AGNOSTIC Papers

AgPa #26: Trading on Price Charts

(Re-)Imag(in)ing Price Trends (2022)
Jingwen Jiang, Bryan T. Kelly, Dacheng Xiu
The Journal of Finance, Forthcoming, URL

This week’s AGNOSTIC Paper is about technical analysis. Full disclosure: I never believed in technical analysis in the sense of drawing lines on charts or imagining somewhat arbitrary patterns.

But the approach of this week’s authors is quite different. They borrow methodology from image recognition and train a machine learning model to detect predictive patterns in price charts (Yes, the machine receives the price chart as picture, not the underlying numbers!)…

  • The model identifies very profitable short-term signals
  • The signals are also profitable over longer horizons
  • Some of the machine-learning-signals are explainable
  • The model disagrees with conventional technical analysis

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AgPa #25: The Economics of High-Frequency-Trading

The Economics of High-Frequency Trading: Taking Stock (2016)
Albert J. Menkveld
Annual Review of Financial Economics, Vol. 8, 1-24, URL/SSRN

This week’s AGNOSTIC Paper examines once again a somewhat controversial topic: high frequency trading. The (public) image of HFTs is quite mixed with a clear tendency towards negative. However, an open-minded and scientific analysis suggests that we are probably better off with HFTs than without them…

  • Trading costs strongly decreased between 2001 and 2011
  • HFTs are fast, well-informed, and often market makers
  • Order-preying and arm’s races – it’s not all good
  • The benefits seem to outweigh the costs

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AgPa #24: Market Capitalization vs. GDP

The big bang: Stock market capitalization in the long run (2022)
Dmitry Kuvshinov, Kaspar Zimmermann
Journal of Financial Economics 145(2), 527-552, URL

This week’s AGNOSTIC Paper is admittedly not very practical but probably more relevant today than ever before. The authors examine the outstanding performance of equity markets since the end of the inflationary 1970s and early 80s. A regime shift that they call the big bang. There are some surprising results, especially beyond the general debate about steadily falling interest rates…

  • The Big Bang: market capitalization detached from GDP growth after the 1980s
  • Most of the Big Bang comes from higher stock prices
  • Falling interest rates are surprisingly not the main driver
  • Higher profitability of listed firms is much more important

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AgPa #23: Trading on the Weather

Global weather-based trading strategies (2022)
Ming Dong, Andréanne Tremblay
Journal of Banking & Finance, Volume 143, 106558, URL/SSRN

People tend to be in a better mood when the sun is shining. That’s nothing dramatically new but this week’s AGNOSTIC Paper shows that this apparently also applies to investors. An investment strategy that went long (short) the stock market index from the country with the best (worst) weather on a particular day generated meaningful (hypothetical) outperformance…

  • The global long-short weather strategy returned 15.2% p.a. between 1993 and 2012
  • The long-only version of the strategy returned 13.4% p.a.

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AgPa #22: Gamification of Trading

Does Gamified Trading Stimulate Risk Taking? (2021)
Philipp Chapkovski, Mariana Khapko, Marius Zoican
Swedish House of Finance Research Paper No. 21-25 via SSRN

Online brokers (Robinhood & Co.) are without question important financial innovations. They offer de-facto free trading and save investors a lot of fees. But they also leverage technology to encourage people to do more transactions. An important part of this is gamification and this week’s AGNOSTIC Paper examines that issue with a pretty cool experiment…

  • Gamification encourages investors to take more risk
  • Inexperienced investors without financial knowledge are most vulnerable

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AgPa #21: AI-Powered vs. Human Funds

Do AI-Powered Mutual Funds Perform Better? (2022)
Rui Chen, Jinjuan Ren
Finance Research Letters, Volume 47, Part A, URL/SSRN

This week’s AGNOSTIC Paper compares the performance of AI-powered- and human mutual funds between 2017 and 2019 in the US. Although AI-powered funds are not the holy grail some investors may have hoped for, they still added value compared to their human peers…

  • AI-powered mutual funds did not outperform the US market
  • But AI-powered funds outperformed their human peers
  • And AI-powered funds avoided the disposition- and rank effect

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AgPa #20: Performance of ESG Exclusions

The Expected Returns of ESG Excluded Stocks. The Case of Exclusions from Norway’s Oil Fund (2022)
Erika Berle, Wanwei (Angela) He, Bernt Arne Ødegaard
SSRN Working Paper, URL

This week’s AGNOSTIC Paper examines the ESG exclusions of a popular investor: the Norwegian sovereign wealth fund, also known as the “oil fund”. Between 2005 and 2021, the fund excluded 189 companies that engage in different types of “bad” practices or products. These exclusions are interesting because they reveal insights about the impact of ESG for a large real-world institutional investor…

  • ESG-excluded stocks generated up to 6.85% alpha per year
  • There seems to be a return premium on “bad” stocks

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AgPa #19: ESG Confusion (2/2)

Aggregate Confusion: The Divergence of ESG Ratings (2022)
Florian Berg, Julian F. Kölbel, Roberto Rigobon
Review of Finance, Corrected Proof, 1-30, URL

The second AGNOSTIC Paper on the confusion around ESG. This one examines the disagreement of ESG ratings in much more detail and provide some explanations why they are so different…

  • ESG ratings disagree: the average correlation is just 0.54
  • 709 indicators and 64 categories: no wonder that there is disagreement
  • Most disagreement comes from “measurement” and “scope”
  • There is a “rater effect” for ESG ratings

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AgPa #18: ESG Confusion (1/2)

ESG Rating Disagreement and Stock Returns (2021)
Rajna Gibson Brandon, Philipp Krueger, Peter Steffen Schmidt
Financial Analysts Journal 77(4), 104-127, URL/SSRN

This week’s AGNOSTIC Paper is about a quite controversial topic: Environmental, Social, and Governance a.k.a. ESG. ESG refers to the idea that investors should consider those dimensions in their decisions and thereby contribute to a more sustainable economy. But as this week’s paper shows, there is little agreement on what ESG actually is…

  • ESG ratings disagree: the average correlation is just 0.45
  • There is less ESG disagreement for larger, more profitable firms with credit ratings
  • Investors demanded a risk premium for ESG uncertainty

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AgPa #17: European Fund Selection

Fund Selection: Sense and Sensibility (2022)
Guido Baltussen, Stan Beckers, Jan Jaap Hazenberg, Willem Van Der Scheer, CFA
Financial Analysts Journal, 78(3), 30-48, URL

Coincidentally, this week’s AGNOSTIC Paper is a pretty good sequel to the last one. The authors study the performance of globally investing mutual fund that were available for European investors between 2008 and 2020. The results are seamlessly consistent with the literature and are anything but a sales-pitch for active fund managers…

  • In aggregate, active managers underperformed the passive alternative
  • Cheap funds with good track records were more likely to outperform

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