New academic paper analyses #75 - Federal Open Market Committee Meeting Effect on Stocks Thursday, 27 August, 2015

#75 - Federal Open Market Committee Meeting Effect on Stocks

Authors: Nilsson

Title: The Pre-FOMC Drift Explored

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2640477

Abstract:

The pre-FOMC drift was first published in 2011 and is a strong driver of equity market performance over the last 30 years. The effect is able to explain approximately half of all the equity market returns over the measured period. We verify the results of prior studies. Furthermore, the report dives into conditional factors; equity market trend and monetary policy action to see if there is any difference in terms of macro variables. We find that FOMC is rather stable throughout time, macro conditions and has not been dependent on a particular Fed Chair.
 

It seems as if the markets are expecting that the FOCM will infuse optimism into equity markets as the majority of the gains occurs before the actual announcement. The effect can be due to behavioral issues and herding among market participants but can also be due to information leakage. The effect remains unexplained.

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New academic paper related to #12 - Pairs Trading with Stocks Wednesday, 19 August, 2015

#12 - Pairs Trading with Stocks

Authors: Cartea, Jaimungal

Title: Algorithmic Trading of Co-Integrated Assets

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2637883

Abstract:

We assume that the drift in the returns of asset prices consists of an idiosyncratic component and a common component given by a co-integration factor. We analyze the optimal investment strategy for an agent who maximizes expected utility of wealth by dynamically trading in these assets. The optimal solution is constructed explicitly in closed-form and is shown to be affine in the co-integration factor. We calibrate the model to three assets traded on the Nasdaq exchange (Google, Facebook, and Amazon) and employ simulations to showcase the strategy's performance.

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When do equity anomalies have the highest return? During earnings announcements... Tuesday, 11 August, 2015

Authors: Engelberg, McLean, Pontiff

Title: Anomalies and News

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2631228

Abstract:

Using a sample of 97 stock return anomalies documented in published studies, we find that anomaly returns are 7 times higher on earnings announcement days and 2 times higher on corporate news days. The effects are similar on both the long and short sides, and they survive adjustments for risk exposure and data mining. We also find that anomaly signals predict analyst forecast errors of earnings announcements. Taken together, our results support the view that anomaly returns are the result of mispricing, which is at least partially corrected upon news arrival.

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