Stock picking

Can Twitter Images Predict Price Action During FED Announcements?

14.November 2024

Do the quants possess a crystal ball? The recent research hints, that if we try to process the Twiter images, then we may get a small glimpse into the future. The Federal Open Market Committee (FOMC) meetings significantly influence financial markets, drawing global attention from traders and investors, especially regarding equity risk premia. Recent research indicates that combining sentiment analysis of Twitter images with text analysis can more accurately predict stock performance on FOMC days than text alone.

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The Impact of Methodological Choices on Machine Learning Portfolios

4.November 2024

Studies using machine learning techniques for return forecasting have shown considerable promise. However, as in empirical asset pricing, researchers face numerous decisions around sampling methods and model estimation. This raises an important question: how do these methodological choices impact the performance of ML-driven trading strategies? Recent research by Vaibhav, Vedprakash, and Varun demonstrates that even small decisions can significantly affect overall performance. It appears that in machine learning, the old adage also holds true: the devil is in the details.

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Short Sellers: Informed Liquidity Suppliers

18.October 2024

Short sellers often have a bad reputation, seen as market disruptors who profit from declining prices. Yet, they play a crucial role in making markets more efficient by identifying overvalued assets and correcting mispricings. A recent study uncovers another surprising aspect of their behavior: rather than just demanding liquidity, the most informed short sellers actually provide it. Using transaction-level data, the research shows that these traders supply liquidity, especially on news days and when trading on known anomalies, challenging the conventional view of short sellers as merely aggressive market participants.

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Valuing Stocks With Earnings

1.October 2024

Today, we will venture a little into the fundamental analysis corner, and we will give you a glimpse of an intriguing paper (Hillenbrand and McCarthy, 2024) that discusses the advantages of using ‘Street’ earnings over traditional GAAP earnings. The paper suggests that ‘Street’ earnings provide better valuation estimates and improved financial analysis. Is this a way how to improve the performance of the struggling equity value factor?

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Outperforming Equal Weighting

2.August 2024

Equal-weighted benchmark portfolios are sometimes overshadowed by the more popular market capitalization benchmarks but are still popular and often used in practice. One of the advantages of equal-weighted portfolios is that academic research shows that in the long term, they tend to outperform their market-cap-weighted peers, mainly due to positive loadings on well-known factor premiums like size and value. So, if equal weighting outperforms market-cap weighting (in the long term), what options do we have if we want to outperform equal weighting? A recent paper by Cirulli and Walker comes to our aid with an interesting proposal …

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The Expected Returns of Machine-Learning Strategies

29.July 2024

Does the investment in sophisticated machine learning algorithm research and development pay off? It is an important question, especially in light of the increasing costs related to the R&D of such algorithms and the possibility of decreasing returns for some methods developed in the more distant past. A recent paper by Azevedo, Hoegner, and Velikov (2023) evaluates the expected returns of machine learning-based trading strategies by considering transaction costs, post-publication decay, and the current high liquidity environment. The obstacles are not low, but research suggests that despite high turnover rates, some machine learning strategies continue to yield positive net returns.

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