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Stingy News: Academia

Low vol in perspective
10/16/17 Markets Indexing Academia
"The superior performance of low-volatility stocks (as well as low-beta stocks, which are closely related) was initially documented in the academic literature in the 1970s, before even the size and value premiums were 'discovered.' The low-volatility anomaly has been found to exist in equity markets across the globe, and not only for stocks but for bonds. In other words, it has been pervasive."

The data mine
09/17/17 Markets Academia
"The authors take the Compustat universe of data points, and use every variable in the dataset to create over 2 million trading strategies"

Anomalies abroad
08/20/17 Value Investing Academia
"A pre-specified set of nine prominent U.S. equity return anomalies produce significant alphas in Canada, France, Germany, Japan, and the U.K. All of the anomalies are consistently significant across these five countries, whose developed stock markets afford the most extensive data. The anomalies remain significant even in a test that assumes their true alphas equal zero in the U.S. Consistent with the view that anomalies reflect mispricing, idiosyncratic volatility exhibits a strong negative relation to return among stocks that the anomalies collectively identify as overpriced, similar to results in the U.S."

The Myth of 1926
06/26/17 Markets Academia
"How much do we know about long-term returns on U.S. stocks?"

Michael Mauboussin interview
05/21/17 Indexing Behaviour Markets Academia
"He and his team have been prolific in the last six months, publishing several long research reports on the most interesting aspects of the investing landscape. In this conversation, we talk about business moats, industry analysis, and how to combine man and machine when building an investment strategy and portfolio." [audio]

Trading costs and factor investing
05/14/17 Academia
"It seems that everywhere you look there is a promotion related to factor investing and/or smart beta. The incentives to develop strategies with strong backtests are strong, both in academia and in industry. This natural conflict of interest should raise concern for investors who are trying to ascertain the validity of a particular study or investment approach. One must always consider the possibility of data-snooping, overfitting, and transaction costs - do they make the strong results null and void?"

Idiosyncratic Momentum
05/07/17 Momentum Investing Academia
"They found that despite similar performances over the first year, these momentum portfolios perform dramatically differently beyond year one - relative-return momentum reverses strongly (producing returns of -0.40 percent per month in months 13 through 60), while abnormal-return momentum continues for years (producing returns of 0.20 percent per month in months 13 through 60)."

Low volatility lottery
12/11/16 Markets Academia
"The abnormal returns associated with the beta anomaly are explained by a lottery demand factor. The beta anomaly exists only when the price impact of lottery demand falls disproportionately on high-beta stocks and is concentrated in stocks with low levels of institutional ownership."

The three coolest studies of 2016
12/11/16 Funds Academia
"It appears that ETFs dropped portfolio returns by 1.1% annually even when they accounted for only a small portion of an investor.s portfolio."

Sharpening the arithmetic
10/16/16 Indexing Academia
"I challenge Sharpe's (1991) famous equality that 'the return on the average actively managed dollar will equal the return on the average passively managed dollar.' This equality does not hold in general. It is based on the implicit assumption that the market portfolio never changes, which does not hold in the real world because new shares are issued and others are repurchased. Hence, even 'passive' investors must trade regularly in order to maintain their market-weighted portfolios. Since passive investors may trade at less favorable prices than active managers, Sharpe's equality is broken. The changes of the market portfolio are large enough that active managers can add noticeable returns. Hence, active managers can be worth positive fees, which allow them to provide an important, beneficial, role in the economy - helping to allocate resources efficiently. Passive investing also plays a useful role, especially since the average active mutual fund manager has charged larger fees than their value added."

Retirement glidepath
10/02/16 Retirement Academia
"After considering declining-equity, rising-equity, and static glidepaths, the comprehensive international evidence from 19 countries and the world market over 110 years considered here ultimately suggests that both an all-equity portfolio and a 60-40 stock-bond allocation are simple and very effective strategies for retirees to implement."

09/17/16 Markets Academia
"What we did was to demonstrate that given virtually ANY desired performance profile, one can devise a stock fund portfolio, constructed from S&P500 stocks, that achieves that profile, based on backtests. Do you want a steady 8% per annum growth, month after month, year after year? You can have it - or 10% or 12% or 15% (all based on backtests, over say a 15-year period). We even constructed portfolios that exhibit a stair-step or sinusoidal growth, just to demonstrate that any profile can be used."

Chipping away at financial reporting quality
11/28/15 Management Academia
"Chief financial officers are responsible for managing the financial reporting process. We test whether the quality of a firm's financial reports is a function of the effort expended by the CFO. Using golfing records to measure leisure consumption, we first show that CFOs consume more leisure when they have lower economic incentives to work. We show further that higher levels of CFO leisure are negatively associated with a number of indicators of financial reporting quality. The use of firm fixed effects and an instrumental variable analysis suggest that the observed relations are causal. Further tests indicate that higher leisure consumption is associated with shorter conference calls with a more uncertain tone. Finally, the effects of lower quality reporting are demonstrated by results linking CFO leisure with analysts' forecast dispersion and weaker earnings response coefficients."

A conversation with Cliff Asness
11/21/15 Value Investing Momentum Investing Academia
"Tyler and investment strategist Cliff Asness discuss momentum and value investing strategies, disagreeing with Eugene Fama, Marvel vs. DC, the inscrutability of risk, high frequency trading, the economics of Ayn Rand, bubble logic, and why never to share a gym with Cirque du Soleil." [video]

Chipping away at financial reporting quality
11/21/15 Management Accounting Academia
"Chief financial officers are responsible for managing the financial reporting process. We test whether the quality of a firm's financial reports is a function of the effort expended by the CFO. Using golfing records to measure leisure consumption, we first show that CFOs consume more leisure when they have lower economic incentives to work. We show further that higher levels of CFO leisure are negatively associated with a number of indicators of financial reporting quality. The use of firm fixed effects and an instrumental variable analysis suggest that the observed relations are causal. Further tests indicate that higher leisure consumption is associated with shorter conference calls with a more uncertain tone. Finally, the effects of lower quality reporting are demonstrated by results linking CFO leisure with analysts' forecast dispersion and weaker earnings response coefficients."

What they don't teach you
10/18/15 Academia
"There are no classes called 'Investing is Hard.' This was probably the main message I tried to convey to these students because they were in a class that required them to invest real money on behalf of the school through their class. No one ever really tells you how hard it can be to earn excess returns in the markets. At that age you're worried about creating the most precise Excel model you can to accurately value a business. Figuring out that successful investing is not easy is actually one of the first steps you have to take to become a better investor."

The active share debate
10/03/15 Funds Academia
"There is an interesting discussion in the geeky world of academic finance literature between the intellectual muscle at AQR and academia."

Can it work if everyone knows about it?
09/05/15 Markets Behaviour Asness Value Investing Academia
"We're going to argue that certain well-known classic strategies that have worked over the long term will continue to work going forward, though perhaps not at the same level and with different risks than in the past."

High failure rates
08/30/15 Academia
"More than 270 researchers from around the world came together to replicate 100 recent findings from top psychology journals. By one measure, only 36 percent showed results that were consistent with the original findings. In other words, many more than half of the replications failed."

Absolute strength
08/16/15 Momentum Investing Academia
"We document a new pattern in stock returns that we call absolute strength momentum. Stocks that have significantly increased in value in the recent past (absolute strength winners) continue to gain, and stocks that have significantly decreased in value (absolute strength losers) continue to lose in the near future. Absolute strength winner and loser portfolio breakpoints are recursively determined by the historical distribution of realized cumulative returns across time and across stocks. The historical distribution yields stable breakpoints that are always positive (negative) for the winner (loser) portfolios. As a result, winners are those that have experienced a significant upward trend, losers are those that have experienced a significant downward trend, and stocks with no momentum have cumulative returns that are not significantly different from zero. The absolute strength momentum strategy is related to, but different from, the relative strength momentum strategy of Jagadeesh and Titman (1993) and the time series momentum strategy of Moskowitz, Ooi, and Pedersen (2011). Time-series regressions show that the returns to the absolute strength momentum strategy completely explain the returns to the relative strength and the time series momentum strategies, but not vice versa. Absolute strength momentum does not expose investors to severe crashes during crisis periods, and its profits are remarkably consistent over time. For example, an 11-1-1 strategy that buys absolute strength winners and sells absolute strength losers delivers a risk-adjusted return of 2.42% per month from 1965-2014 and 1.55% per month from 2000-2014."

A value asset allocation strategy
07/25/15 Markets Value Investing Academia
"After enduring years of frustration trying to identify a valuation-based asset allocation technique.that actually worked.I think the team at Gestaltu is on to an interesting concept. By simply looking at real spreads between equity valuations and realized inflation (high spreads are good for equity; low spreads are bad for equity), one can devise a timing rule that captures most of the upside, but protects on the downside. Of course, this is all historical data and could very well be an exercise in data-mining. That said, the concept of buying equity assets when they have much higher yields than current inflation, is intuitively appealing."

O-score and distress risk
07/12/15 Value Investing Academia
"Value investing always wins, even after controlling for distress. And value investing really wins among the most distressed firms. Oddly enough, expensive firms that are distressed earn 14.44% less than cheap firms that are distressed."

Buyback extravaganza
06/20/15 Value Investing Academia
"Buybacks may not be well timed in aggregate, but they have been timed well (at least, timed at cheaper relative prices) by companies with the highest conviction buyback programs. These can get lost in the shuffle because, on average, the cash spent on buybacks by these high conviction firms represent 22% of the total cash being spend on buybacks (gross)."

Momentum and stop losses
06/20/15 Momentum Investing Academia
"Stop losses and other trend following methods are a way to head off some of the usual pitfalls of human judgement, such as the disposition effect, loss aversion, ambiguity aversion, and flight-to-safety. There is no reason why they should not be used by all momentum investors."

215 years of global multi-asset momentum
06/13/15 Momentum Investing Academia
"Extending price return momentum tests to the longest available histories of global financial asset returns, including country-specific sectors and stocks, fixed income, currencies, and commodities, as well as U.S. stocks, we create a 215-year history of multi-asset momentum, and we confirm the significance of the momentum premium inside and across asset classes. Consistent with stock-level results, we document a large variation of momentum portfolio betas, conditional on the direction and duration of the return of the asset class in which the momentum portfolio is built. A significant recent rise in pair-wise momentum portfolio correlations suggests features of the data important for empiricists, theoreticians and practitioners alike."

Timing poorly
06/06/15 Value Investing Funds Behaviour Academia
"Value investing is viewed as a historically successful investment strategy. The literature generally agrees on the robustness of the strategy but disagrees on the explanations for the success. While the empirical research focuses exclusively on the time-series returns - or the buy-and-hold return - of a value portfolio, the investor experience is, of course, driven by the internal rate of return (IRR) - or the dollar-weighted average return. Although the buy-and-hold average portfolio return may be the proper way to document the anomaly, the dollar-weighted average return can shed light on some interesting questions which cannot be addressed by analyzing the buy-and-hold returns. In particular, examining the dollar-weighted returns allows us to ask whether investors have actually generated superior IRR consistent with the reported buy-and-hold outperformance of value strategies."

Big asset growth = big trouble
05/15/15 Markets Growth Investing Stingy Investing Academia
"The stock market has a way of crushing the hopes and dreams of investors who buy growth stocks. Problem is, they usually pay far too much for stocks that have grown a great deal only to see them slow down. While much has been said about earnings growth, academics recently turned their attention to asset growth and the news isn.t good. They figure firms with large asset growth tend to underperform the market."

Methods to improve the Piotroski F-Score
05/04/15 Value Investing Academia
"We have identified ways to improve the baseline Piotroski F-Score and enhance value investing strategies. The final product is the FS-Score, which incorporates net-share repurchases and free-cash-flow metrics and arranges the metrics to align closer with traditional value-investing principles."

Watch prices and the industrial revolution
03/14/15 History Academia
"Although largely absent from modern accounts of the Industrial Revolution, watches were the first mass produced consumer durable, and were Adam Smith's pre-eminent example of technological progress. In fact, Smith makes the notable claim that watch prices may have fallen by up to 95 per cent over the preceding century; a claim that this paper attempts to evaluate. We look at changes in the reported value of over 3,200 stolen watches from records of criminal trials in the Old Bailey court in London from 1685 to 1810. Before allowing for quality improvements we find that the real price of watches in nearly all categories falls steadily by 1.3 per cent per year, equivalent to a fall of 75 per cent over a century, a rate considerably above the growth rate of average labour productivity in British industry in the early nineteenth century."

Days to cover and stock returns
03/07/15 Markets Academia
"The short ratio -- shares shorted to shares outstanding -- is an oft-used measure of arbitrageurs' opinion about a stock's over-valuation. We show that days-to-cover (DTC), which divides a stock's short ratio by its average daily share turnover, is actually the theoretically correct measure because trading costs vary across stocks. Since trading costs are inversely related to share turnover, DTC is then approximately the marginal cost of the shorts. At the arbitrageurs' optimum it equals the marginal benefit of the shorts, which is their opinion about over-valuation. Consistent with our model, DTC is a stronger predictor of poor stock returns than short ratio. It is distinct from the stock lending fee effect but has comparable forecasting power. An equal-weighted long-short strategy based on DTC generates a significant return of 1.2% per month."

Piotroski F-Score backtest
02/07/15 Markets Value Investing Academia
"This backtest for Piotroski F-Score reveals that the first quintile underperforms the S&P 500 Equal Weight Index benchmark. These companies typically weak balance sheets and weak earnings performance so it is not surprising that stock returns for these companies would underperform. The second through fifth quintiles have higher than average annual excess returns than each of the previous quintiles. I like that there was a consistent linear trend upwards from the 1st to 5th quintiles. The Piotroski F-Score does appear to be a powerful fundamental predictor of 1-year stock performance."

Institutional investors and stock return anomalies
01/12/15 Markets Academia
"We examine institutional investor demand for stocks that are categorized as mispriced according to twelve well-known pricing anomalies. We find that institutional demand during the year prior to anomaly portfolio formation is typically on the wrong side of the anomalies' implied mispricing. That is, we find increases in institutional ownership for overvalued stocks and decreases in institutional ownership for undervalued stocks. Moreover, abnormal returns for all twelve anomalies are concentrated almost entirely in stocks with institutional demand on the wrong side. We consider several competing explanations for these puzzling results."

Retail financial advice
12/06/14 Brokers Academia
"Using unique data on Canadian households, we assess the impact of financial advisors on their clients' portfolios. We find that advisors induce their clients to take more risk, thereby raising expected returns. On the other hand, we find limited evidence of customization: advisors direct clients into similar portfolios independent of their clients' risk preferences and stage in the life cycle. An advisor's own portfolio is a good predictor of the client's portfolio even after controlling for the client's characteristics. This one-size-fits-all advice does not come cheap. The average client pays more than 2.7% each year in fees and thus gives up all of the equity premium gained through increased risk-taking."

Doubling down
11/23/14 Markets Funds Academia
"With a sample from 1/1990 to 12/2013, the paper finds that a portfolio formed of the positions that fund managers add to after recent stock-level underperformance generates significant annualized risk-adjusted outperformance of between 5% to 15% (Table below shows the monthly performances). Double down portfolios perform best with around a 6 to 9 month holding period."

52-Week High and Momentum Investing
11/15/14 Markets Momentum Investing Academia
"That is, the price level, relative to a reference point (the 52-week high), seems in this context to be an even more powerful price predictor than momentum in isolation. And while reversals do occur for momentum stocks, 52-week high stocks do not reverse."

Net Nets in London
11/15/14 Markets Value Investing Graham Academia
"Firms with an NCAV/MV greater than 1.5 display significantly positive market-adjusted returns (annualized return up to 19.7% per year) over five holding years."

Curiosity killed the copycat
10/26/14 Funds Academia
"The funds that get copied, unsurprisingly, are typically those that have performed well in the past and are highly ranked by Morningstar. In the short term, the strategy appears to work; the copycats manage to improve their performance and the copied funds continue to do well. But over a longer period of four years or so, this effect disappears."

Low volatility and value
10/19/14 Value Investing Academia
"A large part of the performance associated with low volatility stocks is clearly being driven by exposures to value; however, there does appear to be some marginal benefit to investing in low volatility stocks."

Avoid high beta stocks
10/19/14 Markets Academia
"Low volatility investing--either expressed via BETA or IVOL--does show promise. The simulation results are not as dramatic as those for value and momentum based strategies, but the results are certainly interesting."

Strategic news releases
09/19/14 Management Markets Media Academia
"We show that CEOs strategically time corporate news releases to coincide with months in which their equity vests. These vesting months are determined by equity grants made several years prior, and thus unlikely driven by the current information environment. CEOs reallocate news into vesting months, and away from prior and subsequent months. They release 5% more discretionary news in vesting months than prior months, but there is no difference for non-discretionary news. These news releases lead to favourable media coverage, suggesting they are positive in tone. They also generate a temporary run-up in stock prices and market liquidity, potentially resulting from increased investor attention or reduced information asymmetry. The CEO takes advantage of these effects by cashing out shortly after the news releases."

The moneyball of quality investing
08/24/14 Markets Value Investing Academia
"Factor investing has rightfully gained adherents among investors seeking superior risk-adjusted returns. Our research reveals that quality is not a factor that reliably commands a premium in its own right. Nonetheless, value investing conditioned upon certain indicators of company quality is a promising strategy."

Are cash flows better return predictors?
08/16/14 Value Investing Academia
"Novy-Marx (2013) shows that profitability, measured by gross profits-to-assets, predicts the cross-section of average returns just as well as book-to-market ratios do. We find that, in our 1994-2013 sample of S&P 1500 stocks, cash flow measures are even better predictors of stock returns than various income statement-based measures. We present a procedure for transforming indirect cash flow method statements into disaggregated and more direct estimates of cash flows from operations and other sources. We then derive 'direct method' cash flow measures and form portfolio deciles based on these measures. Stocks in the highest cash flow decile outperform those in the lowest cash flow decile by over 10% annually after controlling for well-known risk factors. Our results are robust to the investment horizon, and controlling for sector differences. We also show that, in addition to operating cash flow information, cash taxes and capital expenditures provide incremental predictive power."

Technical market indicators
07/18/14 Markets Academia
"Current evidence on the predictability of technical analysis largely concentrates on price-based technical indicators such as moving averages rules and trading range breakout rules. In contrast, the predictability of widely used technical market indicators such as advance/decline lines, volatility indices, and short-term trading indices has drawn limited attention. Although some market indicators have also become popular sentiment proxies in the behavioral finance field to predict returns, the results generally rely on using just one or a few indicators at a time. This approach raises the risk of data snooping, since so many proxies are proposed. We review and examine the profitability of a wide range of 93 market indicators. We give these technical market indicators the benefit of the doubt, but even then we find little evidence that they predict stock market returns. This conclusion continuously holds even if we allow predictability to be state dependent on business cycles or sentiment regimes."

Do longer-term calculations enhance performance?
06/20/14 Value Investing Academia
"In theory, using long-term measures makes sense, but the evidence does not support this story. There may be other considerations such as turnover and taxes, but in the context of the study above, there is no benefit to using longer-term measures."

Deflating profitability
06/20/14 Markets Academia
"Gross profit scaled by book value of total assets predicts the cross-section of average returns. Novy-Marx (2013) concludes that it outperforms other measures of profitability such as earnings, cash flows, and dividends. One potential explanation for the measure's predictive ability is that its numerator - gross profit - is a cleaner measure of economic profitability. An alternative explanation lies in the measure's deflator. We find that net income equals gross profit in predictive power when both measures are constructed using consistent deflators. We then construct an alternative measure of profitability, operating profitability, which better matches current expenses with current revenue. This measure exhibits a far stronger link with expected returns than either net income or gross profit."

Does Academic Research Kill Returns?
06/07/14 Markets Academia
"On average, long-short versions of the 82 investment strategies enjoyed risk-adjusted returns (alpha) of 9.5% per year within the data sample. In the second period, after the initial study was concluded but before the paper was published, the alpha dipped by 13%, to 8.5% annualized. After publication, alpha fell much by the much larger percentage of 44%, landing at 4.8%."

Academic research and return predictability
06/07/14 Markets Academia
"We study the out-of-sample and post-publication return-predictability of 82 characteristics that are identified in published academic studies. The average out-of-sample decay due to statistical bias is about 10%, but not statistically different from zero. The average post-publication decay, which we attribute to both statistical bias and price pressure from aware investors, is about 35%, and statistically different from both 0% and 100%. Our findings point to mispricing as the source of predictability. Post-publication, stocks in characteristic portfolios experience higher volume, variance, and short interest, and higher correlations with portfolios that are based on published characteristics. Consistent with costly (limited) arbitrage, post-publication return declines are greater for characteristic portfolios that consist of stocks with low idiosyncratic risk."

The deliberate amateur
05/30/14 Academia
"Compounding the honor of winning the Nobel is that Geim is the only scientist to date to win both a Nobel and an Ig Nobel, the award given to scientists for experiments so outlandish that they 'first make people laugh, and then make them think.'"

Enhancing yield-based strategies
05/18/14 Dividends Academia
"High dividend yield stocks do not reliably earn above-average risk-adjusted returns. More complete measures of shareholder yield, which account for net share repurchases, perform better. We explore the use of net-debt paydown as a way to further enhance shareholder yield. The addition of net-debt paydown enhances risk-adjusted returns and creates a shareholder yield metric that is more robust over time. We also explore the technique of separating yield metrics by payout percentage as a way to enhance return predictability. We find some evidence that using payout percentage within a yield category can systematically improve portfolio performance."

Fact, fiction and momentum investing
05/10/14 Momentum Investing Academia
"It's been over 20 years since the academic discovery of momentum investing, yet much confusion and debate remains regarding its efficacy and its use as a practical investment tool. In some cases 'confusion and debate' is us attempting to be polite, as it is near impossible for informed practitioners and academics to still believe some of the myths uttered about momentum - but that impossibility is often belied by real world statements. In this article, we aim to clear up much of the confusion by documenting what we know about momentum and disproving many of the often-repeated myths. We highlight ten myths about momentum and refute them, using results from widely circulated academic papers and analysis from the simplest and best publicly available data."

Evasive shareholder meetings
04/05/14 Academia
"We study the location and timing of annual shareholder meetings. When companies move their annual meetings a great distance from headquarters, they tend to announce disappointing earnings results and experience pronounced stock market underperformance in the months after the meeting. Companies appear to schedule meetings in remote locations when the managers have private, adverse information about future performance and wish to discourage scrutiny by shareholders, activists, and the media. However, shareholders do not appear to decode this signal, since the disclosure of meeting locations leads to little immediate stock price reaction. We find that voter participation drops when meetings are held at unusual hours, even though most voting is done electronically during a period of weeks before the meeting convenes."

How much did your house cost?
03/22/14 World Real Estate Academia
"In the case of the Irish property market, it would appear that mortgaged households have considerable difficulty in accurately recalling the actual house price paid for their property."

Stock picking skills of SEC employees
03/02/14 Government Academia
"These results raise questions about potential rent seeking activities of the regulator's employees."

The shorting premium
02/23/14 Markets Academia
"Short-rebate fees are a strong predictor of the cross-section of stock returns, both gross and net of fees. We document a large "shorting premium"; the cheap-minus-expensive-to-short (CME) portfolio of stocks has an average monthly gross return of 1.45%, a 0.92% net return, and a 1.55% four-factor alpha. We show that short fees also interact strongly with the returns to seven of the most well-known and large cross-sectional anomalies. These anomalies disappear among the 80% of stocks with low short fees, but are greatly amplified among those with high fees. We propose a joint explanation for these findings wherein the shorting premium is compensation for the short-side risk borne by the small minority of investors who do most shorting. It therefore raises prices rather than lowers them. We use the CME portfolio return as a proxy for this short risk and demonstrate that a Fama-French CME factor model largely captures the returns to all seven anomalies within both high- and low-fee stocks."

Volatility and mutual fund manager skill
01/26/14 Funds Academia
"Low volatility mutual funds outperform high volatility funds to a remarkable degree, and, in a standard four factor framework, past volatility is a reliable, persistent, and powerful predictor of future abnormal returns. Analyses patterned after Kosowski, Timmerman, Wermers, and White (2006) and Fama and French (2010) indicate that low volatility fund managers have significant skill. However, the addition of a factor contrasting returns on diversified portfolios of low and high volatility stocks eliminates differences in risk-adjusted performance. We conclude that either our volatility measure is associated with a pervasive, systematic pricing factor, or else the volatility effect is a market inefficiency of extraordinary size. Either way, failure to account for the volatility effect can lead to substantial mismeasurement of fund manager skill."

Optimism and credibility of stock spam
01/12/14 Crime Academia
"This study examines attention-driven investment decisions using a sample of firms essentially unknown to investors prior to becoming the target of a stock spam campaign. We show that the market reaction to spam varies predictably with the content of the spam message. Spam date returns and volume are significantly higher for stocks targeted by spam emails containing optimistic target price projections bundled with ostensibly credible information quoted from a previously issued company press release. There is also some evidence that disclaimers in spam messages reduce, but do not eliminate, the market response. Attention effects also contribute to spammers. selection of stocks to target and to spam.related enforcement actions by the Securities and Exchange Commission."

Mike Rowe on the high cost of college
12/15/13 Academia
"If we are lending money that ostensibly we don't have to kids who have no hope of making it back in order to train them for jobs that clearly don't exist, I might suggest that we've gone around the bend a little bit" [video]

My top 10 peeves
12/08/13 Markets Academia
"Clifford S. Asness discusses a list of peeves that share three characteristics: (1) They are about investing or finance in general, (2) they are about beliefs that are very commonly held and often repeated, and (3) they are wrong or misleading and they hurt investors."

More than three little letters
11/10/13 Academia
"Several hundred individuals who hold a Ph.D. in economics, finance, or others fields work for institutional money management companies. The gross performance of domestic equity investment products managed by individuals with a Ph.D. (Ph.D. products) is superior to the performance of non-Ph.D. products matched by objective, size, and past performance for one-year returns, Sharpe Ratios, alphas, information ratios, and the manipulation-proof measure MPPM. Fees for Ph.D. products are lower than those for non-Ph.D. products. Investment flows to Ph.D. products substantially exceed the flows to the matched non-Ph.D. products. Ph.D.s' publications in leading economics and finance journals further enhance the performance gap."

Nick Brown smelled bull
10/27/13 Academia
"Cultivate a 'positivity ratio' of greater than 2.9-to-1 and sail smoothly through life; fall below it, and sink like a stone. The theory was well credentialed. Now cited in academic journals over 350 times, it was first put forth in a 2005 paper by Barbara Fredrickson, a luminary of the positive psychology movement, and Marcial Losada, a Chilean management consultant, and published in the American Psychologist, the flagship peer-reviewed journal of the largest organization of psychologists in the U.S. But Brown smelled bullshit. A universal constant predicting success and fulfillment, failure and discontent? "In what world could this be true?" he wondered."

How science goes wrong
10/20/13 Academia
"A simple idea underpins science: "trust, but verify." Results should always be subject to challenge from experiment. That simple but powerful idea has generated a vast body of knowledge. Since its birth in the 17th century, modern science has changed the world beyond recognition, and overwhelmingly for the better. But success can breed complacency. Modern scientists are doing too much trusting and not enough verifying - to the detriment of the whole of science, and of humanity."

Cyclically adjusted valuation measures
10/13/13 Academia
"We confirm the effectiveness of using cyclically-adjusted valuation metrics to identify high performing stocks. The Shiller P/E, or cyclically-adjusted price-to-earnings (CAPE) ratio, is not the optimal way to implement a cyclically-adjusted value measure. At the margin, the cyclically-adjusted book-to-market (CA-BM) is a better measure to predict returns. We find that more frequent rebalancing and momentum can enhance strategies based on cyclically-adjusted valuation metrics."

Quality Minus Junk
09/05/13 Markets Academia
"We define a quality security as one that has characteristics that, all-else-equal, an investor should be willing to pay a higher price for: stocks that are safe, profitable, growing, and well managed. High-quality stocks do have higher prices on average, but not by a very large margin. Perhaps because of this puzzlingly modest impact of quality on price, high-quality stocks have high risk-adjusted returns. Indeed, a quality-minus-junk (QMJ) factor that goes long high-quality stocks and shorts low-quality stocks earns significant risk-adjusted returns in the U.S. and globally across 24 countries. The price of quality - i.e., how much investors pay extra for higher quality stocks - varies over time, reaching a low during the internet bubble. Further, a low price of quality predicts a high future return of QMJ. "

The romantic appeal of savers
08/04/13 Thrift Fun Academia
"The desire to attract a romantic partner often stimulates conspicuous consumption, but we find that people who chronically save are more romantically attractive than people who chronically spend."

Value around the world
06/16/13 World Value Investing Academia
"Over the last decades the value premium has well been documented for various time spans and countries. It is proven to be a consistent asset pricing anomaly. This study presents the largest international study on portfolio returns formed according to the book-to-market ratio and examines how cultural differences affect the magnitude of value returns. The cultural differences are measured in two dimensions: patience and risk aversion based on the data collected by the International Test on Risk Attitudes (INTRA). In accordance with a consumption based Gordon model we find that risk aversion is positively and patience negatively related to the magnitude of value profits. Similar results hold for the average stock volatility. Although patience is positively related with the degree of economic development, its relation to value returns does not disappear after controlling for general economic and financial development measures. Furthermore, we find that the value premiums are also positively associated with the country price earnings ratio and negatively related to firm size."

The mystery of the missing experiments
05/26/13 Behaviour Academia
"Francis makes the argument that when sample size, effect size and power are low, datasets that are replicated repeatedly without occasional, or even relatively frequent null findings should be treated as suspect. This is because in experiments where it is reported in the data that certainty is low, it should be expected that we'll see null effects with frequency due to the rules of probability." [Watch Gregory Francis' talk]

You cheeky monkey
04/25/13 Indexing Stingy Investing Academia
"Some index investors have suggested that expensive portfolio managers could easily be replaced by monkeys willing to work for bananas. Now a recent study goes even further. It suggests that a chimp can outperform not just the typical money manager but the traditional index fund as well."

Economic experts vs. average Americans
04/20/13 Economics Academia
"The topics most covered in the economic literature, where economists agree among themselves the most, are also the topics in which their opinions are most distant from those of average Americans. This difference does not seem to be driven by knowledge, since informing people of the expert opinions does not have much impact on the responses of ordinary Americans. The explanation most consistent with our limited evidence is that people do not trust many of the implicit assumptions embedded into the economists' answers and that economists give them for granted."

Absolute momentum
04/07/13 Markets Momentum Investing Academia
"There is a considerable body of research on relative strength price momentum but relatively little on absolute, time series momentum. In this paper, we explore the practical side of absolute momentum. We first explore its sole parameter - the formation, or look back, period. We then examine the reward, risk, and correlation characteristics of absolute momentum applied to stocks, bonds, and real assets. We finally apply absolute momentum to a 60-40 stock/bond portfolio and a simple risk parity portfolio. We show that absolute momentum can effectively identify regime change and add significant value as an easy to implement, rule-based approach with many potential uses as both a stand- alone program and trend following overlay."

We aren't the world
03/03/13 Behaviour Academia
"It is not just our Western habits and cultural preferences that are different from the rest of the world, it appears. The very way we think about ourselves and others - and even the way we perceive reality - makes us distinct from other humans on the planet, not to mention from the vast majority of our ancestors. Among Westerners, the data showed that Americans were often the most unusual, leading the researchers to conclude that 'American participants are exceptional even within the unusual population of Westerners - outliers among outliers.' Given the data, they concluded that social scientists could not possibly have picked a worse population from which to draw broad generalizations. Researchers had been doing the equivalent of studying penguins while believing that they were learning insights applicable to all birds."

The gross profitability premium
03/02/13 Value Investing Academia
"Profitability, measured by gross profits-to-assets, has roughly the same power as book-to-market predicting the cross-section of average returns. Profitable firms generate significantly higher returns than unprofitable firms, despite having significantly higher valuation ratios. Controlling for profitability also dramatically increases the performance of value strategies, especially among the largest, most liquid stocks"

Are leveraged ETFs the new portfolio insurers?
01/20/13 Indexing Markets Academia
"This paper studies Leveraged and Inverse Exchange Traded Funds (LETFs) from a financial stability perspective and emphasizes their similarities with portfolio insurers of the 1980s. Mechanical positive-feedback rebalancing of LETFs resembles the portfolio insurance strategies, which contributed to the stock market crash of October 19, 1987 (Brady Report, 1988). I show that a 1% increase in broad stock-market indexes induces LETFs to originate rebalancing flows equivalent to $1.04 billion worth of stock. Price-insensitive rebalancing of LETFs results in price reaction and extra volatility in underlying stocks. Although LETFs are not as large as portfolio insurers of the 1980s and have not been proven to disrupt stock market activity, implied price impact calculations suggest that their effect could reach a tipping point after a large market move in periods of high volatility."

The illiquidity premium
12/29/12 Markets Academia
"This paper examines the illiquidity premium in stock markets in 45 countries. The premium is the excess return on high-illiquidity stocks minus low-illiquidity stocks across volatility portfolios, after controlling for volatility. The average monthly premium is 0.95% (0.44%) for equally-weighted (value-weighted) portfolio return. After controlling for six common global and regional risk factors, the monthly alpha is 1.04% (0.54%). The premium is much higher for emerging markets than it is for developed ones and it is lower in countries with better disclosure and legal\governance rules. We document significant comovement of country illiquidity premium with both the global and regional average illiquidity premiums."

Why college may be free
12/08/12 Academia
"...there will always be students able and willing to pay for a traditional college experience and for them it will be a worthwhile investment. But for the vast majority, from a financial standpoint that kind of education makes no sense and is fast becoming unnecessary. He believes the higher education revolution is coming soon and will happen fast - perhaps fast enough to keep the next generation from finishing school with debts they may never be able to pay."

Low risk stocks outperform
11/10/12 Markets Academia
"The fact that low risk stocks have higher expected returns is a remarkable anomaly in the field of finance. It is remarkable because it is persistent - existing now and as far back in time as we can see. It is also remarkable because it is comprehensive. We shall show here that it extends to all equity markets in the world. And finally, it is remarkable because it contradicts the very core of finance: that risk bearing can be expected to produce a reward."

Statistically significant?
08/18/12 Academia
"A new paper by psychologists E.J. Masicampo and David Lalande finds that an uncanny number of psychology findings just barely qualify as statistically significant."

Creative destruction hits university
05/23/12 Academia
"Without diminishing learning outcomes, automated teaching software can reduce the amount of time professors spend with students and could substantially reduce the cost of instruction, according to new research."

Advice and Investor Portfolio Performance
12/17/11 Academia
"This paper investigates whether financial advisers add value to individual investors' portfolio decisions by comparing portfolios of advised and self-directed (execution-only) Dutch individual investors. The results indicate significant differences in characteristics and portfolios between these investor groups, but no evidence of differences in risk-adjusted performance. The findings indicate that portfolios of advised investors are better diversified and carry significantly less idiosyncratic risk. In addition, evidence from an analysis of investors who switch to advice taking indicates that these findings (at least in part) reflect the effect of advisory intervention."

Great courses, great profits
08/31/11 Academia
"A teaching company gives the public what the academy no longer supplies: a curriculum in the monuments of human thought."

Debt crisis at colleges
08/18/11 Academia
"With mortgage defaults, banks seize and resell the home. But if a degree can't be sold, that doesn't deter the banks. They essentially wrote the student loan law, in which the fine-print says they aren't 'dischargable.' So even if you file for bankruptcy, the payments continue due. Hence these stern word from Barmak Nassirian of the American Association of College Registrars and Admissions Officers. 'You will be hounded for life,' he warns. 'They will garnish your wages. They will intercept your tax refunds. You become ineligible for federal employment.' He adds that any professional license can be revoked and Social Security checks docked when you retire. We can't think of any other statute with such sadistic provisions."

Moody's sounds the alarm on student borrowing
08/05/11 Academia
"A growing chorus of economists and educators think that the higher education industry will be America's next bubble. Easy credit, high tuition, and poor job prospects have resulted in growing delinquency and default rates on nearly $1 trillion worth of private and federally subsidized loans. Now the ratings agency Moody's has weighed in with a chilling diagnosis: 'Unless students limit their debt burdens, choose fields of study that are in demand, and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place.'"

How to make college cheaper
07/13/11 Academia
"Derek Bok, a former president of Harvard, once observed that "universities share one characteristic with compulsive gamblers and exiled royalty: there is never enough money to satisfy their desires." This is a bit hard on compulsive gamblers and exiled royals. America's universities have raised their fees five times as fast as inflation over the past 30 years. Student debt in America exceeds credit-card debt. Yet still the universities keep sending begging letters to alumni and philanthropists. This insatiable appetite for money was bad enough during the boom years. It is truly irritating now that middle-class incomes are stagnant and students are struggling to find good jobs. Hence a flurry of new thinking about higher education. Are universities inevitably expensive? Vance Fried, of Oklahoma State University, recently conducted a fascinating thought experiment, backed up by detailed calculations. Is it possible to provide a first-class undergraduate education for $6,700 a year rather than the $25,900 charged by public research universities or the $51,500 charged by their private peers? He concluded that it is."

Momentum and credit rating
06/19/11 Academia
"This paper establishes a robust link between momentum and credit rating. Momentum profitability is large and significant among low-grade firms, but it is nonexistent among high-grade firms. The momentum payoffs documented in the literature are generated by low-grade firms that account for less than 4% of the overall market capitalization of rated firms. The momentum payoff differential across credit rating groups is unexplained by firm size, firm age, analyst forecast dispersion, leverage, return volatility, and cash flow volatility."

Your so-called education
05/28/11 Academia
"While some colleges are starved for resources, for many others it's not for lack of money. Even at those colleges where for the past several decades tuition has far outpaced the rate of inflation, students are taught by fewer full-time tenured faculty members while being looked after by a greatly expanded number of counselors who serve an array of social and personal needs. At the same time, many schools are investing in deluxe dormitory rooms, elaborate student centers and expensive gyms. Simply put: academic investments are a lower priority. The situation reflects a larger cultural change in the relationship between students and colleges. The authority of educators has diminished, and students are increasingly thought of, by themselves and their colleges, as "clients" or "consumers." When 18-year-olds are emboldened to see themselves in this manner, many look for ways to attain an educational credential effortlessly and comfortably. And they are catered to accordingly. The customer is always right."

Demographic changes and financial markets
05/11/11 Academia
"We find surprisingly powerful results when we apply the same technique for exploring the links between demography and capital markets returns, net of the strong and well-documented effects of valuation and yield levels. Stocks perform best when the roster of people age 35-59 is particularly large, and when the roster of people age 45-64 is fast-growing. Bonds follow a similar pattern, with an age-shift: they're best when the roster of people age 50-69 is growing quickly. We carry out three different forms of robustness checks, each of which provides statistical significance in different ways: applying different country weights, testing alternative demographic variables, and confirming GDP results on out-of-sample countries."

Bad Education
04/26/11 Academia
"If tuition has increased astronomically and the portion of money spent on instruction and student services has fallen, if the (at very least comparative) market value of a degree has dipped and most students can no longer afford to enjoy college as a period of intellectual adventure, then at least one more thing is clear: higher education, for-profit or not, has increasingly become a scam."

How to Get a Real Education
04/09/11 Academia
"I understand why the top students in America study physics, chemistry, calculus and classic literature. The kids in this brainy group are the future professors, scientists, thinkers and engineers who will propel civilization forward. But why do we make B students sit through these same classes? That's like trying to train your cat to do your taxes - a waste of time and money. Wouldn't it make more sense to teach B students something useful, like entrepreneurship?"

Reinvent education
03/13/11 Academia
"Salman Khan talks about how and why he created the remarkable Khan Academy, a carefully structured series of educational videos offering complete curricula in math and, now, other subjects. He shows the power of interactive exercises, and calls for teachers to consider flipping the traditional classroom script -- give students video lectures to watch at home, and do 'homework' in the classroom with the teacher available to help."

Expectation Errors in Value/Glamour Strategies
02/11/11 Academia
"This paper uses financial statement analysis to identify expectation errors regarding future firm performance embedded in the prices of value and glamour firms. We contrast performance expectations implied by firms' value/glamour classification against a simple, financial statement analysis-based metric that differentiates improving versus deteriorating financial performance. We find that the value/glamour effect is concentrated among firms whose financial performance conflicts with implied expectations. Corroborating evidence of predictable expectation errors exists for future analyst forecast errors, forecast revisions, earnings announcement-window returns, and momentum reversals. Together, the results suggest that the value/glamour effect is an artifact of erroneous performance expectations that are predictable from financial statement analysis."

Think twice
02/02/11 Academia
"Business schools have long sold the promise that, like an F1 driver zipping into the pits for fresh tyres, it just takes a short hiatus on an MBA programme and you will come roaring back into the career race primed to win. After all, it signals to companies that you were good enough to be accepted by a decent business school (so must be good enough for them) it plugs you into a network of fellow MBAs and, to a much lesser extent, there's the actual classroom education. Why not just pay the bill, sign here and reap the rewards? The problem is that these days it doesn't work like that. Rather, more and more students are finding the promise of business schools to be hollow. The return on investment on an MBA has gone the way of Greek public debt. If you have a decent job in your mid- to late- 20s, unless you have the backing of a corporate sponsor, leaving it to get an MBA is a higher risk than ever. If you are getting good business experience already, the best strategy is to keep on getting it, thereby making yourself ever more useful rather than groping for the evanescent brass rings of business school."

Value Averaging and Automated Bias
01/04/11 Academia
"Value averaging is a formula investment strategy which can be shown to achieve a lower average cost and higher IRR than alternative strategies. However, in contrast to previous studies, this paper shows that this does not lead to higher expected profits. Instead an "averaging down" effect systematically biases the IRR up and the average purchase cost down. The same bias applies to a wide class of investment strategies (including dollar cost averaging) where the amount invested in each period is negatively correlated with the return made to date."

Hindsight Bias in Dollar-Weighted Returns
01/04/11 Academia
"Dollar-weighted returns have been used as evidence that consistently bad timing drags investor returns significantly below the buy-and-hold market return, and that consequently the equity risk premium is overstated. In this paper we show that this approach is affected by hindsight bias in the dollar-weighted return. We present an alternative method which quantifies and removes this effect. The results show that bad timing has actually had little impact on investor returns from mainstream US equities. We conclude that previous estimates of the equity risk premium remain valid."

The Truth Wears Off
12/29/10 Academia
"Although many scientific ideas generate conflicting results and suffer from falling effect sizes, they continue to get cited in the textbooks and drive standard medical practice. Why? Because these ideas seem true. Because they make sense. Because we can't bear to let them go. And this is why the decline effect is so troubling. Not because it reveals the human fallibility of science, in which data are tweaked and beliefs shape perceptions. (Such shortcomings aren't surprising, at least for scientists.) And not because it reveals that many of our most exciting theories are fleeting fads and will soon be rejected. (That idea has been around since Thomas Kuhn.) The decline effect is troubling because it reminds us how difficult it is to prove anything. We like to pretend that our experiments define the truth for us. But that's often not the case. Just because an idea is true doesn't mean it can be proved. And just because an idea can be proved doesn't mean it's true."

The disposable academic
12/26/10 Academia
"There is an oversupply of PhDs. Although a doctorate is designed as training for a job in academia, the number of PhD positions is unrelated to the number of job openings. Meanwhile, business leaders complain about shortages of high-level skills, suggesting PhDs are not teaching the right things. The fiercest critics compare research doctorates to Ponzi or pyramid schemes."

Accounting for Leverage
12/16/10 Academia
"This paper lays out a decomposition of book-to-price (B/P) that articulates precisely how B/P 'absorbs' leverage. The B/P ratio can be decomposed into an enterprise book-to-price (that pertains to operations and potentially reflects operating risk) and a leverage component (that reflects financing risk). The empirical analysis shows that the enterprise book-to-price ratio is positively related to subsequent stock returns but, conditional upon the enterprise book-to-price, the leverage component of B/P is negatively associated with future stock returns. Further, both enterprise book-to-price and leverage explain returns over those associated with Fama and French nominated factors - including the book-to-price factor - albeit negatively so for leverage. The seemingly perverse finding with respect to the leverage component of B/P survives under controls for size, estimated beta, return volatility, momentum, and default risk."

Hidden Cost for Index Funds
10/27/10 Funds Indexing Academia
"This paper empirically investigates the index premium and its implications from 1990 to 2005. First, we find that the price impact has averaged 8.8% and 4.7% for additions to the S&P 500 and Russell 2000, respectively, and -15.1% and -4.6% for deletions. The premia have been growing over time, peaking in 2000, and declining since then. Second, the implied price elasticity of demand increases with firm size and decreases with idiosyncratic risk, supporting theoretical predictions. Third, we introduce a new concept that we label the index turnover cost, which represents a hidden cost borne by index funds (and the indexes themselves) due to the index premium. We illustrate this cost and estimate its lower bound as 21-28bp annually for the S&P 500 and 38-77bp annually for the Russell 2000."

Bad Mathematics
10/17/10 Academia
"It is likely that someone who engaged in large amounts of deliberate practice in mathematics could perform extremely well on mathematical tests, exams, and other competitive measures so long as these tests involved calculations or derivations that had been practiced. The problem is that by their nature inventions and discoveries involve problems that have never been solved by anyone. There is no way to practice in this way."

Value and Momentum in Frontier Markets
09/20/10 Value Investing Academia
"We document the presence of economically and statistically significant value and momentum effects in the new emerging equity markets in the world, the so-called frontier emerging markets. We are the first to investigate the characteristics of individual stocks in these markets. Our unique data set consists of more than 1,400 stocks over the period 1997 to 2008 and covers 24 of the most liquid frontier emerging markets. Our results serve as out-of-sample evidence for the existence of value and momentum effects that have previously been reported for developed and emerging markets. Further, we provide empirical evidence that value and momentum strategies within frontier markets are negatively correlated, and are uncorrelated with the same value and momentum strategies in developed and emerging markets. Our mean-variance spanning tests indicate that investors who expand their investment opportunity set with value and momentum investment strategies based on stocks from frontier markets can significantly improve the efficiency of their investment portfolio."

The NYSE from 1815 to 1925
09/16/10 Markets Academia
"In this paper, we collect individual stock prices for NYSE stocks over the period 1815 to 1925 and individual dividend data over the period 1825 to 1870. We use monthly price and dividend information on more than 600 individual securities over the period to estimate a stock price index and total return series that extends virtually to the beginning of the New York Stock Exchange. We use this data to estimate the power of past returns and dividend yields to forecast future long-horizon returns. We find some evidence of predictabiity in sub-periods but little predictability over the long term. We estimate the time-varying volatility of the U.S. market over the period 1815 to 1925 and find evidence of a leverage effect on risk. This new database will allow future researchers to test a broad range of hypotheses about the U.S. capital markets in a rich, untouched sample."

Do Investors Benefit from Financial Advice
09/10/10 Academia
"Working with one of the biggest brokerages in Europe, we record what happens when unbiased investment advice is offered for the first time to about a random 8,000 of their several hundred thousand active retail customers. We analyze the data to answer which customers accept the offer and, if they accept the offer, do they improve their investment performance. These are our findings. First, only 5%, (who are likely to be male, older, richer, more financially sophisticated, and have a longer relationship with the brokerage) accept the offer. Second, of those who accept the offer, the advice is hardly followed. Third, though the investment performance does not improve for the average advisee, it does improve for the average advisee who follows the advice. Fourth, it seems that the investors who most need (do not need) the financial advice are the ones who are most likely to not get it (get it). Overall, our results imply that the mere availability of smart and unbiased financial advice is a necessary but not a sufficient condition for benefiting retail customers. "

Beware of 'independent' research
08/20/10 Academia
"It was the medical profession, of course, that sparked the first real public outcry over corporate-funded research. After regulators exposed cases in which researchers doctored data in favor of drug companies, oversight of medical-school faculty tightened. "If people step over the line, it ends up being a big brouhaha," says James O'Toole, professor of business ethics at the University of Denver. But business schools say keeping the corporate world at arm's length would run counter to their core mission."

Fractals and the art of roughness
07/08/10 Academia
"At TED2010, mathematics legend Benoit Mandelbrot develops a theme he first discussed at TED in 1984 -- the extreme complexity of roughness, and the way that fractal math can find order within patterns that seem unknowably complicated."

Negative idiosyncratic risk premium
07/04/10 Academia
"The average gross return of an equally weighted portfolio that is long (short) the fifth of stocks with the lowest (highest) idiosyncratic volatilities, reformed monthly, is 0.79% per month or about 9% per year. Results are similar for sorting on total rather than idiosyncratic volatility. In other words, low-volatility stocks tend to outperform high-volatility stocks."

College: paltry return
06/28/10 Academia
"Over the past 30 years, the S&P 500 Index averaged about 11 percent a year. Only 88 schools out of the 554 in the study had a better return than the S&P. Everywhere else, students would have been better off - financially, at least - if they invested the money they spent on their college educations and never set foot in a classroom. 'For almost every school on the list,' writes Lee in an e-mail, 'prospective students paying full price would probably have been better off investing in the stock market 30 years ago rather than spending their money on a college education.'"

Do politicians cause downsizing?
06/21/10 Government Academia
"This paper provides a new empirical approach for identifying the impact of government spending on the private sector. Using changes in congressional committee chairmanship as a source of exogenous variation in state-level federal expenditures, we find that fiscal spending shocks appear to significantly dampen corporate sector investment activity. Specifically, we find statistically and economically significant evidence that firms respond to government spending shocks by: i.) reducing investments in new capital, ii.) reducing investments in R&D, and iii.) paying out more to shareholders in the face of this reduced investment opportunity set. Further, we find that when the spending shocks reverse (through a relinquishing of chairmanship), most all of these behaviors reverse. Finally, we also find some evidence that firms scale back their employment, and experience a decline in sales growth."

Don't let your sons grow up to be scientists
06/14/10 Markets Academia
"The Real Science Gap: It's not insufficient schooling or a shortage of scientists. It's a lack of job opportunities. Americans need the reasonable hope that spending their youth preparing to do science will provide a satisfactory career."

Asymmetric information based on work?
04/27/10 Academia
"Using a novel dataset covering all individual investors' stock market transactions in Norway over a 10-year period, we analyze whether individual investors have a preference for professionally close stocks, and whether they make an excess return on such investments. After excluding own-company and previous employer stock, investors hold on average 11 % of their portfolio in stocks within their two-digit industry of employment. Given the poor hedging properties of professionally close stocks, one would expect such investments to be associated with asymmetric information and abnormally high returns. In contrast, all our estimates of abnormal returns are negative, in many cases statistically significant. Overconfidence seems the most likely explanation for why individuals excessively trade in professionally close stocks."

Measuring investor sentiment
04/11/10 Funds Markets Academia
"We investigate a proxy for monthly shifts between bond funds and equity funds in the USA: aggregate net exchanges of equity funds. This measure (which is negatively related to changes in VIX) is positively contemporaneously correlated with aggregate stock market excess returns: One standard deviation of net exchanges is related to 1.95% of market excess return. Our main new finding is that 85% (all) of the contemporaneous relation is reversed within four (ten) months. The effect is stronger in smaller stocks and in growth stocks. These findings support the notion of "noise" in aggregate market prices induced by investor sentiment."

Odds are, it's wrong
03/20/10 Academia
"For better or for worse, science has long been married to mathematics. Generally it has been for the better. Especially since the days of Galileo and Newton, math has nurtured science. Rigorous mathematical methods have secured science.s fidelity to fact and conferred a timeless reliability to its findings. During the past century, though, a mutant form of math has deflected science.s heart from the modes of calculation that had long served so faithfully. Science was seduced by statistics, the math rooted in the same principles that guarantee profits for Las Vegas casinos. Supposedly, the proper use of statistics makes relying on scientific results a safe bet. But in practice, widespread misuse of statistical methods makes science more like a crapshoot."

Buying earnings and book value
03/02/10 Value Investing Academia
"The paper shows that book-to-price facilitates the determination: for a given earnings yield, book-to-price indicates additional return associated with expected growth."

Too many scientists?
02/22/10 Academia
"American science education lags behind that of many other nations, right? So why does it produce so many talented young researchers who cannot find a job in their chosen field of study?"

The new cash cows
02/16/10 Academia
"In other words, enrolling in college is a bit like joining a health club. And as with a health club, the revenue comes from signing people up, not from encouraging them to use the services."

The big lie about the 'life of the mind'
02/10/10 Academia
"Some professors tell students to go to graduate school "only if you can't imagine doing anything else." But they usually are saying that to students who have been inside an educational institution for their entire lives. They simply do not know what else is out there." [Which is a shame because there are a great many fun things to do in this world.]

The 'other' imbalance and the financial crisis
01/12/10 Markets Academia
"I argue instead that the root imbalance was of a different kind: The entire world had an insatiable demand for safe debt instruments that put an enormous pressure on the U.S. financial system and its incentives (and this was facilitated by regulatory mistakes). The crisis itself was the result of the negative feedback loop between the initial tremors in the financial industry created to bridge the safe - assets gap and the panic associated with the chaotic unraveling of this complex industry. Essentially, the financial sector was able to create 'safe' assets from the securitization of lower quality ones, but at the cost of exposing the economy to a systemic panic."

Free for a fee
11/02/09 Funds Indexing Academia
"I present and test a rational expectations model consistent with the finding that active funds underperform index funds by an amount roughly equal to their fees. Investors receive privately observed wealth shocks that cause them to rebalance. These shocks also induce noise in stock prices through a wealth effect. As a result, investors tend to buy in and out of index funds at the wrong time, failing to attain the buy-and-hold return of the index fund. Empirically, looking at individual as well as aggregate fund returns, I find that taking into account the timing of investment can account for most of the buy-and-hold advantage of index funds."

Investor timing ability
10/20/09 Indexing Funds Academia
"We examine the timing ability of mutual fund investors using cash flow data at the individual fund level. Over 1991-2004 equity fund investor timing decisions reduce fund investor average returns by 1.56% annually. Underperformance due to poor timing is greater in load funds and funds with relatively large risk-adjusted returns. In particular, the magnitude of investor underperformance due to poor timing largely offsets the risk-adjusted alpha gains offered by good-performing funds. Investors in both actively managed funds and index funds exhibit poor investment timing. We demonstrate that our empirical results are consistent with investor return-chasing behavior."

Information suppression in competitive markets
10/02/09 Academia
"Our analysis begins with the observation that consumers sometimes fail to anticipate contingencies. When consumers pick among a set of goods, some consumers do not take full account of shrouded product attributes, including maintenance costs, prices for necessary add-ons, or hidden fees. Bank accounts, for example, have many shrouded attributes like fees and surcharges. A bank may prominently advertise 'free checking,' but the advertising won't highlight the $30 fee for a bounced check, the $15 surcharge for a checkbook, or the $2 penalty per check for writing more than five checks in a month. Many consumers do not know the details of this fee structure until after they open their account."

Risk and return in general
07/07/09 Academia
"Empirically, standard, intuitive measures of risk like volatility and beta do not generate a positive correlation with average returns in most asset classes. It is possible that risk, however defined, is not positively related to return as an equilibrium in asset markets. This paper presents a survey of data across 20 different asset classes, and presents a model highlighting the assumptions consistent with no risk premium. The key is that when agents are concerned about relative wealth, risk taking is then deviating from the consensus or market portfolio. In this environment, all risk becomes like idiosyncratic risk in the standard model, avoidable so unpriced."

Case closed
06/15/09 Value Investing Academia
"This article provides conclusive evidence that the U.S. stock market is highly inefficient. Our results, spanning a 45 year period, indicate dramatic, consistent, and negative payoffs to measures of risk, positive payoffs to measures of current profitability, positive payoffs to measures of cheapness, positive payoffs to momentum in stock return, and negative payoffs to recent stock performance. Our comprehensive expected return factor model successfully predicts future return, out of sample, in each of the forty-five years covered by our study save one. Stunningly, the ten percent of stocks with highest expected return, in aggregate, are low risk and highly profitable, with positive trends in profitability. They are cheap relative to current earnings, cash flow, sales, and dividends. They have relatively large market capitalization and positive price momentum over the previous year. The ten percent with lowest expected return (decile 1) have exactly the opposite profile, and we find a smooth transition in the profiles as we go from 1 through 10. We split the whole 45-year time period into five sub-periods, and find that the relative profiles hold over all periods. Undeniably, the highest expected return stocks are, collectively, highly attractive; the lowest expected return stocks are very scary - results fatal to the efficient market hypothesis. While this evidence is consistent with risk loving in the cross-section, we also present strong evidence consistent with risk aversion in the market aggregate's longitudinal behavior. These behaviors cannot simultaneously exist in an efficient market."

The Liquidity Premium
06/11/09 Value Investing Markets Academia
"Value tends to outperform growth over time. We've shown that less-liquid stocks outperform more-liquid stocks. In this section, we examine how liquidity interacts with value and growth."

Termination of investment management firms
05/18/09 Funds Academia
"We examine the selection and termination of investment management firms by 3,400 plan sponsors between 1994 and 2003. Plan sponsors hire investment managers after large positive excess returns but this return-chasing behavior does not deliver positive excess returns thereafter. Investment managers are terminated for a variety of reasons, including but not limited to underperformance. Excess returns after terminations are typically indistinguishable from zero but in some cases positive. In a sample of round-trip firing and hiring decisions, we find that if plan sponsors had stayed with fired investment managers, their excess returns would be no different from those delivered by newly hired managers. We uncover significant variation in pre- and post-hiring and firing returns that is related to plan sponsor characteristics."

Identifying overvalued equity
05/01/09 Stocks Academia
"An overvaluation score (O-Score) that combines proxies for earnings overstatement, prior merger activity, excessive stock issuance, and the manipulation of real operating activities, identifies firms with one-year-ahead abnormal price declines averaging -27%. Finally, we propose a model that integrates various attributes of managers' behavior and predicts accounting restatements associated with fraud."

Long term performance of leveraged ETFs
03/25/09 Indexing Academia
"In this paper, we study leveraged ETFs, in particular, Ultra ETFs and UltraShort ETFs from the ProShares family. These Ultra (UltraShort) ETFs are designed to provide twice (twice the opposite) of the performance of the benchmark on a daily basis. We focus on the relation between long term performance of leveraged ETFs and benchmarks. Our results show that over holding periods no greater than one month, an investor can safely assume that the Ultra (UltraShort) ETF would provide twice the return (twice the negative return) of the underlying benchmark. Over the holding period of one quarter, the UltraShort ETFs can deviate from twice the negative returns of the benchmark. For Ultra ETFs, this deviation occurs when the holding period is one year. Overall our results show that leveraged ETFs are not long term substitutes for long or short positions of the benchmark indices."

Large stakes and big mistakes
03/24/09 Behaviour Academia
"Workers in a wide variety of jobs are paid based on performance, which is commonly seen as enhancing effort and productivity relative to non-contingent pay schemes. However, psychological research suggests that excessive rewards can in some cases result in a decline in performance. To test whether very high monetary rewards can decrease performance, we conducted a set of experiments in the US and India in which subjects worked on different tasks and received performance-contingent payments that varied in amount from small to very large relative to their typical levels of pay. With some important exceptions, very high reward levels had a detrimental effect on performance."

Performance surrounding reverse stock splits
03/22/09 Academia
"We examine long-run return performances of over 1,600 firms with reverse stock splits over a 40-year period. These stocks record statistically significant negative abnormal returns over the three-year period following the ex-split month. They also experience poor operating performances over the same time period, suggesting informational inefficiencies. However, due to their unique financial characteristics, these stocks were difficult to sell short, thus restricting arbitrageurs from earning abnormal profits, even if they correctly anticipated the price declines."

Market volatility and momentum
03/19/09 Academia
"We model momentum as unexpected returns due to shocks to firm fundamentals. Investors learn about the shocks from noisy information. The learning is gradual, which generates momentum. The model predicts that momentum is more pronounced when the market is more confident, because a more confident market responds to shocks at a slower speed. Using market volatility to inversely proxy for market confidence, we find supportive evidence: market volatility negatively predicts momentum profits. More specifically, momentum exists only in 60% of the months with lower volatility but not in 40% of the months with higher volatility. This effect is not subsumed by market state as an alternative predictor of momentum profitability. The model also predicts that idiosyncratic shocks, not systematic shocks, produce momentum. This prediction receives supports from empirical findings in a number of studies."

Currency crashes in industrial countries
03/11/09 Academia
"Sharp exchange rate depreciations, or currency crashes, are associated with poor economic outcomes in industrial countries only when they are caused by inflationary macroeconomic policies. Moreover, the poor outcomes are attributable to inflationary policies in general and not the currency crashes in particular. On the other hand, crashes caused by rising unemployment or external deficits have always had good economic consequences with stable or falling inflation rates."

Which talking heads to trust
02/18/09 Academia
"Which forecasters should you trust on the direction of the economy and the markets? Ask Philip Tetlock, who knows the kind of expert worth listening to - and what to listen for."

Markets in 19th century Britain
02/16/09 Dividends Value Investing Academia
"This article examines the size and value anomalies using an original dataset consisting of monthly information on stock prices and annual information on dividends for 1,051 stocks traded in the London Stock Exchange between 1825 and 1870. In this historical British stock market, smaller stocks are found to deliver significantly higher returns than the larger ones. Value stocks indicated by high dividend yield also have higher average returns than growth stocks. The empirical evidence from this article provides important and fresh new empirical evidence on the asset pricing anomalies, suggesting that the size and value anomalies are unlikely to be random events that just appeared by chance."

Cash holdings and equity returns
02/11/09 Academia
"This paper documents a new empirical finding: an investing strategy that is long in stocks of firms with a high cash-to-assets ratio (High Cash portfolio) and short in stocks of firms with a low cash-to-assets ratio (Low Cash portfolio) produces an average excess return of 42 basis points per month. The three Fama-French factors are not able to explain such a difference in average returns, while a cash factor (HCMLC) does. I propose a structural model of the firm's investing and savings decisions that rationalizes the empirical evidence relating corporate cash holdings to the average excess equity returns. I amend the real option model of the firm of Berk, Green, and Naik [1999] to allow for a non-trivial capital structure decision. In my setup, firms can finance investment by means of equity or retained earnings. Equity issuance involves pecuniary costs such as bankers and lawyers' fees. Corporate savings allow the firm to avoid costly external financing, but yield a return which is lower than shareholders would be able to obtain. Because of risky cash flows, the model generates an additional precautionary savings motive that is the key ingredient to explain the positive relationship between corporate cash holdings and average equity returns found in the data."

Price and performance for funds
02/10/09 Academia
"Gruber (1996) drew attention to the puzzle that investors buy actively managed equity mutual funds, even though on average, such funds underperform index funds. We uncover another puzzling fact about the market for equity mutual funds: Funds with worse before-fee performance charge higher fees. This negative relation between fees and performance is robust and can be explained as the outcome of strategic fee-setting by mutual funds in the presence of investors with different degrees of sensitivity to performance. We also and some evidence that better fund governance may bring fees more in line with performance."

More info leads to less knowledge
01/21/09 Academia
"Normally, we expect society to progress, amassing deeper scientific understanding and basic facts every year. Knowledge only increases, right? Robert Proctor doesn't think so. A historian of science at Stanford, Proctor points out that when it comes to many contentious subjects, our usual relationship to information is reversed: Ignorance increases."

Fundamental value investors
01/15/09 Value Investing Academia
"We examine novel data on the detailed investment decisions of professional value investors. We find evidence that value investors are not easily defined: they exploit traditional tangible asset valuation discrepancies such as buying high book-to-market stocks, but spend more time analyzing intrinsic value, growth measures, and special situation investments. We also test whether fundamental value investors outperform the market in our sample (January 2000 to June 2008). Analyzing buy-and-hold abnormal returns and calendar-time portfolio regressions, we conclude that value investors have stock picking skills."

Value vs. Glamour
01/07/09 Value Investing Academia
"In 1994, Josef Lakonishok, Andrei Shleifer, and Robert Vishny published a landmark study investigating the performance of value stocks relative to that of glamour securities in the United States over a 26-year period. Their research concluded that value stocks tended to outperform glamour stocks by wide margins. However, their study did not include the glamour-driven markets of the late 1990s and early 2000s. What effect might this period have on their conclusions? To find out, the Brandes Institute updated their Value vs. Glamour research, now through June 2008, to examine the comparative performance over a 40-year period. In addition, we also extended the scope of the initial study to include non-U.S. markets, seeking to determine if the value premium has been evident worldwide"

The American Dream?
12/13/08 Real Estate Academia
"Using a unique data set that links up well-being and housing consumption, this paper sets out to measure systematic differences between homeowners and renters, in term of moment-to-moment emotions, life satisfaction, joy and pain derived from domains of life including home and neighbourhood, family life and time use. A remarkable similarity between homeowners and renters is found. Controlling for demographics and income, homeowners do not report higher levels of well-being by any measure in this data set. In fact, they report to be less healthy, derive less joy from love and relationships, spend less time with friends and on active leisure, and also experience less positive affect during time spent with friends. Their time use patterns reveal little evidence of them being "better citizens". Due to self-selection in the housing tenure choice, these results are likely to represent upper bounds of the causal benefits of homeownership. Homeowners who live in ZIP code areas with higher rates of homeownership report more positive attitudes only if other owners are similar to them in socio-economic terms, lending some support to the idea of beneficial social interaction among owners."

Most likely to succeed
12/08/08 Academia
"This is the quarterback problem. There are certain jobs where almost nothing you can learn about candidates before they start predicts how they'll do once they're hired. So how do we know whom to choose in cases like that? In recent years, a number of fields have begun to wrestle with this problem, but none with such profound social consequences as the profession of teaching."

Private matters
12/08/08 Academia
"Why do private firms stay private? Empirical evidence on this issue is sparse, as most private firms in the US do not report their financial results. We investigate why private status matters by taking advantage of a unique dataset of large, leveraged private firms with SEC filings. Unlike a number of other studies, we find that neither the existence of growth opportunities, nor the desire of firm founders to diversify, is a principal determinant of the decision whether or not to retain private status. Rather, the existence of private benefits of control appears to serve as the most significant incentive to stay private. Family-controlled firms have significantly lower probabilities of filing for an IPO, while a board structure that grants management relatively more autonomy lowers the probability of an IPO filing as well. Crosssectional analysis of profitability and ex post performance suggests that while private benefits of control may encourage firms to stay private, they do not have detrimental effects on firm efficiency. In contrast, firms controlled by private equity specialists appear to place a low value on control benefits and are likely to go public as a means of cashing out."

Value and momentum everywhere
09/13/08 Value Investing Momentum Academia
"We study jointly the returns to value and momentum strategies for individual stocks within countries, stock indices across countries, government bonds across countries, currencies, and commodities. Value and momentum generate abnormal returns everywhere we look. Exploring their common factor structure across asset classes, we find that value (momentum) in one asset class is positively correlated with value (momentum) in other asset classes, and value and momentum are negatively correlated within and across asset classes. Long-run consumption risk is positively linked to both value and momentum, as is global recession risk to a lesser extent, while global liquidity risk is related positively to value and negatively to momentum. These patterns emerge from the power of examining value and momentum everywhere at once and are not easily detectable when examining each asset class in isolation."

The Halloween effect in US sectors
08/28/08 Markets Academia
"All US stock market sectors and industries perform better during winter than during summer in our sample from 1926-2005. In more than two-third of all sectors and industries this difference in summer and winter returns, known as the Halloween effect, is statistically significant and in half of all sectors and industries risk premia are negative during summer. However, while all sectors and industries show this effect, there are large differences across sectors and industries. The effect is almost absent in sectors related to consumer consumption but strong in production sectors."

An active value strategy in disguise
08/27/08 Value Investing Indexing Academia
"In this paper we critically examine the novel concept of fundamental indexation. We argue that fundamental indexation is by definition nothing more than an (elegant) value strategy, because the weights of stocks in a fundamental index and a market capitalization-weighted index only differ as a result of differences in valuation ratios. Moreover, fundamental indices more resemble active investment strategies than classic passive indices, because (i) they appear to be at odds with market equilibrium, (ii) they do not represent a buy-and-hold strategy and (iii) they require several subjective choices. Last but not least, because fundamental indices are primarily designed for simplicity and appeal, they are unlikely to be the most efficient way of benefiting from the value premium. Compared to more sophisticated, multi-factor quantitative strategies, fundamental indexation is likely to be an even more inferior proposition."

Abnormal returns from the U.S. senate
08/18/08 Markets Government Academia
"The actions of the federal government can have a profound impact on financial markets. As prominent participants in the government decision making process, U.S. Senators are likely to have knowledge of forthcoming government actions before the information becomes public. This could provide them with an informational advantage over other investors. We test for abnormal returns from the common stock investments of members of the U.S. Senate during the period 1993--1998. We document that a portfolio that mimics the purchases of U.S. Senators beats the market by 85 basis points per month, while a portfolio that mimics the sales of Senators lags the market by 12 basis points per month. The large difference in the returns of stocks bought and sold (nearly one percentage point per month) is economically large and reliably positive."

Mutual fund flows and investor returns
07/06/08 Funds Academia
"We examine the timing ability of mutual fund investors using cash flow data at the individual fund level. Over 1991-2004 equity fund investor timing decisions reduce fund investor average returns by 1.56% annually. Underperformance due to poor timing is greater in load funds and funds with relatively large risk-adjusted returns. In particular, the magnitude of investor underperformance due to poor timing largely offsets the risk-adjusted alpha gains offered by good-performing funds. Investors in both actively managed funds and index funds exhibit poor investment timing. We demonstrate that our empirical results are consistent with investor return-chasing behavior."

Superstar CEOs
07/03/08 Stocks Management Academia
"Compensation, status, and press coverage of managers in the U.S. follow a highly skewed distribution: a small number of .superstars. enjoy the bulk of the rewards. We evaluate the impact of CEOs achieving superstar status on the performance of their firms, using prestigious business awards to measure shocks to CEO status. We find that award-winning CEOs subsequently underperform, both relative to their prior performance and relative to a matched sample of non-winning CEOs. At the same time, they extract more compensation following the award, both in absolute amounts and relative to other top executives in their firms. They also spend more time on public and private activities outside their companies, such as assuming board seats or writing books. The incidence of earnings management increases after winning awards. The effects are strongest in firms with weak governance, even though the frequency of obtaining superstar status is independent of corporate governance. Our results suggest that the ex-post consequences of media-induced superstar status for shareholders are negative."

The new economics and the pursuit of happiness
07/01/08 Books Behaviour Academia
"The revolution begun by Kahneman and Tversky is now some three decades old, and it is generating excitement well beyond the borders of academe--and so this is a good time to examine whether it has lived up to its promise. Bruno S. Frey's Happiness and Dan Ariely's Predictably Irrational together offer a fine occasion to begin such a reckoning. Not all the revolutionaries in economics are discussed by Frey; the media star Levitt does not even make an appearance. Ariely, who teaches at MIT, helps to fill in the picture. Like Levitt, he has climbed the best-seller list with some of the most counterintuitive findings of behavioral economics. One is dry and humorless, the other is sprightly and inviting, but between them these books offer an overview of what this new economics is all about, and enable us to evaluate whether it is as innovative as its adherents claim."

Information diffusion based explanations
06/30/08 Markets Academia
"In this paper we develop information based factors which outperform other popular factors used in the multifactor pricing literature such as the Fama and French size and book-to-market factors. The first factor is based on the age of an asset, measured by the number of months since the asset's IPO, while the second factor is based on the percentage of trading days an asset does not trade in a given year. Both factors attempt to capture the quality and speed of information diffusion on the market. Our information factors perform particularly well on momentum portfolios, which, Hong et al (2000) have shown to result from gradual-information diffusion. This gradual information diffusion explanation is consistent with the information argument underlying our factors, namely that, assets plagued with information problems can be miss-priced for sustained periods of time. Furthermore, our multifactor model successfully prices most industry portfolios and performs as well as the Fama and French model when pricing the 25 size/book-to-market sorted portfolios."

Eight centuries of financial crises
06/25/08 Markets Debt Government Academia
"This paper offers a 'panoramic' analysis of the history of financial crises dating from England's fourteenth-century default to the current United States sub-prime financial crisis. Our study is based on a new dataset that spans all regions. It incorporates a number of important credit episodes seldom covered in the literature, including for example, defaults and restructurings in India and China. As the first paper employing this data, our aim is to illustrate some of the broad insights that can be gleaned from such a sweeping historical database. We find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies. Major default episodes are typically spaced some years (or decades) apart, creating an illusion that 'this time is different' among policymakers and investors. A recent example of the 'this time is different' syndrome is the false belief that domestic debt is a novel feature of the modern financial landscape. We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses. Thus, the recent US sub-prime financial crisis is hardly unique. Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements."

Long-term performance following rights issues
06/18/08 Markets Academia
"This study finds evidence of significant long-term underperformance following rights issues made during 1986-95 in the UK. The findings are resilient to a number of methodological controls. In contrast, our results for a smaller sample of open offers made during 1991-95 show strong positive performance over a 5-year post-issue period, implying that firms making open offers had better growth prospects than firms making rights issues. During 1986-90, a period when open offers were rarely used, firms appeared to be making rights issues to exploit overvaluation. However, this was not evident for rights issues made during 1991-95, a period when open offers were more commonly used."

Subprime outcomes
05/06/08 Debt Economy Real Estate Academia
"Our second point is that house price depreciation - negative house price appreciation(HPA) - is the main driver of foreclosures. The easiest way to see this is to look at aggregate data. Figure 1 shows that periods of exceptionally high HPA in Massachusetts, as in 2002-2004, are associated with exceptionally low numbers of foreclosures, while periods of negative HPA, such as 1989-1991 and 2005-2007, are associated with high foreclosure rates. Cash flow problems at the household level, driven by job loss, for example, play a role, but only when HPA is low. For example, in 2001, a recession generated a record high number of delinquencies, a sign that many households had problems making monthly mortgage payments. During this time, however, there was a record low number of foreclosures in Massachusetts. Thus, the phenomenal levels of HPA in the early 2000s enabled many borrowers to either refinance or sell to avoid foreclosure."

And behind door no. 1, a fatal flaw
04/10/08 Math Behaviour Academia
"The Monty Hall Problem has struck again, and this time it's not merely embarrassing mathematicians. If the calculations of a Yale economist are correct, there's a sneaky logical fallacy in some of the most famous experiments in psychology."

Sell in May and go away
04/09/08 Markets Academia
"We document the existence of a strong seasonal effect in stock returns based on the popular market saying 'Sell in May and go away', also known as the 'Halloween indicator'. According to these words of market wisdom, stock market returns should be higher in the November-April period than those in the May-October period. Surprisingly, we find this inherited wisdom to be true in 36 of the 37 developed and emerging markets studied in our sample. The 'Sell in May' effect tends to be particularly strong in European countries and is robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694. While we have examined a number of possible explanations, none of these appears to convincingly explain the puzzle."

Whither Black-Scholes?
04/08/08 Taleb Markets Derivatives Academia
"In fact, Black-Scholes may not be used that much in the markets to begin with. New research by veteran traders and best-selling authors Nassim Taleb and Espen Haug points in that direction. Clearly, a formula that isn't used can't have much of an effect on markets, let alone cause the massacre that began last summer."

Asset growth and stock returns
02/28/08 Value Investing Academia
"Asset growth rates are strong predictors of future abnormal returns. Asset growth retains its forecasting ability even on large capitalization stocks, a subgroup of firms for which other documented predictors of the cross-section lose much of their predictive ability. When we compare asset growth rates with the previously documented determinants of the cross-section of returns (i.e., book-to-market ratios, firm capitalization, lagged returns, accruals, and other growth measures), we find that a firm's annual asset growth rate emerges as an economically and statistically significant predictor of the cross-section of U.S. stock returns."

Sensation seeking, overconfidence, and trading activity
02/20/08 Behaviour Academia
"This study analyzes the role that two psychological attributes - sensation seeking and overconfidence - play in the tendency of investors to trade stocks. Equity trading data from Finland are combined with data from investor tax filings, driving records, and mandatory psychological profiles. We use these data, obtained from a large population, to construct measures of overconfidence and sensation seeking tendencies. Controlling for a host of variables, including wealth, income, age, number of stocks owned, marital status, and occupation, we find that overconfident investors and those investors most prone to sensation seeking trade more frequently."

Momentum and credit rating
02/19/08 Momentum Bonds Academia
"This paper establishes a robust link between momentum and credit rating. Momentum profitability is large and significant among low-grade firms, but it is nonexistent among high-grade firms. The momentum payoffs documented in the literature are generated by low-grade firms that account for less than 4% of the overall market capitalization of rated firms. The momentum payoff differential across credit rating groups is unexplained by firm size, firm age, analyst forecast dispersion, leverage, return volatility, and cash flow volatility."

The law of one price in financial markets
02/04/08 Academia
"It is good for a scientific enterprise, as well as for a society, to have well-established laws. Physics has excellent laws, such as the law of gravity. What does economics have? The first law of economics is clearly the law of supply and demand, and a fine law it is. We would nominate as the second law 'the law of one price,' hereafter simply the Law. The Law states that identical goods must have identical prices. For example, an ounce of gold should have the same price (expressed in U.S. dollars) in London as it does in Zurich, otherwise gold would flow from one city to the other. Economic theory teaches us to expect the Law to hold exactly in competitive markets with no transactions costs and no barriers to trade, but in practice, details about market institutions are important in determining whether violations of the Law can occur."

Why we have never used the BSM option formula
01/25/08 Academia
"Options traders use a pricing formula which they adapt by fudging and changing the tails and skewness by varying one parameter, the standard deviation of a Gaussian. Such formula is popularly called "Black-Scholes-Merton" owing to an attributed eponymous discovery (though changing the standard deviation parameter is in contradiction with it). However we have historical evidence that 1) Black, Scholes and Merton did not invent any formula, just found an argument to make a well known (and used) formula compatible with the economics establishment, by removing the "risk" parameter through "dynamic hedging", 2) Option traders use (and evidently have used since 1902) heuristics and tricks more compatible with the previous versions of the formula of Louis Bachelier and Edward O. Thorp (that allow a broad choice of probability distributions) and removed the risk parameter by using put-call parity. 3) Option traders did not use formulas after 1973 but continued their bottom-up heuristics. The Bachelier-Thorp approach is more robust (among other things) to the high impact rare event. The paper draws on historical trading methods and 19th and early 20th century references ignored by the finance literature. It is time to stop calling the formula by the wrong name."

ROIC patterns and shareholder returns
01/25/08 Academia
"Three main points emerged from the analysis of ROIC patterns. First, analysts need to consider the lessons of history when modeling rather than approaching each model as unique. Analysts should view the experience of a large sample of companies as a rich reference class. Second, the empirical evidence shows ROICs tend to revert to the mean, a level similar to the cost of capital. Randomness plays an important role in the mean-reversion process. Finally, some companies do deliver persistently high or low results beyond what chance would dictate. Unfortunately, pinpointing the causes of persistence is a challenge."

Performance persistence of individual investors
09/29/07 Academia
"We find that a substantial number of investors exhibit economically and statistically significant performance persistence. This is robust to how we measure past performance, how often investors trade and whether investors are small or large. Unlike the evidence from mutual and pension funds, the persistence in performance we uncover is not concentrated in investors with poor prior performance. We also show that forming a portfolio that is long in stocks previously favored by top performing investors earns a substantial risk adjusted return in the future."

'Toxic' mortgages are the best
09/23/07 Academia
"Crazy? Not as crazy as you might think. The key, according to professors Tomasz Piskorski of Columbia Business School and Alexei Tchistyi of New York University's Stern School of Business, is that this kind of mortgage is optimal only in a perfect world - namely, one in which borrowers are fully rational and always do what's in their own best interest." [or why some theorists should stay away from real markets]

Where are the shareholders' mansions?
05/15/07 Academia
"We study real estate purchases by major company CEOs, compiling a database of the principal residences of nearly every top executive in the Standard & Poor's 500 index. When a CEO buys real estate, future company performance is inversely related to the CEO's liquidation of company shares and options for financing the transaction. We also find that, regardless of the source of finance, future company performance deteriorates when CEOs acquire extremely large or costly mansions and estates. We therefore interpret large home acquisitions as signals of CEO entrenchment. Our research also provides useful insights for calibrating utility based models of executive compensation and for understanding patterns of Veblenian conspicuous consumption."

We don't quite know what we are talking about
05/15/07 Academia
"Finance professionals, who are regularly exposed to notions of volatility, seem to confuse mean absolute deviation with standard deviation, causing an underestimation of 25% with theoretical Gaussian variables. In some fat tailed markets the underestimation can be up to 90%. The mental substitution of the two measures is consequential for decision making and the perception of market variability."

Stocks of admired companies and despised ones
02/26/07 Academia
"Do stocks of admired companies yield admirable returns? We study Fortune magazine's annual list of "America's Most Admired Companies" and find that stocks of admired companies had lower returns, on average, than stocks of despised companies during the 23 years from April 1983 through March 2006. We link differences between the returns of stocks of admired and despised companies to differences in affect, the quick feeling that distinguishes good from bad, admired from despised. The affect of admired companies is positive, and investors who were attracted by affect to stocks of admired companies paid for it with lower returns. However, the relative returns of stocks of admired and despised companies varied considerably from year to year and from decade to decade and the relationship between admiration and returns is not always monotonic."

How active is your fund manager?
02/14/07 Academia
"To quantify active portfolio management, we introduce a new measure we label Active Share. It describes the share of portfolio holdings that differ from the portfolio's benchmark index. We argue that to determine the type of active management for a portfolio, we need to measure it in two dimensions using both Active Share and tracking error. We apply this approach to the universe of all-equity mutual funds to characterize how much and what type of active management they practice. We test how active management is related to characteristics such as fund size, expenses, and turnover in the cross-section, and we look at the evolution of active management over time. We also find that active management predicts fund performance: the funds with the highest Active Share significantly outperform their benchmark indexes both before and after expenses, while the non-index funds with the lowest Active Share underperform. The most active stock pickers tend to create value for investors while factor bets and closet indexing tend to destroy value."

Rewriting history
11/07/06 Academia
"Comparing two snapshots of the entire I/B/E/S analyst stock recommendations database, taken in 2002 and 2004 but each covering the same time period 1993-2002, we identify nearly twenty thousand changes of an unusual nature: the selective removal of analyst names from historic recommendations ("anonymizations"). This practice turns out to be pervasive and non-random: Bolder recommendations are more likely to be anonymized, as are recommendations from more senior analysts, Institutional Investor "all-stars," and those who remain in the industry beyond 2002. Abnormal stock returns following subsequently anonymized buy recommendations are significantly lower (by up to 11.0% p.a.) than those following buy recommendations that remain untouched, suggesting that particularly embarrassing recommendations are most likely to be anonymized. Analysts whose track records appear brighter due to anonymizations experience more favorable career outcomes over the 2003-2005 period than their track records and abilities would otherwise warrant."

M.B.A.s: the biggest cheaters
10/27/06 Academia
"Many of these students reportedly believe cheating is an accepted practice in business. More than half (56%) of M.B.A. candidates say they cheated in the past year. For the study, cheating was defined as plagiarizing, copying other students' work and bringing prohibited materials into exams."

A great company can be a great investment
08/11/06 Academia
"A classic investment mistake is to confuse a great company with a great investment, since a company's well-known virtues are presumably already factored into the price of the company's stock. We test this "mistake" by looking at the stock performance of the companies identified each year by Fortune magazine as America's most admired companies. Surprisingly, a portfolio of these stocks outperformed the market by a substantial and statistically significant margin, contradicting the efficient market hypothesis."

'Big Brother' eyes make us act more honestly
06/28/06 Academia
"We all know the scene: the departmental coffee room, with the price list for tea and coffee on the wall and the 'honesty box' where you pay for your drinks - or not, because no one is watching. In a finding that will have office managers everywhere scurrying for the photocopier, researchers have discovered that merely a picture of watching eyes nearly trebled the amount of money put in the box."

The price of conformism
06/03/06 Academia
"As previous agency models have shown, fund managers with career concerns have an incentive to imitate the recent trading strategy of other managers. We embed this rational conformist tendency in a stylized financial market with limited arbitrage. Equilibrium prices incorporate a reputational premium or discount, which is a monotonic function of past trade between careerdrive traders and the rest of the market. Our prediction is tested with quarterly data on US institutional holdings from 1983 to 2004. We find evidence that stocks that have been persistently bought (sold) by insitutions in the past 3 to 5 quarters underperform (overperform) the rest of the market in the next 12 to 30 months. Our result is of a similar order of magnitude of - but cannot be reconduced to - other known price anomalies. Our findings challenge the mainstream view of the roles played by individuals and institutions in generating price anomalies."

Founder-CEOs and stock market performance
04/11/06 Academia
"Eleven percent of the largest public U.S. firms are headed by the CEO who founded them. Founder-CEO fims differ systematically from successor-CEO firms. They have a higher firm valuation. Founder-CEO firms invest more in R&D, have higher capital expenditures, and make more focused mergers and acquisitions. Moreover, an equal-weighted investment strategy that had invested in founder-CEO firms from 1993 - 2002 would have earned a benchmark-adjusted return of 8.3% annually. A value- weighted investment strategy would have earned an abnormal return of 10.7%. The excess return is robust; after controlling for a wide variety of firm characteristics, CEO characteristics, and industry aliation, the abnormal return is still 4.4% annually."

How is a hedge fund like a school?
02/16/06 Academia
"Hedge-fund guru Joel Greenblatt applied Wall Street principlesand $1,000 per studentto turn around a struggling Queens elementary school. And it worked, spectacularly."

Bayes rules
01/10/06 Academia
"Recently, however, Bayes's ideas have made a comeback among computer scientists trying to design software with human-like intelligence. Bayesian reasoning now lies at the heart of leading internet search engines and automated "help wizards". That has prompted some psychologists to ask if the human brain itself might be a Bayesian-reasoning machine. They suggest that the Bayesian capacity to draw strong inferences from sparse data could be crucial to the way the mind perceives the world, plans actions, comprehends and learns language, reasons from correlation to causation, and even understands the goals and beliefs of other minds."

Herding and contrarian behavior
01/09/06 Academia
"Our experiment complements a large empirical literature on herding. Our results confirm the finding of the bulk of this literature that herd behavior driven by informational externalities does not seem to be an important force in fnancial markets. To the contrary, one could even argue that the observed contrarian behavior, which we find sometimes to be profitable, has a stabilizing effect as it implies that agents tend to differentiate their investments from those of their predecessors."

The performance of equity premium prediction
12/25/05 Academia
"Given the historically high equity premium, is it now a good time to invest in the stock market? Economists have suggested a whole range of variables that investors could or should use to predict: dividend price ratios, dividend yields, earnings-price ratios, dividend payout ratios, net issuing ratios, book-market ratios, interest rates (in various guises), and consumptionbased macroeconomic ratios (cay). The typical paper reports that the variable predicted well in an in-sample regression, implying forecasting ability. Our paper explores the out-of-sample performance of these variables, and finds that not a single one would have helped a real-world investor outpredicting the then-prevailing historical equity premium mean. Most would have outright hurt. Therefore, we find that, for all practical purposes, the equity premium has not been predictable, and any belief about whether the stock market is now too high or too low has to be based on theoretical prior, not on the empirically variables we have explored."

12/02/05 Academia
"Did Steven Levitt, author of 'Freakonomics', get his most notorious paper wrong?"

Experts and markets
11/23/05 Academia
"Economist Burt Malkiel says it this way: "While it is abundantly clear that the pros do not consistently beat the averages, I must admit that there are exceptions to the rule of the efficient market. Well, a few. While the preponderance of statistical evidence supports the view that market efficiency is high, some gremlins are lurking about that harry the efficient-market theory and make it impossible for anyone to state that the theory is conclusively demonstrated.""

The brains business
09/12/05 Academia
"This survey will offer two pieces of advice for countries that are trying to create successful higher-education systems, be they newcomers such as India and China or failed old hands such as Germany and Italy. First: diversify your sources of income. The bargain with the state has turned out to be a pact with the devil. Second: let a thousand academic flowers bloom. Universities, including for-profit ones, should have to compete for customers. A sophisticated economy needs a wide variety of universities pursuing a wide variety of missions. These two principles reinforce each other: the more that the state's role contracts, the more educational variety will flourish."

Cap-weighted portfolios are sub-optimal portfolios
07/21/05 Academia
"In this paper, we show that under a fairly innocuous assumption on price inefficiency, market capitalization weighted portfolios are sub-optimal. If market prices are more volatile than is warranted by changes in firm fundamentals, then cap-weighted portfolios do not capture the full premium commensurate their risk. The sub-optimality arises because cap-weighting tends to overweight stocks whose prices are high relative to their fundamentals and underweight stocks whose prices are low relative to their fundamentals. The size of the cap-weighted portfolio underperformance is increasing in the magnitude of price inefficiency and is roughly equal to the variance of the noise in prices. However, portfolios constructed from weights, which do not depend on prices, do not exhibit the same underperformance observed for cap-weighted portfolios. We illustrate this cap-weighting underperformance empirically by comparing returns from cap-weighted portfolio vs. non-cap-weighted portfolios with similar characteristics. We also derive testable implications from our model assumption and find empirical support."

Scientists create 'trust potion'
06/03/05 Academia
"Some may worry about the prospect that political operators will generously spray the crowd with oxytocin at rallies of their candidates. The scenario may be rather too close to reality for comfort, but those with such fears should note that current marketing techniques - for political and other products - may well exert their effects through the natural release of molecules such as oxytocin in response to well-crafted stimuli. Civic alarm at such abuses should have started long before this study."

Who gambles in the stock market?
03/21/05 Academia
"The average economic cost of gambling motivated investments is roughly 5% (range is 2-32%) of investors' annual household income. Collectively, these results indicate that people's attitudes toward gambling are reflected in their stock investments."

Reputation and asset prices
03/11/05 Academia
"What are the equilibrium features of a dynamic financial market where traders care about their reputation for ability? We modify a standard sequential trading model to study a financial market with career concerns. We show that this market cannot be informationally efficient: there is no equilibrium in which prices converge to the true value, even after an infinite sequence of trades. This finding, which stands in sharp contrast with the results for standard financial markets, is due to the fact that our traders face an endogenous incentive to behave in a conformist manner. We show that there exist equilibria where career-concerned agents trade in a conformist manner when prices have risen or fallen sharply. We also show that each asset carries an endogenous reputational benefit or cost, which may lead to systematic mispricing if traders without career concerns possess market power."

Bad for business?
02/18/05 Academia
"Business schools stand accused of being responsible for much that is wrong with corporate management today"

Smart people choke under pressure
02/09/05 Academia
"A new study finds that individuals with high working-memory capacity, which normally allows them to excel, crack under pressure and do worse on simple exams than when allowed to work with no constraints. Those with less capacity score low, too, but they tend not to be affected by pressure."

CEO overconfidence and corporate investment
01/20/05 Academia
"Specifically, standard incentives such as stock- and option-based compensation are unlikely to mitigate the detrimental effects of managerial overconfidence. As a result, the board of directors may need to employ alternative disciplinary measures, such as debt overhang, which can suffice to constrain overconfident CEOs. In addition, the results confirm the need for independent and vigilant directors."

In search of distress risk
01/13/05 Academia
"This paper explores the determinants of corporate bankruptcy and the pricing of financially distressed stocks using US data over the period 1963 to 1998. Firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, and lower cash holdings are more likely to go into bankruptcy."

The effect of skill on the success of the less skilled
10/26/04 Academia
"This paper uses computer simulations to examine the effect of highly skilled gamblers on the success of moderately skilled gamblers. It shows that skilled players negatively impact the outcome for less skilled players. A player's winnings are not only affected by the house rake or vigorish but also by the skill of other players. It is concluded that less skilled players are often better off playing a game of chance than a game of skill."

A signal of future stock performance
10/26/04 Academia
"our value-stocks research team has studied how balance-sheet data that serve as indicators of the reliability and likely persistence of reported earnings can be used as a signal of future stock performance."

Who gains from trade?
08/30/04 Academia
"After costs, we estimate that the trading of institutional investors adds one percentage point annually to their portfolio performance, while the trading of individuals subtracts over three percentage points annually from their performance."

Canadian GIC RATs
04/28/04 Academia
"More precisely, any Canadian investor whose marginal tax rate exceeded 35.5% earned, on average, a negative RAT return from 1-year GICs which were continuously rolled over during the last 30 years. And, for longer maturity 3-year and 5-year GICs typically greater -- the breakeven tax rate was only slightly higher. We conclude by arguing that for many Canadians, the strategy of rolling over so-called riskfree GICs outside of a tax shelter is a sure way to destroy long-term wealth."

Surprise! Higher Dividends=Higher Earnings Growth
04/16/04 Academia
"We investigate whether dividend policy, as observed in the payout ratio of the U.S. equity market portfolio, forecasts future aggregate earnings growth. The historical evidence strongly suggests that expected future earnings growth is fastest when current payout ratios are high and slowest when payout ratios are low. This relationship is not subsumed by other factors, such as simple mean reversion in earnings. Our evidence thus contradicts the views of many who believe that substantial reinvestment of retained earnings will fuel faster future earnings growth. Rather, it is consistent with anecdotal tales about managers signaling their earnings expectations through dividends or engaging, at times, in inefficient empire building. Our findings offer a challenge to market observers who see the low dividend payouts of recent times as a sign of strong future earnings to come."

Can you have too many choices?
03/29/04 Academia
"There are even cases, as Schwartz notes, where just one additional choice can produce outright paralysis. Tversky and the young Princeton psychologist Eldar Shafir asked experimental subjects how they would react to a desirable Sony appliance placed in a shopwindow, radically marked down. The offer met with predictable enthusiasm. When a second appliance, similarly marked down, was placed alongside the bargain Sony, enthusiasmand salesdropped. Some hypothetical customers were evidently frozen by indecision."

Good companies, bad stocks
02/22/04 Academia
"The inverse relationship is familiar but why are good stocks such a bad buy?"

Lottery Players/Stock Traders
02/21/04 Academia
"Stock trading also is a negative-sum game. But whereas the frame of lottery-ticket buying as a negative-sum game is transparent, the frame of stock trading as the same game is opaque. As Treynor (1995, originally 1971) noted, people confuse the stock-holding game with the stock-trading game. The stock-holding game is a positive-sum game; buyers of stocks can expect to receive, on average, more than they spend. The stock-trading game, however, is a negative-sum game. In the absence of trading costs, management fees, and expenses, stock traders can expect to match the returns of an index of all stocks. But after trading costs are considered, they can expect to lag that index."

10/26/03 Academia
"converting gravity into electricity has involved building huge dams to tame vast rivers at great expense and no little environmental cost. But a group of researchers at the University of Alberta, in Canada, thinks the whole process can be scaled down to something that will fit on a table."

College costs take another leap
10/21/03 Academia
"College costs once again have increased far faster than inflation, with tuition at state schools posting the biggest increase in 30 years, the College Board reported Tuesday."

Herding psychology and financial markets
10/13/03 Academia
"Despite giving all the participants the same perfect knowledge of coming dividend prospects and then an actual declared dividend at the end of the simulated trading day, which could vary more or less randomly but which would average a certain amount, the subjects in these experiments repeatedly created a boom-and-bust market profile."

MIT's OpenCourseWare
10/06/03 Academia
"With the publication of 500 courses, MIT OCW offers educational materials from 33 academic disciplines and all five of MIT's schools"

Is MPT the solution -- or the problem?
01/07/03 Academia
"Modern Portfolio Theory bestrides the investment world today like the legendary Colossus. Its precepts dominate the education and training of every professional investment manager; its key terms -- risk-return tradeoff, diversification, expected stock returns -- frame virtually all advice offered to non-professional investors. Indeed, so complete is MPT's domination that we may forget how recent it is. While the set of concepts itself is a product of many years' labor by many individuals -- the seminal paper by Harry Markowitz was published exactly 50 years ago -- widespread adoption of MPT principles by the professional investment community is barely 20 years old. Our thesis is that exclusive and uncritical devotion to investment ideas that can hardly be said to have stood the test of time is dangerous in itself -- but especially so today."

Boys will be boys
11/02/02 Academia
"Theoretical models predict that overcon.dent investors trade excessively. We test this prediction by partitioning investors on gender. Psychological research demonstrates that, in areas such as .nance, men are more overcon.dent than women. Thus, theory predicts that men will trade more excessively than women. Using account data for over 35,000 households from a large discount brokerage, we analyze the common stock investments of men and women from February 1991 through January 1997. We document that men trade 45 percent more than women. Trading reduces men's net returns by 2.65 percentage points a year as opposed to 1.72 percentage points for women."

Is that a $100 bill lying on the ground?
10/24/02 Academia
"A few days before Kahneman and Smith got their phone calls from the Nobel Prize committee, Wharton hosted a debate that addressed these questions. Called "Two Views of Market Efficiency: A Discussion of Behavioral Finance and Efficient Market Theory," the scrimmage took place between Burton Malkiel and Richard Thaler, and was moderated by Wharton finance professor Jeremy Siegel, author of Stocks for the Long Run."

Trading is hazardous to your wealth
10/22/02 Academia
"Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high-beta, small, value stocks, and turns over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth."

Math prof tests investing formulas
10/12/02 Academia
"Retired University of Waterloo professor Peter Ponzo, who has found statistics have limits when trying to predict the future."

Nobel prize in economics
10/09/02 Academia
"for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty"

The Top Achievements, Challenges, and Failures of Finance
01/06/02 Academia
"There is much subjectivity in my particular selection of subjects. Still, I would guess that most finance professors would agree that most of my final choices below represent important progress in the development of finance. Alas, I would expect none to agree with my specific rankings. Thus, my hope is that the list below is of interest to many practitioners and academics. " [PDF]

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