parity is measured as the
average difference in implied volatility (volatility spread)
between call and put options with the same strike price
and expiration date.
Between 1986 2006, a portfolio that is
long in stocks with relatively expensive calls and
high volatility spread
short in stocks with relatively expensive puts and
low volatility spread
earns a value-weighted, four-factor adjusted
abnormal return of 113 bps per week (61 bps on
the long side and -52 bps on the short side).
Under the assumption that portfolio is formed on
the day after the option signal is observed, the
return spread drops to 51 bps a week.
The results are not driven by short sale constraints using
rebate rates from the stock short lending market.
The degree of predictability decreases over the sample
period (150 bps per week in 1996-2000 to 83 bps in
2001-2005), this may be due to decrease in trading costs

and growth of hedge fund capital.
Comments:
1. Discussions
Some quant fund use put-call ratio as an alpha factor in their
quant models. There may be correlation between the put-call
ratio factor and the option volatility spread factor discussed here,
because informed investors may bid up call(put) option prices
and drastically change put-call ratio in the mean time. This is
confirmed in the table 7 in the paper.
The other main concern may be high turnover: the paper
portfolio was rebalanced on weekly basis.
The options market closes at 4:02pm EST everyday whereas the
stock exchanges close at 4:00pm EST. The two minutes
difference can create the non-synchronicity bias since the new
information can be reflected into stock prices one day later,
especially given that some companies choose to make
announcements by 4pm EST.
The lower predictability found in the second half of the sample
might cast some doubts on the economic significance of this
effect for the next few years.
2. Data
1996/01 2005/12 option data is taken from OptionMetrics and
merged with the daily stock prices from CRSP. Microstructure
related robustness checks are conducted using the TAQ
database.
Paper Type:
Working Papers
Date:
2008-01-17
Category:
idiosyncratic volatility, decomposition
Title:
Separating Up from Down: New Evidence on the Idiosyncratic

Volatility
Authors:
Laura Frieder, George J. Jiang
Source:
Notre Dame working paper
Link:
http://www.nd.edu/~finance/020601/news/Laura%20Frieder%20Pap
er%20-%20March%202007.pdf
Summary:
This
paper found that only one component of idiosyncratic
volatility
(IV) is responsible for the "high IV,

low return"
finding, and
the
decomposition of IV can improve the classic momentum strategy.

idiosyncratic volatility (IV)
is decomposed into two
components:
the
upside(downside) volatility is measured by as
semi
standard deviation of positive (negative) idiosyncratic
returns
The inverse relationship of stock returns and IV is driven
mostly by the upside component of idiosyncratic volatility.
The intuition for this decomposition is that investors react
differently to downside losses than they do to upside gains.
The authors propose that the findings suggest that investors
under react to bad news but over react to good news (hence a
correction in future stock prices with high upside volatility
stocks)
The classic momentum strategies may be enhanced by taking
into account stocks upside variations.
specifically,
momentum strategy yields 2.2% per
quarter (8.8% per year) higher profits among

stocks
with 40% highest upside volatility.
Comments:
1. Discussions
Investors usually demand higher returns for stocks with higher risk,
thats maybe why "high IV, low return" is deemed to a puzzling and
counter-intuitive finding. Like other IV related papers, this one in our
view also is lack of economic reasoning. If investors indeed over react
to good news, then reversal (instead) momentum should exist in
stocks with high past returns.
A notable paper of point is "The Cross Section of Volatility and
Expected Returns"
(
http://www.gsb.columbia.edu/faculty/aang/papers/vol.pdf
), which
AlphaLetters covered in 2006. In a related study, "Idiosyncratic
volatility and the cross section of expected returns"
(
), it is
found that the evidence presented in Ang
et. al
is not robust to
different choices of data frequency, weighting scheme, conditioning
variables, sample stocks, and sample periods and this paper does not
address these issues either.
Further, the theory implies relations that are concerned with expected
stock returns and using realized stock returns may very well yields
results that are not conclusive as realized returns are poor proxies for
expected returns. An interesting paper that addresses this issue is
"Expected Volatility, Unexpected Volatility, and the Cross section of
Stock Return"
(
http://www.mysmu.edu/faculty/ctchua/ChuaGohZhang.pdf
), where
idiosyncratic volatility (IV) is decomposed into expected and
unexpected idiosyncratic volatility, and it is found that
unexpected idiosyncratic volatility is positively related to
unexpected returns (hence the total return since expected
return is usually dominated by un expected returns)
when using the unexpected idiosyncratic volatility to control for
unexpected returns, the expected idiosyncratic volatility is
significantly and positively related to expected returns.
2. Data
1980-2005 US stock data from CRSP, Compustat, and Thomson
Financial.
Paper Type:
Working Papers
Date:
2007-11-18
Category:
realized/implied volatility, stock returns
Title:
Volatility Spreads and Expected Stock Returns
Authors:
Turan G. Bali, Armen G. Hovakimian
Source:
SSRN working paper
Link:
Summary:
This paper presents three volatility based strategies.

Strategy 1: one
month lagged realized volatility
(RVol)
negatively forecast returns: high

RVol, lower returns.
A strategy that is long (short) the stocks with the lowest

(highest 20% RVol yields 18% annual return. (1.5% per
month)
by contrast, implied volatility alone does not forecast
stock returns
Strategy 2:
Spread between realized
and implied volatilities
(RVol - IVol, difference between "realized volatility" and "implied

volatility") can forecast stock returns.
A strategy that is long (short) the stocks with lowest
(highest 20% realized implied volatility generate 11% risk
adjusted annually returns (0.9% per month).
the reason: stocks whose expected volatility is expected

to be higher (IVol > RVol) are riskier, so investors
demand a positive return when (IVol-RVol)>0 , ie,
negative return for (RVol-IVol)
Strategy 3:
call-put implied volatilities (CVol-PVol ,
difference
between "volatility implied by call options and "volatility implied

by put options") can forecast stock returns
A strategy that is long (short) stocks with highest
generates 15% risk-adjusted annually returns (1.3% per
month)
the reason: higher CVol-PVol may mean that "irrational
investors move stock prices (but not options prices) away
from their fundamental values and if there is short sale
constraints, then stocks with relatively more expensive
calls (stocks with high CVol-PVol) are expected to
generate higher returns"
These results are robust after controlling for a variety of factors
(size, b/p, liquidity, Bid Ask Spread, analyst earnings forecast
dispersion, etc)
Comments:
1. Discussions
This is a very interesting paper, and may be more relevant to
large cap stocks given t e liquidity requirement for options. From
page 7, the average number of stocks covered is around 1,650.
(197,362 Month * stock observations / 10 years / 12 months ).
What is the reason behind this finding? The story of RVol - IVol
makes sense, but we are puzzled by the finding related to
call-put implied volatility.
A related paper is Idiosyncratic Implied Volatility and the Cross
Section of Stock Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=954249),
where it is found that
"an
idiosyncratic
implied
volatility"(calculated as the difference between option implied

volatility and lagged VIX implied
variance
) is positively correlated
with future returns.
2. Data
2005/01 stock return and accounting data are from
Compustat/CRSP. Option implied volatilities are from the Ivy DB
database of OptionMetrics. Average implied volatilities across all
eligible options are used to forecast returns in the following
month.
To remove the correlation among the three volatility measures,
the authors transform RVol, PVol and CVol into new principal
components orthogonal to each other. It is shown that

relationship between the principal components and the three
volatility measures is stable over time.
Paper Type:
Working Papers
Date:
2007-10-29
Category:
Evaluating the Seasonality and Persistence of ETFs Performance

and Volatility:
Title:
Implications for Profitable Investing
Authors:
Gerasimos Rompotis
Source:
SSRN working paper
Link:
Summary:
This paper documents a "November effect": for a sample of 83

equity index-tracking ETFs during the period of 2002-2006,
November consistently saw the best returns with low risks.
During the past five years (2002-2006), these ETFs
generate a mean return of 0.22% in November,
compared with mean of 0.03% for all months
This effect exists in subgroups of sector ETFs,
international markets ETF and different market
capitalizations
November return is highest in two of five years
The daily return volatility is lowest in November (0.89%,
compared with an mean volatility 1.00% of all months)
In terms of persistence, slight evidence for persistence in
ETFs November return, stronger persistence in ETFs
November risk and tracking error.
Comments:
1. Discussions
This paper presents an interesting calendar effect. Two
questions:
Why not look at the indices itself? 5 year data can give us
a reasonable indication of the November effect, but not
enough to build its statistic significance. A natural
extension is to look into returns of various indices that
these ETFs track.
Why November? For US market, people can say it due to

the "Tax Reform Act of 1986" (which shifted the tax-year
end for mutual funds from December to October). Then
why it exists for international ETF as well?
2. Data
2002-2006 daily pricing and volume data for 83 equity ETFs are
from the website of the board of Nasdaq.
The sample includes:
73 Barclays iShares, which cover a variety of domestic,
international equity portfolios
The Diamonds Trust series, which track the Dow Jones
Industrials Index
The SPDRS and MidCap SPDRS, which replicate the return
of S&P 50 and S&P 400 Indexes respectively
The Nasdaq-10 Index Tracking Stock (QQQQ)
streetTRACKS, which invest on various Dow Jones U.S or
global indexes.
The data of tracking indexes are from Nasdaq.com, iShares.com
and the web site of Dow Jones.
Paper Type:
Working Papers
Date:
2007-09-23
Category:
VIX(Chicago Board Options Exchange Volatility Index, which

measures the market's
Title:
Fear and the Fama French Factors
Authors:
Robert Durand, Dominic Lim, Kenton Zumwalt
Source:
Asia Finance Association conference paper
Link:
http://asianfa.org/Paper/Fear%20and%20the%20Fama%20Frenc
h%20factors_Durand.pdf
Summary:
VIX is a measure of investors collective expectations for market

volatility (hence a "fear factor"). This paper studies whether
change of VIX (VIX) can be used forecast stock returns just like
the four Fama French risk factors: market premium, value
premium, size and momentum Key findings:
As a stand
alone factor,
VIX
can not
explain
(daily) stock
returns
When combined
with the other four factors (equity
premium, value, size,

momentum), VIX
can help explain
stock returns at daily level.
How does fear flows through other risk factors? Applying

Granger causality framework over a period of 5 days, the authors
finds that
a sudden increase in VIX is associated with
Decrease in the equity risk premium. This means when
expected volatility goes up, market will likely go down.
I
ncrease in the value premium. This indicates that when
expected volatility goes up, investors
will
likely
favor value
over growth stocks.

A weaker impact on size premium and momentum.
Comments:
1. Why important
This paper presents an intuitive strategy for managers with a daily
level investment horizon.
It is also an interesting extension to one other paper VIX
term Signal-Investing
(
ber26.pdf
)
where it is found that that VIX is a useful signal to
decide short term (1 5 days) switching between small cap and
large cap stocks, though it doesnt help choose value/growth
stocks. The strategy: when VIX is above (below) its 75 day
moving average by 20%, long (short) large cap and short (long)
small cap for 1 5 days. This strategy works over 60% trades, with
a 5 day profit of 40bps.
2. Data
2003/12 data for VIX are from Chicago Board Options Exchange.
Paper Type:
Journal papers
Date:
2007-09-05
Category:
RiskReturn Relationship, volatility, risk premium
Title:
The Emp irical RiskReturn Relation: A Factor Analysis Approach
Authors:
Sydney C. Ludvigson, Serena Ng
Source:
Journal of Financial Economics, January 2007, Vol. 83, No. 1:

171-222.
Link:
http://dx.doi.org/10.1016/j.jfineco.2005.12.002
Summary:
A key criticism of the existing empirical literature on the

risk-return relation relates to the relatively small amount of
conditioning information used to model the conditional mean and
conditional volatility of excess stock market returns. To the
extent that financial market participants have information not
reflected in the chosen conditioning variables, measures of
conditional mean and conditional volatility--and ultimately the
risk-return relation itself--will be misspecified and possibly highly
misleading. We consider one remedy to these problems using the
methodology of dynamic factor analysis for large datasets,
whereby a large amount of economic information can be
summarized by a few estimated factors.
We find that three new
factors, a "volatility," "risk premium," and "real" factor, contain
important information about one-quarter ahead excess returns
and volatility that is not contained in commonly used predictor
variables. Moreover, the factor-augmented specifications we
examine predict an unusual 16-20 percent of the one-quarter
ahead variation in excess stock market returns, and exhibit
remarkably stable and strongly statistically significant
out-of-sample forecasting power.
Finally, in contrast to several
pre-existing studies that rely on a small number of conditioning
variables, we find a positive conditional correlation between risk
and return that is strongly statistically significant, whereas the
unconditional correlation is weakly negative and statistically
insignificant.
Comments:
Paper
Type:
Working Papers
Date:
2007-08-08
Category:
Beta, option implied volatility, Dow Jones 30 stocks
Title:
Forward looking beta
Authors:
Peter Christoffersen, Kris Jacobs, Gregory Vainberg
Source:
University of Chicago seminar paper
Link:
http://www.chicagogsb.edu/research/workshops/econometrics/christofferse
n-forward.pdf
Summary:
The classic method to compute market betas uses historical return data,
and is therefore backward-looking in nature U
sing
option
prices of
30
largest US
individual stock
, this paper proposes a forward
looking
market
beta
which is
effective
at forecasting future
realized
betas.
The beta is computed based on forward looking estimates of

variance and skewness(see paper 9 for details)
Comments
:
The forward-looking beta is a better predicator than the best

performing historical beta (out of
180-day, 1
-
year, 5
-
year beta
) in
about half the cases, and it contains additive information to

historical betas (and vice versa).
The forward looking betas explain
22% of the cross sectional variation in the returns on the underlying
securities.
An equally weighted average of historical and forward looking beta
outperforms either, even when both methods have significant
predictive power.
This beta can be computed using option data for very short time
span (e.g. a single day), so it can reflect sudden changes in the
structure of the underlying company.
1. Why important
The classic way to computing historical betas are assuming that history will
repeat itself, since it only relies on past price data. Option data, on the
other hand, reflects investors' collective forward looking view. The new beta
proposed here may give practitioners a more flexible, short term, and
forward looking picture of a stock.
2. Data
1996 2003 option data for S&P500 options and the 30 components of the
Dow Jones index are from the Ivy DB database provided by OptionMetrics.
Option prices are estimated as the average of the bid and ask quotes. The
authors eliminate in money options "because they are less liquid than out
money and at money options". Also eliminated are put options with strike
prices more than 103% of the underlying asset price (K/S > 1.03), and call
options with strike prices less than 97% of the underlying asset price (K/S
< 0.97).
3. Discussions
This paper is thought provoking. Some stocks are evolving faster than
others, intuitively using past 5 year historical data to compute betas (the
classic beta) may be more feasible for more mature companies with stable
business. This said, it would be interesting to test the performance of a
beta scheme where the forecast window (e.g. 180-day, 1-year, 5-year)
varies from stock to stock.
Our concerns:
The performance of the forward looking beta seems only marginally
better than the classic beta. The authors claim that the looking beta
is better than the best performing historical beta in about half the
cases, so it's worse than historical beta in other 50% cases?
Data availability will constrain the use of this methodology. This
paper covers only the largest 30 stocks in the US market. For
smaller stocks, their options may not be liquid enough to calculate
the short term beta.
Paper
Type:
Working Papers
Date:
2007-07-22
Categor
y:
Volatility forecasting
Title:
The Information Content of Realized Volatility Forecasts
Authors: Andersen, Torben; Frederiksen, Per H.; Staal, Arne

Source:
Stanford University working paper
Link:
http://www.stanford.edu/group/SITE/SITE_2007/segment_3/andersen_AFS_0
7_03_19.pdf
Summar
y:

past realized volatility
is a more efficient predicator of
future realized volatility than

VIX model
free implied volatility, and
is
roughly
as
efficient as
option (Black and Scholes
implied
volatility)
Paper
Type:
Working papers
Date:
2007-07-22
Categor
y:
Idiosyncratic volatility, skewness
Title:
The Next Microsoft: Skewness, Idiosyncratic Volatility and Expected Returns
Authors: Nishad Kapadia

Source:
2006 WFA paper
Link:
https://wpweb2.tepper.cmu.edu/wfa/wfasecure/upload/2006_2.528392E+07
_wfa_main_text.pdf
Summar
y:
Previous papers document that the high idiosyncratic volatility stocks have
low returns This paper claims that skewness can explain this.
Here IV is defined as the variance of the residuals from a FF three factor
model. Skewness is calculated as E[(x-xe)3]/s3 where
xe
is the mean and
s
is
the standard deviation. A distribution that is symmetric around its mean has
skewness zero, and is not skewed. Sectional skewness is defined using the
following formula:
Where
r
is the average monthly return across all stocks in month
m
r
iis the
return for an individual stock and is the standard deviation for all stocks in
month
m
Key findings
1. A strategy that was short (long) stocks with high (low) IV generates low
(high) return when cross- section skew is high (low).
2. Skewness can more effectively predict positive portfolio returns when it is
low rather than predicting negative returns when it is high
3. Highly volatile stocks move together (leading to the belief that there is a
common underlying variable driving the effect).
4. IPOs only underperform if they list in times of high cross-sectional
skewness.
Commen
ts:
1. Why important
This paper shows that c sectional skewness seems to be a valuable variable to
consider when looking for excess returns, although one may expect more
discussion on the economic story as to why this may be the case in order to
consider it as a strategy candidate.
2. Data
1963 -2005 US stock data is from the Center for Research in Security Prices
(CRSP).
2. Discussion
The author does a nice job convincing us that cross sectional skewness and
idiosyncratic volatility are highly correlated but does not provide any
economic or logical rationale for why they are related. Intuitively skewness
means fatter tails of stock returns distribution, but what is the intuition of
investors preference of skewness
A simple test for the significance of the cross sectional skewness would be to
start out with a FF factor (or four) regression model and simply add the new
variable (cross sectional skewness) and see if its coefficient is significant. It
would be nice to see this test added.
Paper Type:
Working Papers
Date:
2007-06-20
Category:
Volatility, worldwide evidence
Title:
The Volatility Effect: Lower Risk without Lower Return
Authors:
David Blitz, Pim van Vliet
Source:
SSRN working paper
Link:
Summary:
Common wisdom believes that high risk stocks should generate

high returns This paper
tests the
relationship between risk
(measured
as the past 3
years
weekly
return volatility) and stock
returns
in
large
cap
stocks
worldwide
. Key Findings:
Stocks with highest
deciles
volatility generates
substantially
lower
raw returns. For other stocks,
the
relationship
between volatility
and future raw return is
weak
Within global large cap stock a portfolio that is long
(short) stocks with highest (lowest) volatility yields 12%
annual risk adjusted (size, value, momentum) return, and
his result is robust for different sub periods and for
different definitions (intervals) of volatility.
Beta
(return
volatility relative to market) is
shown to a
less effective measure compared with

return volatility
measures.
Worldwide, low volatility stocks consistently
enjoys lower
risk
and high
return (
i.e., higher Sharpe
ratio)
. The
superior performance of l volatility stocks is more likely

when market is going up volatility stocks exhibit the
opposite behavior
Possible explanations discussed include (1) leverage
restrictions/inhibitions that limit exploitation; (2)investment
manager incentives that focus on raw rather than risk adjusted
return; and, (3) a behavioral bias that bids up volatility "lottery
tickets."
Comments:
1. Why important
This is one of those few papers by investment professionals We
would question less about the robustness of the finding, given
that the universe is already limited to large cap stocks, and given
the robustness check reported in the paper. What we care more
is perhaps the reason for the finding: a robust quant factor
should come with a sensible explanation.
2. Data
1985/12 2006/01 FTSE World Developed index constituents
(capitalization stocks ) constituent and return data are from
Factset. US fundamental data are from Compustat. Non US
fundamental data are from Worldscope. Short term interest rate
data are from Thomson Financial Datastream.
3. Discussions
As the author reported, the superior performance of low volatility
stocks is more likely when market is going up. Consequently, the
effectiveness of the volatility factor may just reflect the factor
that most time in the 1985/12 2006/01 period, market
worldwide goes up. For a quant manager who cares about
monthly/quarterly performance, the formidable challenge is to
figure out when is a good time to use this factor, i.e, he/she
should be able to guess when the market will go up.
It is interesting to contrast this paper with Term and short term
market betas in Securities Prices (reviewed in this issue). These
two papers agree on the finding that Beta can not effectively
predict stock returns compared with return volatility measures
Also both choose to discard monthly returns and use daily or
weekly returns to calculate beta/volatility.
Paper
Working Papers
Type:
Date:
2007-03-18
Category: Stock return correlation, dispersion, market volatility

Title:
Average correlation and stock market returns
Authors:
Joshua M. Pollet, Mungo Wilson
Source:
Link:
http://www.bm.ust.hk/fina/FinanceSymposium/2006Symposium/2006Papers
/Average%20Correlation_MungoWilson.pdf
Summary
:

Variance of market index daily returns = (average variance of
individual stock returns) * (average correlation between individual
stocks)
Average correlation strongly forecasts future quarterly market excess
returns
But average variance of individual stocks is not priced and has no
forecasting power.
Comment
s:
1. Why important
Correlation and dispersion are loosely used by some investors to measure
how closely stocks move with one another. This paper shows that one needs
to scale dispersion by volatility for a better measure.
Correlation and dispersion are also used to decide when to increase target
tracking error and risk budget for higher alpha. Many people believe that a
higher correlation means fewer opportunities for stock pickers: fall stock
prices are perfectly correlated, and then there is no such thing as good
stocks or bad stocks. In this perspective, we can re write t he result of this
paper as
correlation = volatility / dispersion
since volatility = variance of daily returns, and
dispersion = average variance of individual stock returns
2. Data
1962 2004 stock prices for US stocks are from CRSP. Average correlation is
me assured as the average correlation of all pairs of the 100 largest stocks in
the market.
3. Discussions
Questions we have about the findings:
1.) What is so special about 1984-1994 period (it is the only 10 year period
since 1964 when correlation cant forecast market return)
For other three 10 year period, R2 is over 10%.
2.) Why is average variance risk not priced?
We agree with the authors that "An interesting test would be to compare the
performance of average correlation hedged portfolios to average volatility
hedged equity portfolios."
3.) Why correlation can forecast returns?
4.) Seemingly discrepancy in regression
Table 3 in the paper ( 8) shows the forecasting regression of different
variables on market excess returns. One puzzling fact is regression 2
(average variance on excess return) and regression 6 (Market
variance/Average correlation on excess return) shows very different t
statistics, while according to the paper these two measures should be
roughly equal.
Paper Type:
Working Papers
Date:
2007-02-15
Category:
Implied Volatility, VIX, VIX moving average
Title:
Implied Volatility and Future Portfolio Returns
Authors:
James S. Doran, Prithviraj Banerjee, David R. Peterson
Source:
Florida State University working paper
Link:
http://www.cob.fsu.edu/fin/phd_papers/VIX_JBF.pdf
Summary:

VIX and deviations of VIX from recent
mean(200 day moving average) can significantly forecast stock
returns
(in future 1 and 2 months), after controlling for usual
asset pricing factors like size, beta, b/p and momentum.
A VIX above the recent moving average predicts high returns,
but VIX below the recent moving average does not predicts low
returns
Comments:
1. Why important
We all know that VIX is at a much lower level than before. In
more formal words, it's going through a "regime change". This
paper may be helpful to quant researchers because it shows the

importance of deviation from recent mean trending technique)
may help predict stock returns.
2. Data
1986 to 2005 stock data are from CRSP/COMPUSTAT. The VIX
data is from the CBOE website
http://www.cboe.com/vix
3. Discussions
Two potential extensions
1) Use different implied volatility measure for different group of
stocks for better predicting power. Though there is no option for
every index, one can easily find option prices for S&P small cap
and mid cap indices.
2) I would be very helpful to show a period results, since VIX has
been trending down for the past 4 years. We suspect that during
this period VIX deviation measures may have better predicting
power than VIX
per se
. The reason is that there is little evidence
of mean reversion in the VIX trend, consequently, the level of
VIX should matter less.
Its very interesting that the authors show an asymmetric impact
of a VIX deviation from recent mean (high VIX deviation leads to
high return, but negative VI X deviation does not lead to low
return) Some clients may be already using volatility as a quant
factor, conceivably correlated with the factors discussed here.
Paper Type:
Working Papers
Date:
2007-02-01
Category:
Stock index volatility forecast, intraday high low price range
Title:
Forecasting Stock Index Volatility: Comparing Implied Volatility

and the Intraday High Low Price Range
Authors:
Charles Corrado, Cameron Truong
Source:
University of Technology Sidney Working paper
Link:
http://www.qfrc.uts.edu.au/research/research_papers/rp127.pdf
Summary:

a
simple measure, intraday high
low
price range, can predict stock indexvolatility in future 1, 10, 20

days
. This predicting power holds in three major US large cap
indices (S&P500, S&P 100, Nasdaq 100), and is not subsumed by
widely used implied volatility indexes (e.g. VIX)
Comments:
1. Why important
Even a brief glance at the VIX and SP500 price curve suggests
that there still exists a negative relationship between these two,
even in recent years . This said, any methodology that can
forecast stock index volatility should be
2. Data
2003 index implied volatility (VIX for S&P 500, VXO for S&P 100,
VXN for Nasdaq 100) are from Chicago Board of Exchange.
3. Discussions
Why does this simple factor work? What extra information does
intraday high low capture that VIX does not? We are not
convinced by the authors argument ( ) that microstructure
issues may be the reason The daily return non-normality
(kurtosis) sounds more likely. If this is the case, then kurtosis
should also be able to predict volatility. A study of this
relationship should shed more light
Quant managers care more about whether this will be an
actionable idea, so one may want to test whether a higher
intraday high low predicts lower index prices.
Regarding VIX, a related paper we mentioned before is VIX
term Stock
ber26.pdf
where it is shown that VIX is a useful signal to decide
short term (15 days) switching between small cap and large cap
stocks
Paper Type:
Working Papers
Date:
2007-01-16
Category:
Idiosyncratic Volatility, Idiosyncratic Implied Volatility
Title:
Idiosyncratic Implied Volatility and the Cross Section of Stock
Returns
Authors:
Dean Diavatopoulos, James Doran and David Peterson
Source:
SSRN working paper
Link:
Summary:
This paper constructs an "idiosyncratic implied volatility"(IV-idio),

which is calculated as the difference between
option implied
volatility and lagged VIX implied variance

. Key findings:
IV_idio
(idiosyncratic
implied volatility
IV
(option
implied)
RV idio
(Realized
idiosyncrati
c volatility
Definition
In essence,
difference between
IV(t) and 1) implied
variance. (equation
5 in the paper
Calculate
d based
on the
Scholes
option
valuation
formula
Calculated
based on
regression
residual on
CAPM
forecast
return
Predictin
g power
onstock
returns
High
IV_idio
predicts
positive future
risk-adjusted
returns
,particularly for
equally-weighted
portfolios
IV
predicts
stock
returns,
after
controllin
g for
macro
factors
and
RV_idio.
RV_idio is
not
significantly
predictive
Not
surprisingly, IV_idio strongly predicts realized idiosyncratic
volatility
Comments:
1. Why important
The use of implied volatility in calculating idiosyncratic volatility is
both innovative and reasonable, since option implied volatilities are
the markets assessment of future risks and are thus arguably
better than historical realized volatility as a measure of future risks.
Previous papers (e.g. High Idiosyncratic Volatility and Low Returns:
International and Further U.S. Evidence
http://www.gsb.columbia.edu/faculty/aang/papers/ivol.pdf, covered
in 20060519 AlphaLetters)which claim that RV_idio are negatively
correlated with future stock returns have been puzzling to us,
results in this paper seem more reasonable since it shows that high
risk does lead to higher return.
2. Data
2005 daily data for 240 stocks with sufficient options data are from
Option Metrics and CRSP,
3. Discussions
It would be very interesting to test another idiosyncratic volatility
measure: implied volatility residual variance based on CAPM
forecast returns.
The empirical tests in the paper suggest that 1.) IV_idio premium is
positive for growth stocks and negative for signal-stocks 2.) IV_idio
premium is concentrated in the stocks of small and medium sized
companies. In other words, market demand a premium for holding
stocks with high implied volatilities when suchstocks have high P/E
and small market size. We cant help asking why no similar premium
is demanded for value and large stocks? This conclusion is also not
in line with the notion that value (growth) stocks with high (low)
volatility tend to perform better.
Paper Type:
Working Papers
Date:
2006-11-03
Category:
Volatility, future/currencies
Title:
Foreign Exchange Rates Dont Follow a Random Walk
Authors:
Hui Guo, Robert Savickas
Source:
Link:
Summary:
This paper finds that: for most G7 countries, industry or firm

level stock idiosyncratic volatility (IV) can predict the value of its
currency: the higher the IV, the higher the future currency
value.
Comments:
1. Why important
This result may interest quant managers who are using foreign
exchange as an enhancing overlay. It is also provoking as IV
(which has been a "buzz word" recently) seems be informative in
many senses: from forecasting stock returns on individual and
aggregate level, to the valuation of foreign exchange.
2. Data
Quarterly nominal exchange rate data are from IFS
(International Financial Statistics). For Euro countries period
covered is 1973:Q1 to 1998:Q4 (when Euro was introduced); for
non-Euro countries, 1973:Q1 to2004:Q2. Daily market and stock
returns are from the CRSP database and DataStream.
Paper Type:
Working Papers
Date:
2006-09-22
Category:
Strategy, volatility, VIX (Chicago Board Options Exchange

Volatility Index, which shows the
Title:
VIX Signaled Switching for Style-Differential and Size-Differential

Short-term Stock Investing
Authors:
Dean Leistikow and Susana Yu
Source:
Fordham University working paper
Link:
ber26.pdf
Summary:
This paper finds that VIX is a useful signal to decide short-term

(1-5 days) switching between small cap and large cap valueds,
though it doesnt help chose value/growth stocks.
The strategy: when VIX is above (below) its 75-day moving
average by 20%, long (short) large cap and short (long) small
cap for 1-5 days. This strategy works over 60% trades, with a
5-day profit of 40bps when tested on SP500/SP600 indices.
Comments:
1. Why important
VIX levels were used to forecast stock market returns: a VIX
over 20 is believed to be a bad sign, while a lower VIX bodes
well. This strategy seems no longer working in recent years, as
VIX has been staying at fairly low levels. This paper is interesting
since it shows VIX may still be useful to decide the relative
strength of style/size indices.
2. Data
1994-2004 VIX data are from the Chicago Board Options
Exchange. Daily return data on three S&P indexes (large cap,

mid cap, small cap), and S&P/Barra Growth/Value sub indexes
are from S&P Index Services. Russell Indices
3. Discussions
In essence, this strategy is built on two assumptions:
1.) VIX will reverse to its mean in short term
2.) When VIX goes down, small cap underperforms large cap (in
more general terms, riskier assets underperform less risky
assets)
The first assumption should not be taken for granted. Since
2003, VIX has been trending down and has stayed at fairly low
level. Testing this strategy using recent years data will provide
more insights.
The second assumption suggests that, in more general terms,
investors risk-averseness goes up after VIX reaches a high level.
This leads to "flight to quality" where1.) Small cap should
underperform large cap, 2.) Stocks should underperform bonds.
Its interesting to note that 1) still holds while 2) does not.
Paper Type:
Working Papers
Date:
2006-09-08
Category:
Title:
Authors:
Source:
NBER working paper
Link:
Summary:

Comments:
1. Why important
delisting, etc.
average.
2. Data
3. Discussions
Altmans Z-score, Ohlsons O-score, and Shumway hazard
model. In our view, this paper adds value by presenting a model
that can more accurately predict risk at both short and long
horizons. At least part of the power is in its details - some
commonly used factors are modified (e.g, income and leverage
scaled by asset market value rather than book value) and also
some are added (e.g. cash holdings)
Paper Type:
Working Papers
Date:
2006-06-15
Category:
Novel strategy, divergence of opinion, volatility
Title:
Divergence of Opinion and the Cross Section of Stock Returns
Authors:
Ginger Wu
Source:
Link:
http://www.terry.uga.edu/finance/research/seminars/papers/wu.pdf
Summary:
Long (short) stocks with low (high) divergence of opinion. It is

shown to yield an average annual alpha of 7%+. Here the
"divergence of opinion" is a measure developed in this paper based
on asset volume and volatility.
The story behind this strategy is that, since many stocks can not be
easily shorted, the higher the dispersion, the more likely that the
stock is held by fewer investors that favors more about this stock,
hence a higher likelihood of subsequent lower return.
Comments:
1. Why important
The beauty of this paper is that it proposes a generalized measure
of investors opinion divergence. The author claims that the new
measure is more reliable than existing proxies (eg. Analysts
dispersion and turnover), since it captures the divergence of opinion
among all investors, not just among analysts.
2. Data
Stock return and volume data are taken from the CRSP. The data on
analysts earnings estimates are from the I/B/E/S.
3. Discussions
This new measure, though certainly not the easiest to follow
mathematically, will intuitively move in tandem with price volatility
and trading volume. The power of this measure seems to come from
the statistic treatment, where the author uses simulated maximum
likelihood (SML) and thus isolates divergence of opinion from the
joint distribution of volume and volatility.
It is no secret that some quant managers are already using various
measure of divergence, most notably analysts estimates dispersion
and institution ownership breadth. The correlation between the new
and the old institution ownership breadth remains to be studied,
since the author is obviously trying to devise a measure of
all-encompassing all-investors ownership breadth".
A concern we have comes from data presented in Table I
(Regressions of Divergence of Opinion on Lagged Firm
Characteristic), which says to us that this "new" measure may be a
variant of short term turnover, and that this strategy may be merely
to long low volatility, high quality stocks.
Paper Type:
Working Papers
Date:
2006-05-19
Category:
Strategy, Volatility
Title:
High Idiosyncratic Volatility and Low Returns: International and

Further U.S. Evidence
Authors:
Andrew Ang, Robert J. Hodrickz, Yuhang Xing, Xiaoyan Zhang
Source:
Link:
http://www.gsb.columbia.edu/faculty/aang/papers/ivol.pdf
Summary:
Long companies with low idiosyncratic volatility (IV) and short

companies with high IV. (IV defined as the standard deviation of
the error term in the 3-factor Fama-French regression.) The
strategy is shown to yield annual profit of 15%+ across 23
developed countries.
Comments:
1. Why important:
This paper confirms the impact of a relatively new stock-pricing
factor which was previously shown to work in the US market.
When all evidence (like those cited below) is combined, it seems
to suggest that idiosyncratic volatility capture something thats
missing from CAPM.
2. Data
Individual US stock returns are from COMPUSTAT/CRSP. Stock
return data for international countries are obtained from
DataStream.
3. Discussion:
This paper is a natural and nice extension of a paper reviewed
previously by AlphaLetters (The Cross- Section of Volatility and
Expected Returns,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=426460).
We also find an independent but related paper (Average
Idiosyncratic Volatility in G7 Countries,
), where
the authors find that, in G7 countries, idiosyncratic volatility can
predict stock market return when combined with stock market
volatility, and in US idiosyncratic volatility has explanatory power
for stock returns.
In our previous comment on "The Cross-Section of Volatility and
Expected Returns", we expressed concern that "One cloud over
the theory is that there is no sound explanation for the abnormal
alpha, and we dont know if such a pattern will repeat itself if we
dont know why it arose in the first place". Well its still a puzzle
to us, but the factors effectiveness around the world will make
quant managers more comfortable to bet their money on it.
Paper Type:
Working Papers
Date:
2006-03-09
Category:
Strategy, Volatility, idiosyncratic volatility (IV)
Title:
The Cross-Section of Volatility and Expected Returns
Authors:
Andrew Ang, Robert J. Hodrick, Yuhang Xing, Xiaoyan Zhang
Source:
SSRN working paper
Link:
Summary:
Strategy 1: long companies with low sensitivity to aggregate

market volatility, and short companies high sensitivity to
aggregate market volatility
Strategy 2: long companies with low idiosyncratic volatility (IV)
and short companies with high IV. (IV defined as the standard
deviation of the error term in the 3-factor Fama-French
regression.)
Comments:
1. Why important
This paper is interesting because it proposes a new factor which
is potentially profitable but has not been widely used. The
authors find that companies with low IV outperform those with
high IV.
One cloud over the theory is that there is no sound explanation
for the documented abnormal alpha, and we don't know if such a
pattern will repeat itself if we don't know why it arose in the first
place. As a matter of fact, the authors claim that they found a
"puzzle". What's more troubling is that people are tempted to
draw an opposite conclusion: investors should demand a high
excess return for those stocks with high idiosyncratic risks since
they are hard to hedge and its risk is hard to be diversified away
by the market portfolio. A puzzle indeed.
2. Next steps
Decomposing the risks of any risks has further implications on
risk management. For each stock, its risk can be decomposed
into 3 components: 1.) market risk, 2.) sector risk and 3.)
Idiosyncratic risk. Other things equal, presumably a stock with
high idiosyncratic risks should get lower misweights. Note that a
stock with high idiosyncratic risks does not necessarily have high
beta.
Paper Type:
Working Papers
Date:
2006-03-09
Category:
Trading cost, momentum, volatility
Title:
Market Impact Costs of Institutional Equity Trades
Authors:
Jacob A. Bikkera, Laura Spierdijkb, Pieter Jelle van der Sluis
Source:
University of Twente working paper
Link:
http://wwwhome.math.utwente.nl/~spierdijkl/marketimpact.pdf
Summary:
This article presents market impact costs of Q1, 2002 equity

trading by ABP, a top 5 largest pension funds in the world. It
also shows a significant impact of momentum, volatility as well
as timing of trades.
Comments:
1. Why important
We think this is a valuable study for portfolio managers given its
useful information of worldwide equity trades of a large investor.
People may trade in a completely different market and trade in
different sizes, but the insights from the paper should be com
on: an asymmetric market impact (higher impact for sell than
buy), funds cost much higher than the market impact, spread
out of trades lowers market impact but increases impact
volatility.
2. Next steps
We are not sure how applicable the trade day study (trading cost
analysis on Monday, Tuesday, January, February, etc.) is to
other managers. Rather we believe this maybe specific to that
specific period (Q1 of 2002), and a more relevant study should
how the market trading volume and liquidity impact the trading
cost.

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