Helix Partners

For Part 2 of our Q42009 research update, we’d like to talk about some new and interesting papers in factor research. Along with this post, you can find 18 new citations in our reference database.

Factor research papers present data items that have some sort of explanatory power of future stock returns in one of two ways: either by describing a novel piece of information or by combining or decomposing factors already familiar to the industry. That both approaches can be equally valuable highlights some of the difficulty inherent in this type of research. Not only is the search space over possible factors basically infinite, but we can not just be content to try to find novel data items because the non-linear and conditionally dependent relationships between data and returns makes combining and decomposing known factors an equally compelling research avenue. With this in mind, it is essential that any factor research thoughtfully discuss the robustness of its approach and the possibility that any abnormal relationship is simply a spurious result.

In this update, we would like to highlight two novel factor approaches. In the first, Umut Gocken uses price and volume data to construct a proxy for information revelation to show negative abnormal returns to low information environments. The second paper, by Ioannis V. Floros and Travis R. A. Sapp, discusses the abnormal returns to shell companies involved in reverse mergers.

We also highlight three papers that revisit factors well-known to the investment community. Xuemin (Sterling) Yan and Zhe Zang decompose institutional ownership in a stock to examine only those holdings of short-term institutions, which are thought to be better informed. They find confirming evidence that the positive relationship between institutional ownership and stock returns is actually driven by the holdings of these short-term institutions. In other work, Tim Loughran and Jay W. Wellman improve on the classic measure of value, the book-to-market ratio, by presenting an enterprise multiple that shows better cross-sectional explanatory power, especially in large market cap stocks. Finally, Zhipeng Yan and Yan Zhao compose post earnings announcement drift with the value anomaly to great success.

Read past the break for citations for a few of the most interesting papers, or continue to references for the entire set.

1. Umut Gokcen, “Information Revelation and Expected Stock Returns,” September 14, 2009.
2. Ioannis V. Floros and Travis R. A. Sapp, “Shell Games: On the Stock Price Performance of Shell Companies,” September 30, 2009.
3. Xuemin (Sterling) Yan and Zhe Zhang, “Institutional Investors and Equity Returns: Are Short-term Institutions Better Informed?,” January 3, 2007.
4. Tim Loughran and Jay W. Wellman, “The Enterprise Multiple Factor and the Value Premium,” October 1, 2009.
5. Zhipeng Yan and Yan Zhao, “When Two Anomalies meet: Post-Earnings-Announcement Drift and Value-Glamour Anomaly,” September 2009.
6. Eric Gettleman and Joseph M. Marks, “Acceleration Strategies,” April 27, 2006.
7. Matteo P. Arena, K. Stephen Haggard, and Xuemin (Sterling) Yan, “Price Momentum and Idiosyncratic Volatility,” The Financial Review 43 (2008): 159-190.
8. Andy Puckett and Xuemin (Sterling) Yan, “Short-term Institutional Herding and Its Impact on Stock Prices,” March 2008.
9. Brian Walkup, “The Cost of Illiquidity: Evidence from After-Hours Trading,” September 9, 2009.
10. Josh Cherry, “The Limits of Arbitrage: Evidence from Exchange Traded Funds,” December 1, 2004.