AGNOSTIC Papers

AgPa #7: Spotify Streaming and Stock Returns

Music sentiment and stock returns around the world (2021)
Alex Edmans, Adrian Fernandez-Perez, Alexandre Garel, Ivan Indriawan
Journal of Financial Economics, In Press, Corrected Proof, URL

This week’s AGNOSTIC Paper examines the role of music sentiment in the stock market. What sounds like statistical hocus-pocus is part of an important question. Do other factors than rational information drive stock markets?

I like the paper for its creative use of alternative data and its clean methodology. But to be honest, I was somewhat skeptical when I first heard about it. However, the authors present an intuitive economic rationale and rigorously test their hypotheses in various robustness checks. The results are quite interesting…

  • Music sentiment is related to stock market returns
  • Music sentiment is more important in less efficient markets
  • Music sentiment is also related to fund flows and bond market returns

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AgPa #6: Predicting Returns with (Alternative) Consumer Data

Predicting Performance Using Consumer Big Data (2022)
Kenneth Froot, Namho Kang, Gideon Ozik, Ronnie Sadka
The Journal of Portfolio Management 48(3), 47-61, URL

This week’s AGNOSTIC Paper is again more related to my other content. The authors use proxies for in-store activity, brand awareness, and web traffic to predict fundamentals and returns of consumer-oriented companies.

I like the paper because it examines alternative data and is published in a peer-reviewed journal. Other studies on the topic are often just white papers of data providers. So it is nice to have a more scientific analysis.

  • Alternative consumer-data predicts firm fundamentals
  • Trading on alternative consumer-data generated monthly alphas of up to 1.9%

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AgPa #5: The Return on Everything

The Rate of Return on Everything, 1870–2015 (2019)
Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, Alan M. Taylor
The Quarterly Journal of Economics 134(3), 1225-1298, URL

This week’s AGNOSTIC Paper is a deep dive into financial history. The authors estimate the total return of equity, housing, bonds, and bills in 16 advanced economies for the period from 1870 to 2015.

The paper is very comprehensive and I focused on the issues that are (in my opinion) most interesting for investors:

  • Real returns on risky assets were 7-8% from 1870 to 2015
  • Returns on risky assets were substantial but volatile
  • Realized risk premiums fluctuate widely across time and countries

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AgPa #4: Measuring the World’s Assets (2/2)

Historical Returns of the Market Portfolio (2019)
Ronald Doeswijk, Trevin Lam, Laurens Swinkels
The Review of Asset Pricing Studies 10(3), 521-567, URL

This is the second post on the global market portfolio and again examines two papers. It is designed to be a sequel, so I recommend to read the first part before.

The global market portfolio is a tough empirical challenge. Different methodology leads to different results and the papers disagree on several points. But there are some common insights that enhance our understanding of the market portfolio.

  • Most assets are not publicly traded
  • Stock markets are relatively small
  • Recent historical returns were 4.4% to 6.3% per year
  • The market portfolio is a good starting point

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AgPa #3: Measuring the World’s Assets (1/2)

The Global Market Portfolio (2021)
Gregory Gadzinski, Markus Schuller, Andrea Vacchino
The Journal of Portfolio Management 47(8), 151-163, URL

This week’s AGNOSTIC Paper attempts to translate an important theoretical concept into practice – the global market portfolio.

The global market portfolio captures all available assets and each is weighted by its market value. The authors develop two proxies for this portfolio and present some interesting insights:

  • Global assets were worth about $667T in 2019
  • The investable market portfolio returned 4.7% p.a. from 2005-2020/Q1
  • The non-investable market portfolio returned 5.9% p.a. from 2005-2020/Q1

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AgPa #2: What Moves Stock Prices?

What Moves Stock Prices? The Role of News, Noise, and Information (2022)
Jonathan Brogaard, Thanh Huong Nguyen, Talis J. Putnins, Eliza Wu
The Review of Financial Studies, Forthcoming, URL

This week’s AGNOSTIC Paper attempts to answer a very fundamental question: What drives the day-to-day volatility of stock prices? Of course, there are many things active at the same time. News about the underlying businesses, news about the economy, market impact of large investors, and various more.

The authors develop a novel model to isolate the impact of those different types of information. They also applied it to the US stock market and derive some interesting results:

  • Stock-Specific information is most important
  • Markets became more efficient over time
  • Smaller stocks are more noisy

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AgPa #1: Index Whales

Index Providers: Whales Behind the Scenes of ETFs (2021)
Yu An, Matteo Benetton, Yang Song
Invited for submission to the Review of Financial Studies, URL

The first research paper examines a specific area of the asset management industry: Exchange Traded Funds (ETFs) and index providers, the companies selling market indices like the S&P 500.

In a remarkable combination of empirical analysis and theoretical modeling, the authors present several interesting results:

  • Index providers are an oligopoly
  • ETF investors care about the index
  • Index providers capture 1/3 of ETF fees
  • Index providers are extremely profitable

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AGNOSTIC Papers: Introduction

The idea of AGNOSTIC Papers is to combine theory and practice by presenting one research paper per week. The papers should provide scientifically robust insights that are relevant and applicable to real-world investing. More details about it in this brief introduction.

Of course, you are more than welcome to follow the series and share your comments!

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