The long-term price-earnings ratio

price-earnings ratio;value premium;arbitrage trading rule;UK stock returns;contrarian investment Abstract:  The price-earnings effect has been thoroughly documented and is the subject of numerous academic studies. However, in existing research it has almost exclusively been calculated on the basis of the previous year's earnings. We show that the power of the effect has until now been seriously underestimated due to taking too short-term a view of earnings. Looking at all UK companies since 1975, using the traditional P/E ratio we find the difference in average annual returns between the value and glamour deciles to be 6%. This is similar to other authors' findings. We are able to almost double the value premium by calculating the P/E ratio using earnings averaged over the previous eight years.

Aplicando estratégias simultâneas de momento e valor no mercado brasileiro

A teoria de Finanças Comportamentais surge como uma nova abordagem ao mercado financeiro, argumentando que alguns eventos podem ser mais bem explicados se as restrições da racionalidade do investidor são relaxadas. Conceitos de psicologia e limites à arbitragem são usados para modelar as ineficiências, criando a idéia de ser possível ganhar sistematicamente do mercado. Este trabalho propõe um novo modelo, simplista na sua implementação, para aproveitar os retornos anormais advindos de estratégias de momentum e reversão à média simultaneamente. A idéia de um efeito momentum de longo prazo mais forte que o de curto prazo é introduzida, mas os resultados empíricos mostram que a dinâmica do mercado brasileiro rejeita este conceito. O modelo falha em conseguir retornos positivos e livres de risco.

Scenari finanziari e portafogli ottimi: modelli di previsione e strategie per l'asset allocation tattica

Le scelte di asset allocation costituiscono un problema ricorrente per ogni investitore. Quest’ultimo è continuamente impegnato a combinare diverse asset class per giungere ad un investimento coerente con le proprie preferenze. L’esigenza di supportare gli asset manager nello svolgimento delle proprie mansioni ha alimentato nel tempo una vasta letteratura che ha proposto numerose strategie e modelli di portfolio construction. Questa tesi tenta di fornire una rassegna di alcuni modelli innovativi di previsione e di alcune strategie nell’ambito dell’asset allocation tattica, per poi valutarne i risvolti pratici. In primis verificheremo la sussistenza di eventuali relazioni tra la dinamica di alcune variabili macroeconomiche ed i mercati finanziari. Lo scopo è quello di individuare un modello econometrico capace di orientare le strategie dei gestori nella costruzione dei propri portafogli di investimento. L’analisi prende in considerazione il mercato americano, durante un periodo caratterizzato da rapide trasformazioni economiche e da un’elevata volatilità dei prezzi azionari. In secondo luogo verrà esaminata la validità delle strategie di trading momentum e contrarian nei mercati futures, in particolare quelli dell’Eurozona, che ben si prestano all’implementazione delle stesse, grazie all’assenza di vincoli sulle operazioni di shorting ed ai ridotti costi di transazione. Dall’indagine emerge che entrambe le anomalie si presentano con carattere di stabilità. I rendimenti anomali permangono anche qualora vengano utilizzati i tradizionali modelli di asset pricing, quali il CAPM, il modello di Fama e French e quello di Carhart. Infine, utilizzando l’approccio EGARCH-M, verranno formulate previsioni sulla volatilità dei rendimenti dei titoli appartenenti al Dow Jones. Quest’ultime saranno poi utilizzate come input per determinare le views da inserire nel modello di Black e Litterman. I risultati ottenuti, evidenziano, per diversi valori dello scalare tau, extra rendimenti medi del new combined vector superiori al vettore degli extra rendimenti di equilibrio di mercato, seppur con livelli più elevati di rischio.

On the Efficiency of the Benchmarks Used in the Asset Management

In this work we studied the efficiency of the benchmarks used in the asset management industry. In chapter 2 we analyzed the efficiency of the benchmark used for the government bond markets. We found that for the Emerging Market Bonds an equally weighted index for the country weights is probably the more suited because guarantees maximum diversification of country risk but for the Eurozone government bond market we found a GDP weighted index is better because the most important matter is to avoid a higher weight for highly indebted countries. In chapter 3 we analyzed the efficiency of a Derivatives Index to invest in the European corporate bond market instead of a Cash Index. We can state that the two indexes are similar in terms of returns, but that the Derivatives Index is less risky because it has a lower volatility, has values of skewness and kurtosis closer to those of a normal distribution and is a more liquid instrument, as the autocorrelation is not significant. In chapter 4 it is analyzed the impact of fallen angels on the corporate bond portfolios. Our analysis investigated the impact of the month-end rebalancing of the ML Emu Non Financial Corporate Index for the exit of downgraded bond (the event). We can conclude a flexible approach to the month-end rebalancing is better in order to avoid a loss of valued due to the benchmark construction rules. In chapter 5 we did a comparison between the equally weighted and capitalization weighted method for the European equity market. The benefit which results from reweighting the portfolio into equal weights can be attributed to the fact that EW portfolios implicitly follow a contrarian investment strategy, because they mechanically rebalance away from stocks that increase in price.

Momentum profits following bull and bear markets

This paper examines the profitability that the widely published momentum strategy achieves following bull and bear markets. Investors can gain stronger momentum profits by adopting the continuation strategy after poor lagged market returns. The longer the duration used to describe the bear state, the stronger the momentum returns that are realised. The results contradict the theoretical findings of the investors' overconfidence model of Daniel et al. (`Investor Psychology and Security Market Under- and Over-Reactions', Journal of Finance, 53, 1839-85, 1998) and the follow-the-trend model of Kim (`Long-term Momentum Hypothesis: Contrarian and Momentum Strategies', Working Paper, 2002), but concur with the theoretical results of the traders' hesitation model of Du (`Heterogeneity in Investor Confidence and Asset Market Under- and Overreaction', Working Paper, 2002).

Is Trading Behavior Stable Across Contexts? Evidence from Style and Multi-Style Investors

In this paper we study priming of identity within the context of inherent vs. contextual financial decision making. We use a sample of individual trading accounts in equity-style funds taken from one fund family to test the hypothesis that trading styles are inherent vs. contextual. Our sample contains investors who invest either in a growth fund, a value fund, or both. We document behavioral differences between growth fund investors and value fund investors. We find that their trades depend on past returns in different ways: growth fund investors tend towards momentum trading and value fund investors tend towards contrarian trading. These differences may be due to inherent clientele characteristics, including beliefs about market prices, specific personality traits and cognitive strategies that cause them to self-select into one or the other style. We use a sample of investors that trade in both types of funds to test this proposition. Consistent with the contextual hypothesis, we find that investors who hold both types of funds trade growth fund shares differently than value fund shares.