The Handbook of Equity Market Anomalies: Translating Market Inefficiencies into Effective Investment Strategies

354 Pages·2011·6.54 MB·English

by  Leonard Zacks

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The Handbook of Equity
Market Anomalies
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The Handbook of Equity
Market Anomalies
TranslatingMarket
InefficienciesintoEffective
InvestmentStrategies
Editedby
LEONARD ZACKS
JohnWiley&Sons,Inc.
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Copyright © 2011 by John Wiley & Sons. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or
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LibraryofCongressCataloging-in-PublicationData:
Zacks,Len.
Thehandbookofequitymarketanomalies:translatingmarketinefficienciesinto
effectiveinvestmentstrategies/LenZacks.
p.cm.
Includesbibliographicalreferencesandindex.
ISBN978-0-470-90590-6(cloth);ISBN978-1-118-12776-6(ebk);
ISBN978-1-118-12775-9(ebk);ISBN978-1-118-12774-2(ebk)
1.Investmentanalysis–Handbooks,manuals,etc. 2.Stocks–Handbooks,
manuals,etc. 3.Portfoliomanagement–Handbooks,manuals,etc. I.Title.
HG4529.Z332011
332.63(cid:2)22–dc22
2011015863
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
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Contents
Preface xi
Acknowledgments xvii
CHAPTER1 Conceptual Foundations of Capital
Market Anomalies 1
MozaffarKhan
Efficient Markets 2
Identifying Anomalies in Capital Markets 3
Explaining Anomalies 5
Anomalies: Weighing the Evidence 10
Appendix 1.1: Risk and Expected-Return Models 10
References 17
CHAPTER2 The Accrual Anomaly 23
PatriciaM.Dechow,NatalyaV.Khimich,
andRichardG.Sloan
What Are Accruals? 24
Sloan (1996) in a Nutshell 32
Extensions of Sloan (1996) 38
Alternative Explanations for the Accrual Anomaly 45
Practical Implications 51
Appendix 2.1: Estimation and Testing Framework
Used in Sloan (1996) 52
Appendix 2.2: Details on the Broader Definition of
Accruals 54
References 59
CHAPTER3 The Analyst Recommendation and Earnings
Forecast Anomaly 63
GeorgeSerafeim
Role of Research Analysts 63
Investment Recommendations 64
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Earnings Forecast Revisions 73
Determinants of Forecast Revisions 76
International Evidence 78
Overview of the Investment Performance of
Forecast Revisions 79
Appendix 3.1: Details of Returns to
Recommendation Strategies 79
References 87
CHAPTER4 Post-Earnings Announcement Drift and
Related Anomalies 91
DanielTaylor
The Basics of the Anomaly 92
Measuring Earnings Surprises 99
Sources of Post-Earnings Announcement Drift 102
Extensions 106
Institutional Investors 108
Individual Investors 110
References 112
CHAPTER5 Fundamental Data Anomalies 117
IanGow
Fundamental Metrics 118
Distress Risk 122
Capital Investment and Growth Anomalies 123
International Evidence 125
Conclusion 126
References 126
CHAPTER6 Net Stock Anomalies 129
DanielCohen,ThomasLys,andTzachiZach
Initial Public Offerings 130
Seasoned Equity Offerings 132
Debt Issuances 133
Share Repurchases and Tender Offers 134
Dividend Initiation and Omissions 136
Private Equity Placement 138
Overall Net External Financing 138
Mergers and Acquisitions 141
International Evidence 142
Other Explanations for the Abnormal Returns 143
References 144
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Contents vii
CHAPTER7 The Insider Trading Anomaly 147
IanDogan
Overview of Insider Filings 148
Documentation of the Anomaly 148
Results for the 1978–2005 Period 150
How Consistent Is the Anomaly Year by Year? 152
When Are Returns Generated during the 1-Year
Holding Periods? 154
Returns in Small Cap versus Large Cap 155
Does It Work on the Short Side? 156
Do Returns Vary by Industry? 160
Institutional Investors 162
Individual Investors 162
Relation to Other Anomalies 163
International Evidence 164
Can Insider Data Predict S&P 500 Returns? 165
Latest Developments 166
Long/Short Strategy for Institutional Investors 167
References 170
CHAPTER8 Momentum: The Technical Analysis Anomaly 173
LeeM.Dunham
History of Technical Analysis and Momentum 176
Assessing Momentum and Reversal
in Stock Prices 178
Early Influential Work on Momentum
and Reversals 179
Improving Upon Momentum Strategies 184
Moving Averages 186
52-Week High/Low 187
Momentum at Industry Levels 188
Momentum and Mutual Funds 189
Is Technical Analysis Profitable? 190
Institutional Investors 193
Explanations for Momentum and Reversals 195
International Evidence 198
References 200
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CHAPTER9 Seasonal Anomalies 205
ConstantineDzhabarovandWilliamT.Ziemba
January Effect 206
The January Barometer 213
Sell-in-May-and-Go-Away 221
Holiday Effects 226
Day-of-the-Week Effects 231
Seasonality Calendars 234
Political Effects 237
Turn-of-the-Month Effects 248
Open/Close Daily Trade on the Open 254
Weather: Sun, Rain, Snow, Moon, and the Stars 255
Conclusions and Final Remarks 256
References 256
CHAPTER10 Size and Value Anomalies 265
OlegA.Rytchkov
The Early Days 265
Fama-French Three-Factor Model 266
Value Anomaly: Risk or Mispricing? 267
Alternative Value Indicators 269
Time Variation in the Value Premium 270
Cross-Sectional Variation in the Value Premium 273
Anatomy of the Size Anomaly 275
International Evidence 278
Value Premium: Evidence from Alternative Asset
Classes 279
References 281
CHAPTER11 Anomaly-Based Processes for the
Individual Investor 285
LeonardZacks
Increasing Returns Using Market Neutral 286
Using ETFs to Add a Market Neutral Asset to a
Portfolio 291
Using Stock Scoring Systems to Outperform Indexes 292
Implementation of Anomaly-Based Quant Processes 296
End of the Tour 305
References 305