Abstract: Beyond the Random Walk Vyay Singal Oxford University Press, 2004 Is Academic Finance Research of Any Value? Key Words: Finance; Academic finance research; Investments; Stock markets; Options market; Mutual funds. Is academic finance research of any practical value? Dr. Vijay Singal in his book Beyond the Random Walk (Oxford University Press, 2004) shows that the answer is yes. He starts by reviewing a vast amount of academic research and summarizing it in a useful way. After adding a touch of his own research to update the results, he presents a series of investment strategies for making money. The result is one of the most useful books for investors we have seen. For academics, it is a useful way to learn about areas in the literature they may have missed. This review will attempt to show that academic finance has found ways to make money. The primary source will be Singal's book, but we will draw on other sources (including our own research) to supplement the discussion. The book begins with the highly controversial subject of market efficiency [Grossman and Stiglitz (1980); Fama (1998); Haugen (1999, 2002)]. The introductory chapter summarizes most of the market anomalies (market is a technical term for predictable regularity) in a clear fashion, and makes useful points for anyone hoping to exploit possible mispricings. Especially useful is the discussion of why investment opportunities may persist. Anyone contemplating trying to profit from a publicized anomaly should try to figure out whether it will disappear now that it is publicized. If there is a good reason for it to persist, one can be much more confident in trying to exploit it. After the introductory discussion that should apply to many of the effects discussed in the book, Singal proceeds to useful discussions of many possible profitable effects. He starts by discussing the well-known January effect for small firms (or past losers) and a new December effect for past winners in stock markets. The January effect consists of very high returns for the smallest firms. The primary reasons for both effects are tax-related. Investors sell stocks in December to realize capital losses to offset capital gains; but investors delay selling past winner stocks till early January in order to postpone the taxes on their capital gains. The author shows both effects in terms of differential returns and turnover (volume), especially during the December-January period. Singal divides firms into ten deciles by capitalization and into four quartiles by how much the stock price has declined since its high over the previous eleven months. If one sells a stock that is down within a year of its purchase, one has a short-term loss. If it has risen, one has a short-term gain (which is taxed at a higher rate than gains earned on stocks held for over a year). Especially, near the end of the year investors often sell their losers in order to take the losses (which can be offset against capital gains or against ordinary income up to $3000). It is believed that this selling tends to force prices down in December. Come January, this year-end selling lets up and the stocks rebound. Singal shows how the smallest firms in the worse loser quartile had returns of -20.2% for December (data is over 1963-2001). However, in January they are up an average of 4.5%. However, this well-known January effect is hard to trade because of large bid-ask spread in small low priced stocks (which is what losing stocks tend to be after their loses). This is probably why it has not been arbitraged away. However, much less attention has been paid to the good performance of winner stocks in December. Firms, which are both, top quartile winners and in the top size decile average a 9% December return. The next to top decile did even better, 11.3% (Table 2.1, p. 25). This is probably because the owners typically have capital gains in these firms and are reluctant to sell when selling involves taxes. …
Publication Year: 2005
Publication Date: 2005-04-01
Language: en
Type: article
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