Buy Stocks Research Articles

Does investment style effect portfolio returns: a study on Indian markets

There is significant empirical evidence specifying the effect of size, value and momentum in portfolio pricing. To confirm the effect, the article has attempted to construct long and short term winners and losers portfolios comprising of stocks forming the CNX NIFTY 500. Stocks are classified based on their past performance, book-to-market value and market capitalisation. The resultant portfolios' pricing is empirically assessed using Carhart four-factor model. The current work further evaluates a set of conditioning information contributing to these factors. Based on the findings, the study makes an attempt to evaluate and compare the returns generated due to 'growth', 'value', and 'momentum' investing in the Indian capital market. It further empirically evaluates the effect of size (small minus large market capitalisation stocks), value (stocks with a low price-to-book ratio) versus growth (stocks with a high price-to-book ratio), and momentum (past winners minus past losers) in the pricing of the portfolios. The study has acknowledged that Indian equity market provides significant profits if investors buy stocks with large market capitalisation and sell stocks with small market capitalisation. This finding is in contrast to the finding of Fama-French (1993) and Carhart (1997).

The Performance of Relative-Value Equity Strategies

This paper examines investment strategies that combine time-series and cross-sectional stock sorts based on scaled price-to-earnings ratios, which I describe as relative-value strategies. Relative-value strategies buy (short) stocks that are below (above) their long-run historical absolute or market-relative valuation. I test the performance of relative-value strategies versus a traditional value strategy. I find that a relative-value effect exists, but is dwarfed by the traditional value effect. On average, the tested relative-value strategies deliver long-short returns of 1.25% p.a. and long-only excess returns of 0.69% p.a. over 1990 to 2014. The traditional value strategy produces long-short returns of 5.50% p.a. and long-only excess returns of 4.33% p.a. Relative-value strategies offer an alternative but not necessarily superior source of returns. I evaluate returns after adjusting for common risk factors. I explore the effect on returns from alternative portfolio formation and rebalancing rules. I discuss possible explanations for the findings and implications for investors.

Sequential Detection of Market Shocks With Risk-Averse CVaR Social Sensors

This paper considers a statistical signal processing problem involving agent-based models of financial markets, which at a microlevel are driven by socially aware and risk-averse agents. These agents trade (buy or sell) stocks at each trading instant by using the decisions of all previous agents (social learning) in addition to a private (noisy) signal they receive on the value of the stock. We are interested in the following: 1) modelling the dynamics of these risk averse agents and 2) sequential detection of a market shock based on the behaviour of these agents. Structural results that characterize social learning under a risk measure, conditional value-at-risk (CVaR), are presented and formulation of the Bayesian change point detection problem is provided. The structural results exhibit two interesting properties: 1) risk averse agents herd more often than risk neutral agents and 2) the stopping set in the sequential detection problem is nonconvex. The framework is validated on data from the Yahoo! Tech Buzz game dataset and it is revealed that 1) the model identifies the value changes based on agent’s trading decisions. 2) Reasonable quickest detection performance is achieved when the agents are risk-averse.

ESG Investing: A Simple Approach

Socially conscious individual investors face a host of challenges, not least of which are a stock buy list screened by environmental, social, and governance (ESG) criteria, and investment strategies that are easily implementable. In this study, we addressed these issues by utilizing a publicly available ESG stock list (100 Best Corporate Citizens) with investment strategies involving low-volatility investing, mean-variance optimization, and equally weighted approach, and introducing an innovative method in estimating the return premium due to survivorship bias. Over the period under review, the various strategies and shortlisted ESG stock mutual funds outperformed the S&P 500 index.

Stock Prices and Stock Return Volatilities Impliedby the Credit Market

In this article, the author compares equity and credit investors’ opinions on price formation in the equity market. More exactly, he inverts the CreditGrades model in order to back out credit-implied stock prices and stock return volatilities from credit default swap spreads for companies in the DJIA index. The credit-implied stock prices often deviate significantly from actual stock prices over the long term. Meanwhile, their day-to-day movements are significantly correlated with actual stock returns for most firms in the DJIA. In an attempt to demonstrate potential applications of credit-implied stock prices, the author constructs simple “capital structure arbitrage” trading strategies based on past credit-implied prices. These strategies only require the buying and selling of stocks and differ from traditional cross-capital structure strategies by being suitable for retail investors and other investors without access to the credit derivatives market. The credit-implied volatilities, in turn, behave rather similarly to observed stock market volatilities but without any ghost effects. The author demonstrates how an alternative credit-based “fear gauge,” comparable to the CBOE VIX but emanating from the credit market, can be constructed using the credit-implied volatilities. He calls this implied volatility index the Credit-Implied Volatility Index (CIVX). Finally, a plot of the entire term structure of implied volatilities demonstrates a distinct maturity volatility skew.

Stock Prices and Stock Return Volatilities Implied by the Credit Market

In this paper we compare equity- and credit investors’ opinions on the price formation in the equity market. More exactly, we invert the CreditGrades model in order to back out credit-implied stock prices and stock return volatilities from credit default swap spreads for the firms in the DJIA index. The creditimplied stock prices often deviate significantly from actual stock prices over the longer term. Meanwhile, their day-to-day movements are significantly correlated with actual stock returns for most firms in the DJIA index. In an attempt to demonstrate potential applications of credit-implied stock prices we construct simple “capital structure arbitrage” trading strategies based on past credit-implied prices. Our strategies only require the buying and selling of stocks and differ from traditional cross-capital structure strategies by being suitable for retail investors and other investors without access to the credit derivatives market. The credit-implied volatilities, in turn, behave rather similarly to observed stock market volatilities but without any ghost effects. We demonstrate how an alternative credit-based “fear gauge”, comparable to the VIX index but emanating from the credit market, can be constructed using the credit-implied volatilities. We call this implied volatility index the Credit-Implied Volatility Index (CIVX) index. Finally, a plot of the entire term-structure of implied volatilities demonstrates a distinct maturity volatility skew.

Realized Skewness and the Return Predictability

We explore the cross-section of realized variance, skewness, and kurtosis for stock returns obtained from intraday data. We investigate the properties of the realized higher moments, and more importantly, examine relations between the realized moments and subsequent stock returns. We find evidence of a negative relation between realized skewness and next week’s returns. A strategy buying stocks in the lowest realized skewness quintile and selling stocks in the highest realized skewness quintile earns 0.79 percent per week a risk-adjusted basis. Our results on the realized skewness are robust to controls for various firm characteristics such as size and book-to-market. Little evidence exists that either the realized volatility or the realized kurtosis is significantly related to next week’s returns.

Managers’ Escalation Behavior in Equity Investment Decisions and the Role of Corporate Governance

The aim of this study is to investigate the relationship between free cash flows and escalation behavior in the long-term stock buying decisions for the firms listed in Taiwan. The main findings include: (1) Managers tend to exhibit the escalation behavior in the long-term equity investment. (2) There is a positive association between the level of free cash flows and the magnitude of managers’ behavioral escalation. (3) The corporate governance mechanisms play a contributory role in mitigating the escalation behavior. The evidence is robust across subsamples for electronic versus non-electronic industries, growth versus value firms, and loss versus gain firms.

The impact of foreign investors on the Serbian stock market

Frontier markets, such as Serbia, which are at the early stages of development, are characterized by very low level of solvency, absence of corporate management rules and reports to the public, insufficiently developed regulations, as well as significant participation of foreign portfolio investors in the exchange. Those are usually foreign investment funds specialized in risky investments at such markets; they apply the principle of geographic portfolio diversification in their investment policy. At the Belgrade Stock Exchange, foreign investors have been present at the stock market since 2002 and they participated in high volumes in stock buying during the stock market growth in the period from 2002 to 2007, whereas during the crisis at the Serbian capital market from 2008 to 2010 there was a significant increase in foreign investors' participation on the selling side and a withdrawal from the Belgrade Stock Exchange. Such behavior of foreign investors was initially prompted by local factors, but was intensified by the global financial crisis and will be analyzed in this paper.

A changeable personal identification number‐based keystroke dynamics authentication system on smart phones

AbstractOne can apply cell phones to access e‐bank, buy stocks, pay credit card bills, and so on. The security issues of cell phones become extremely important. Most of subscribers use personal identification number (PIN) codes which combined with 6–8 numbers to protect their subscriber identity module cards from illegal accesses. It is easily to be decoded by the dictionary attack or shoulder surfing attack. Many studies employed keystroke dynamics to protect the PIN code, and the relative results exhibit that keystroke dynamics can indeed improve the security of a PIN code. However, the traditional keystroke dynamics‐based authentication (KDA) system has to collect user's keystroke dynamics firstly and then produce a unique personal biometrics. It is inconvenient for users when changing their PIN codes is required, because the corresponding KDA systems should be retrained. To solve the previously mentioned drawbacks, this paper proposes a novel technique that allows users to change their PIN codes anytime without any extra retraining. This technique not only enhance the security of the PIN codes but also enrich the security of accessing e‐bank, buying stocks, paying credit card bill, and other service via smart phones. Conducted experiment results show that the proposed system can effectively improve the KDA system to distinguish legitimate users and impostors even when users change their original passwords. Copyright © 2015 John Wiley & Sons, Ltd.

Do Investors Look at the Past to Predict the Future? Evidence Based on the Perceived Sharpe Ratio

We find that human perception contradicts the market efficiency assertions that high return is accompanied by high risk and that past returns do not affect future prices. A survey of investors reveals that the last week realized returns are positively correlated with perceived returns and negatively correlated with perceived risk. Thus, in the human mind there is a free lunch opportunity, where the perceived Sharpe ratio is positively correlated with short-term past returns. As higher perceived Sharpe ratios are also followed by more actual stock buying, our study provides a novel explanation to the observed short-term autocorrelations in stock returns.

Industry information and the 52-week high effect

We find that the 52-week high effect (George and Hwang, 2004) cannot be explained by standard risk factors. Instead, it is more consistent with investor underreaction caused by anchoring bias: the presumably more sophisticated institutional investors suffer less from this bias and buy (sell) stocks close to (far from) their 52-week highs. Further, the effect is mainly driven by investor underreaction to industry instead of firm-specific information. The extent of underreaction is more for positive than for negative industry information. The 52-week high strategy works best among stocks with high factor model R-squares and high industry betas (i.e., stocks whose values are more affected by industry factors and less affected by firm-specific information). An industry 52-week high strategy to buy (sell) industries whose total capitalizations are close to (far from) their 52-week highs outperforms an idiosyncratic 52-week high strategy to buy stocks with prices close to their 52-week highs and short stocks in the same industry with prices far from their 52-week highs.

The 'Tone Effect' of News on Investor Beliefs: An Experimental Approach

We experimentally investigate how the content presented by the news media affects investor expectations and beliefs. We ask subjects to estimate the future stock price for twelve real (anonymous) listed companies. They received information about historical stock prices and extracts from real newspaper articles. The relative content discussed in the newspaper articles was manipulated, while keeping the absolute content unchanged. We found that subjects were more likely to expect higher (lower) future stock prices, be optimistic (pessimistic) about the economy and the potential of a stock, to perceive stock markets as more safe (risky), and to decide to buy (sell) stocks after reading positively (negatively) framed news.

Portfolio KVA: I Theory

XVA models for the calculation of CVA, FVA (see for example (Burgard and Kjaer 2013)), KVA(Green, Kenyon, and Dennis 2014), MVA (Green and Kenyon 2014) and TVA (Kenyon and Green 2014a) have frequently been formulated at the counterparty level. However, it is clear that some elements of the Regulatory Capital Framework are calculated at entity level rather than per counterparty (BCBS-128 2006; BCBS-189 2011) and hence the corresponding KVA term includes elements that are calculated across all counterparties. The Leverage Ratio for example, is clearly a function of all bank positions. Furthermore, in the KVA model of (Green, Kenyon, and Dennis 2014) capital was assumed to be readily available in any quantity at treasury level to be allocated down to individual businesses in return for the payment of a return\gamma_K. In practice, however, the central capital pool cannot be increased or decreased on demand. Additional equity capital is normally obtained through a rights issue, a relatively rare an expensive operation for a company, while equity capital can be returned to shareholders through stock buy backs, although these operations are highly regulated. The cost of capital at portfolio level should depend on the overall capital requirement in some way. Furthermore the act of trading and hedging can no longer be done at single counterparty level. A trade and hedge as a pair will imply two counterparties and capital changes due to both transactions. The hedge attracts capital and hence to hedge to overall portfolio will require an iterative process to neutralise the risk of the whole portfolio including KVA across all counterparty positions. Hence there are entity level aspects of XVA that have hitherto been ignored. This paper rectifies this problem by extending the Burgard-Kjaer semi-replication framework to multiple counterparties and multiple underlying assets, and allowing for entity-level capital requirements and effects. The work is presented in two parts, this paper covering theoretical and algorithmic developments and paper II covering practical examples and impact analysis.

Pengumuman Stock Buyback dan Reaksi Pasar Saham (Studi Kasus Perusahaan di Bursa Efek Indonesia)

This study aims to examine the stock market reaction to the announcement of the stock buy back with two indicators of AAR and CAAR. The sample taken is a company that does the announcement of stock buy back in the period 2008 - 2013. Study also tested the market reaction between two groups of companies announcing stock buyback based on BAPEPAM-LK regulations are used. The first group are companies conducting announcements of stock but back by BAPEPAM-​​LK regulations number XI.B.2 which is rules on stock buy back under normal conditions and the second group by BAPEPAM-LK regulation number XI.B.3 which is rules on stock buy back on market conditions potentially crisis. The results showed that there was a significant positive market reaction around the announcement of the stock buy back as indicated by the value of AAR and CAAR are significant. The results also showed that there were significant differences in market reaction between companies that stock buy back announcements reference to BAPEPAM -LK regulations number XI.B.2 with the companies referring to BAPEPAM -LK regulations number XI.B.3. Market reaction to the company that conducting stock buy back announcements with reference to the rules BAPEPAM-LK number XI.B.2 have been reacted all positively, whereas the company that refers to BAPEPAM -LK regulation number XI.B.3 there are some that have been reacted negatively.
 Keywords : Buy back, Abnormal return, BAPEPAM-LK Regulation

Value Investing: Bridging Theory and Practice

Abstract Value investing refers to the buying or selling of stocks on the basis of a perceived gap between their current market price and their fundamental value – commonly defined as the present value of the expected future payoffs to shareholders. This style of investing is predicated upon two observations about publicly listed companies and their stock prices: (1) a share of stock is merely a fractional claim on the futures cash flows of an operating business, and that claim is the basis of its long-run value; (2) over shorter horizons, prices can deviate substantially from the long-run value of the stock. Value investors buy stocks that appear to be cheap relative to their intrinsic value and sell (even sell short) stocks that seem expensive.

Friends do let friends buy stocks actively

This research provides empirical evidence that social interaction is more prevalent among active rather than passive investors. While previous empirical work, spearheaded by Hong et al. (2004), shows that proxies for sociability are related to participation in asset markets, the literature is unable to distinguish between the types of participants because of data limitations. I address this shortcoming by using data from the Consumer Expenditure Quarterly Interview Survey, which contains information on individual holdings and the buying and selling of financial assets, as well as expenditure variables that imply variation in the level of social activity. This finding supports a new explanation for the active-investing puzzle in which informal communication tends to promote active rather than passive strategies (Han and Hirshleifer, 2012).

An Intermarket Approach to Tactical Risk Rotation: Using the Signaling Power of Treasuries to Generate Alpha and Enhance Asset Allocation

Numerous academic studies have shown that asset allocation is the single most important determinant of portfolio returns. We accept this premise but note that an optimal asset allocation strategy must still be determined based on dynamic conditions. Using the principles of intermarket analysis and the relationship between the total return of the 10-year Treasury and the 30-year Treasury, we develop one such strategy. We find that an active strategy that uses the signaling power of these Treasury bonds to position into either the stock market or Treasuries can be used to outperform a buy and hold stock portfolio on an absolute and risk-adjusted basis. We also find that the signaling power of Treasuries can be used to enhance asset allocation decisions and traditional rebalancing. The predictive behavior of Treasuries on equities is a market anomaly that has persisted over time, and has served as an anticipatory gauge of expansionary or contractionary conditions which favor stocks or bonds. Contrary to the Efficient Market Hypothesis, the information provided by relative total return Treasury movement does not appear to be priced in immediately by broad stock market averages, and therefore may be exploitable for active traders and tactical asset allocators.

Valuation of common and preferred stocks

Buying stocks is a modern way of investing. The investors may place the available capital on the domestic and foreign stock market, they may buy more stocks of a single issuer or distribute money to purchase stocks of various public (stock-exchange) companies, and they may form a portfolio of various securities. The investors' decisions on these options are based on their estimate on returns and risks underlying individual security instruments (securities). The two basic approaches to valuation of common stocks are: the Present Value Approach (method of valuating the capitalization of income) and the P/E Ratio Approach (the method of valuating the multiple of per-share earnings). Instead of viewing these methods as competing alternatives, they should better be viewed as mutually complementary methods. Both methods are equally useful and their concurrent use may provide better grounds for the analysts' valuation of stocks.

Strategic Complementarities between Security Analyst Information, Security Companies, and Investor

In this paper, we study how investors react to security analyst reports. Security companies earn profits by increasing investment volume in the stock market. They manipulate analyst reports through their security analysts and provide information to induce investors to buy stocks. The question is how do investors who know this fact react to such reports? We build a model of investor activity by assuming complementarity among investors who buy a stock. In other words, if an investor buys a stock when its stock price is believed to be high, this purchase induces other investors to buy, which results in increases the stock price. The first investor believes his or her belief to be correct. Based upon this complementarity in the stock market, we use the supermodular game and monotone comparative statics of Milgrom and Roberts (1990a). Then, we study the investment volumes, stock prices, and manipulation ratios of security companies, with the following findings. First, the security company always manipulates analyst reports for expected gains. Therefore, true information is not provided to the market, in which case the investment volume is lower than that in the first best case under perfect information. However, as analyst report precision increases, security companies relax their level of manipulation, although they easily manipulate analyst reports if the analyst precisely forecast the company profit. Under certain circumstances, manipulation leads to higher stock prices and stimulates company production, compared with the first best case. In this paper, we show that complementarity among investors explains the structure of the market, investor behavior, and company production levels in a bull market.