The state of the market and the contrarian strategy: Evidence from China’s stock market

This is the author's accepted manuscript. The final published article is available from the link below. Copyright @ 2012 The Chinese Economic Association.Using the most comprehensive weekly dataset of ‘A’ shares listed on the Chinese stock market, this paper examines short-term contrarian strategies under different market states from 1995–2010. We find statistically significant profits from contrarian strategies, especially during the period after 2007, when China (along with other countries) experienced an economic downturn following the worldwide financial crisis. Our empirical evidence suggests that: (1) no significant profit is generated from either momentum or contrarian strategies in the intermediate horizon; (2) after microstructure effects are adjusted for, contrarian strategies with only four to eight weeks holding periods based on the stocks’ previous four to eight week's performance generate statistically significant profits of around 0.2% per week; (3) the contrarian strategy following a ‘down’ market generates higher profit than those following an ‘up’ market, suggesting that a contrarian strategy could be used as a shelter when the market is in decline. The profits following a ‘down’ market are robust after risk adjustment

Fundamental Value Investors: Characteristics and Performance

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 investing, abnormal returns, hedge funds, market efficiency, Valueinvestorsclub.com performance

Combining value and momentum strategies with fundamentals : Empirical evidence from the returns of the combined investment strategies in US equities

Traditional value, momentum and fundamentals-based equity investment strategies have been studied extensively in the previous literature. In contrast, studies on combined investment strategies are still at an early stage. The previous literature has, however, shown that fundamentals can be used to enhance value and momentum portfolios’ performance. This provides an interesting framework to study combined investment strategies as there seems to be a premium towards fundamentally stronger stocks particularly among smaller and less followed stocks. Hence, the main purpose of this thesis is to examine whether ex ante fundamental information can be used to enhance value and momentum strategies in order to earn abnormal returns. The sample used in the empirical part is from Thomson Reuters Datastream and Kenneth R. French Data Library. The sample period is from 1997 to 2015 and includes all stocks listed in the S&P Composite 1500 index, which combines three different indices: The S&P 500, S&P MidCap 400 and S&P SmallCap 600. Each year we form value and momentum portfolios using the book-to-market ratio and the past 12-month cumulative total raw return (skipping the most recent month). We use the FS_SCORE to measure stocks’ fundamental strength, which is very close to the original FSCORE by Piotroski (2000), but makes some key improvements. To test whether fundamentally stronger value and momentum stocks outperform weaker ones and all value and momentum stocks, we use several risk and return measures including market-adjusted returns, the Sharpe ratio, the CAPM, the Fama-French three-factor and Carhart four-factor model. Our results indicate that fundamental analysis does not help to discriminate winners from losers among value and momentum stocks. Firstly, stocks with high FS_SCORE did not outperform stocks with low FS_SCORE. These results were also strengthened using time-series tests that showed that monthly regression intercepts were primarily close to zero and less than two standard errors from zero. Secondly, the size partition analysis showed that fundamental analysis was not economically or statistically more beneficial among small-sized stocks. Thirdly, the results were also relatively robust across the sample period as the high FS_SCORE portfolio outperformed the low FS_SCORE portfolio only 7 out of 18 years in the value context, compared to 11 out of 18 years among momentum stocks. Based on our results it is also difficult to argue that the financial markets are inefficient or that the information dissemination is weak among value and momentum stocks

Window dressing em fundos de investimento no Brasil

This paper investigates the presence of window dressing in the Brazilian investment fund market, focusing on equity funds. Window dressing is a practice that presents a particular portfolio composition to the market, which is different from that held by the fund in the reporting period. Just before the end of the period, fund managers change their positions with the aim of presenting safer, more profitable securities portfolios. We believe that there is a lack of empirical evidence on this topic in Brazil. Previous research focuses on diversification, style analysis, fund portfolio turnover, manager profile, and performance. Therefore, we believe that our paper is pioneering in presenting results on window dressing in Brazil. With the presence of window dressing, the market may signal distorted results to investors and guide their allocations towards funds in which they would not invest in the absence of such practices. Moreover, the adoption of window dressing may increase transaction costs and thus destroy value. Our results present a connection with previous studies by Bremer and Kato (1996), O’Neal (2001), Ng and Wang (2004), Ortiz, Sarto, and Vicente (2012), and Agarwal, Gay, and Ling (2014). This paper provides evidence of window dressing in Brazilian equity funds and proposes an empirical study to verify the presence of the practice between 2010 and 2016, using market model residuals, rank gap, and backward holding return gap analysis techniques. In short, our results are consistent with window dressing practices in funds managed by small companies that were losers against the Bovespa Index and presented a high tracking error in the period.Este artigo busca aferir a existência de window dressing no mercado brasileiro de fundos de investimento em ações. O window dressing é uma prática que apresenta determinada composição do portfólio ao mercado, diferente daquela mantida pelo fundo no período de reporte. Momentos antes do fechamento do período, gestores de fundos alteram suas posições com objetivo de apresentar em carteira papéis eventualmente mais seguros ou mais rentáveis. Acreditamos que existe uma lacuna de resultados empíricos para o tema proposto por esta pesquisa no Brasil. Pesquisas anteriores enfatizam diversificação, análise de estilo, rotatividade da carteira do fundo, papel dos gestores e desempenho. Portanto, acreditamos que o presente estudo é pioneiro ao apresentar resultados sobre window dressing no Brasil. Com a existência de window dressing, o mercado pode sinalizar resultados distorcidos e guiar a alocação de recursos por parte dos investidores em fundos que eles não investiriam na ausência de tais práticas. Em adição, a adoção de window dressing pode apresentar aumento nos custos de transação e, portanto, destruir valor. Os resultados encontrados apresentam conexão com as pesquisas prévias de Bremer e Kato (1996), O’Neal (2001), Ng e Wang (2004), Ortiz, Sarto e Vicente (2012) e Agarwal, Gay e Ling (2014). Este artigo apresenta evidências favoráveis à prática de window dressing nos fundos de investimento em ações no Brasil e propõe um estudo empírico para aferir a existência da prática de window dressing entre 2010 e 2016 por meio das técnicas de análise de resíduos, diferença entre rankings e diferença de retornos reversos. Em suma, encontramos resultados consistentes para a prática de window dressing em fundos de investimento geridos por instituições pequenas, perdedores ante o Índice Bovespa e que apresentaram alto tracking error no período

Quantitative equity portfolio management strategy : a combination of fundamental value and risk-managed Momentum

This dissertation examines return predictability from B/M and Momentum for US stocks for the period 1970-2015. Particularly, it investigates whether a simple fundamental screening (F-Score) within the high B/M quintile helps separating winners (financially undistressed firms) from losers (financially distressed firms). Finally, it identifies whether a simple 50-50 combination of HML (High-Minus-Low) and risk-adjusted WML (Winners-Minus-Losers) portfolios generates significant abnormal returns (alpha) for the full sample and sub-sample periods. In accordance with the literature, Fama-MacBeth cross-sectional regressions reveal that Momentum and B/M offer significant and persistent return predictive ability. Conflicting with previous evidence (Piotroski 2000), no return predictability in the cross-section of firms is detected for the interaction term between the F-Score and B/M. Return improvements from conditioning the high B/M quintile on high F-Scores are reduced to the 1976-1996 sample period of Piotroski (2000). Contrary, the target volatility momentum adjustment (Barroso & Santa-Clara 2015) does yield significant risk-return improvements, duplicating the Sharpe-Ratio from the Raw WML portfolio, reducing the maximum drawdown and improving the third and fourth moments of the return distribution. The 50-50 HML and WML* (target vol-atility WML) portfolio strategy significantly outperforms the CRSP market-value weighted portfolio and the S&P500 from 1970-2015, although the outperformance was strongest from 1970-2000. Ultimately, both the pure HML - WML* and the HML_F-Score - WML* com-binations (50-50) generated highly statistically significant abnormal monthly returns of 0.8% when setting the Carhart Four-Factor Model as the relevant asset-pricing model benchmark.Èsta tese analisa a previsibilidade de retornos de ações através de B/M e Momentum nos EUA no período 1970-2015. Particularmente, investiga se uma estratégia de triagem por da-dos fundamentais (F-Score; Piotroski 2000) no quintil B/M superior contribui a separar ações de empresas com balanços financeiros sólidos (‘Winners’) de empresas com balanços finan-ceiros fracos (‘Losers’). Finalmente, a tese identifica se uma estratégia simples de uma com-binação 50-50 de portfólios de HML (High-Minus-Low) e WML (Winners-Minus-Losers) com ajustamento de risco genera um retorno anormal (alpha). De acordo com a literatura, regressões de Fama-MacBeth revelam que Momentum e B/M possuem capacidade signifi-cativa e persistente de previsões de retornos. Em contraste com Piotroski (2000), não conse-gue-se identificar previsibilidade significativa de retornos na cross-section de ações em relação á interação entre o F-Score e B/M. Ganáncias de triagens por F-Score no quintil B/M superior reduzem-se ao período da amostra original de Piotroski (2000). Pelo contrário, o ajustamento de WML á volatilidade constante (Barroso & Santa-Clara 2015) produz melhorias significantes de retorno e risco: duplica o Sharpe-Ratio da WML simples, reduz a perda máxima num mes, e melhora os terceiros e quartos momentos da distribuição de retor-nos mensuais. A estratégia 50-50 HML e WML* (ajustado por volatilidade) supera signifi-cativamente os retornos dos portfólios de mercado CRSP e S&P500 de 1970 á 2015, mesmo que o melhor desempenho tivesse tido lugar entre 1970-2000. Finalmente, tanto a com-binação HML-WML* quanto a combinação HML_F-Score-WML* generaram retornos anormais de 0.8% por més (altamente significativos) em relação ao Carhart Four-Factor Model

Information, Uncertainty, and Subjective Entitlements in Bargaining

More often than not production processes are the joint endeavor of people having different abilities and productivities. Such production processes and the associated surplus production are often not fully transparent in the sense that the relative contributions of involved agents are blurred; either by lack of information about the actual performance of collaborators or because of random noise in the production process or both. These variables likely influence the surplus sharing negotiations following the production. By means of a laboratory experiment, we systematically investigate their role for the whole bargaining process from opening offers to (dis)agreements and find that uncertainties in surplus production and (even) a very coarse performance information lead to bargaining asymmetries. In addition, we find that bargainers’ subjective entitlements are also influenced by performance information and the randomness inherent in the production process. These differences in subjective entitlements together with the differences in entitlements between better and worse performers influence the whole bargaining process and significantly contribute to the differences in bargaining outcomes.bargaining, performance information, randomness in production process, entitlements, experiments

The P/E Ratio And Profitability

This paper examines the relation between the forward price-to-earnings (P/E) ratio and profitability. Consistent with the theoretical predictions of Ohlson and Zhan (2006), this paper finds a U-shaped relation between the forward P/E ratio and return on equity (ROE). Besides, firms with high P/E ratios tend to have lower ROE in the subsequent years, and their ROE is very volatile and wide-distributed. Using the GSCORE from Mohanram (2005), this paper separates winners from losers among high P/E firms. Firms with high GSCORE yield higher earnings growth, sale growth, ROE, and excess stock returns in the following years

Long-Term Return Reversal and Fundamental Strength

Past return-based strategies, such as reversal and momentum, have been widely discussed in academic papers. In reversal strategies, such as long-term return reversal which was first presented by De Bondt and Thaler (1985), past stock price movements in one direction are expected to reverse to opposite direction in the future. Instead of focusing only on simple long-term return reversals, the purpose of this study is to examine whether fundamental strength-based sorting can enhance the performance of the long-term reversal strategy. Firms’ fundamental strength is measured with Piotroski’s (2000) FSCORE, which consists of nine variables measuring firms’ profitability, leverage/liquidity, and operational efficiency. This study is motivated by the expectation errors framework presented by Piotroski and So (2012), who find that value/growth-strategy’s returns are concentrated in portfolios with incongruent expectations implied by firms’ FSCORE and book-to-market multiples. This study combines FSCORE with past return performance instead of pricing multiples. The hypothesis is, that reversals are strongest with high (low) fundamental strength stocks with the lowest (highest) past return performance. The portfolios are formed by double sorting. First, the stocks are sorted to non-overlapping quartile portfolios based on the past 36 months returns, with ranking and holding periods being three years. Thereafter the winner and loser quartiles are sorted to high and low fundamental portfolios based on firms’ individual FSCORE-values. The returns for each three-year fundamental reversal portfolios are calculated as value-weighted compound returns. Traditionally equal-weighted returns have been used widely in empirical finance, but value-weighted returns are used here to have more credible results, as suggested by Hou, Xue and Zhang (2018). Risk-adjusted return performance of the strategies is measured using Sharpe (1966) and Sortino (1994) ratios. It is also examined, whether the returns of the fundamental reversal strategies are explained by the common risk factors of Fama and French (2018) three-, five-, and six-factor models. As hypothesized, long-term past losers with high fundamental strength have stronger reversals than past losers with low fundamental strength. On the other hand, similar return reversals are not observed with past winners. FSCORE-based fundamental analysis can help to enhance future risk-adjusted returns, as past winners and losers with high fundamental strength have better risk-adjusted performance than the low fundamental counterparts. The returns of the fundamental reversal strategies are explained by the common risk factors, when the three-factor model is augmented with investment and profitability factors. In factor loading level, past losers are characterized as having conservative capital expenditures, whereas past winners tend to have aggressive capital expenditures. The results of the study are affected by survivorship bias, as the data includes only the stocks included in the S&P 1500 index at the time of collecting the data

Long-Term Contrarian profits in the Middle East Market Indices

This paper examines whether there is an existence of a long-term contrarian profits at the Middle East (ME) market indices. This paper shows strong evidence for the long-term contrarian strategy in the Middle East indices. The result of this study demonstrates that the long-term contrarian profits for the Middle East markets can’t be explained by two-factor model. In spite of whether winners are smaller or larger than losers, there are long-term abnormal profits. Finally, the findings in this paper suggest that the long-term contrarian profits may be stronger and more enveloping than is usually understood. KEYWORDS: long-term contrarian, Middle East (ME), market indices, two-factor model.