Premium Essay

Submitted By liyimei

Words 1632

Pages 7

Words 1632

Pages 7

Essay: Market Efficiency and Anomalies

Topic：Stock price momentum: Jegadeesh and Titman (1993)

Momentum anomaly and EMH

Anomaly is a stock return deviation that challenge efficient market hypothesis (EMH). Jegadeesh and Titman (1993) theorise price momentum anomaly in the stock market for the first time. It contradicted to efficient market hypothesis thereby is widely debated. EMH states that no consistent excess return can be achieved since security prices fully reflect all available information (Fama 1970). Therefore, future prices cannot be predicted through technical analysis of past prices. If the hypothesis is true, passive investment strategy ought to be taken, because it is impossible to get abnormal return by aggressive trading.

However, Jegadeesh and Titman show that stocks performed well over the previous 3 to 12 months tend to continue to perform well over 3 to 12 months holding periods. Buy past winners and short past losers earned statistically significant positive return of averaging 12.01% per year. Predictable price patterns and excess returns contradict the efficient market hypothesis. Investors and fund managers perform actively in pursuing abnormal profits.

Literature review and the reason of anomaly

A large number of literatures illustrate that momentum anomaly exist. Some important literatures are Chan, Jegadeesh and Lakonishok (1996), Conrad and Kaul (1998) and Moskowitz and Grinblatt (1999). Lee and Swaminathan (2000) find high past turnover stocks exhibit larger magnitude of momentum but shorter persistence of momentum. Grundy and Martin (2001) study of the US market 1926 – 1995 found that after adjusting for dynamic risks, there are stable momentum profits. However, Carhart (1997), Brooks and Miffre (2007) believe if take transaction costs into account, there will be no persistence…...

Premium Essay

...that represent ownership interest that the shareholders in an organization hold and debt securities representing borrowed funds that must be paid back. In this essay I will be discussing the significance of understanding the differences between fixed income securities and common stock securities. In the United States, the sales of securities are regulated by organizations like the Financial Industry Regulatory Authority and the Securities and Exchange Commission or for short the SEC. Publicly traded companies have two classes of securities they issue, which are common stock securities and preferred stock securities. A security is what is considered a paper asset with the potential to be traded in small denominations (mostly) in the secondary market. Securities that pay a fixed amount of income are considered to be fixed-income securities i.e. bonds or preferred stocks. Bonds are debt securities that are dispensed by the government and corporations having a face value, or par. Unlike bonds preferred stocks are a representation of equal ownership within the issuing corporation having no maturities but the ability of the giver to cash in, or call the shares at par. Now a common stock security on the other hand is different from fixed-income securities. They are considered to be the simple form of ownership of any organization or corporation. Every corporation issues a specific number of common stock shares, which are approved for issuance by a board of directors. Every......

Words: 567 - Pages: 3

Premium Essay

...International University 2013 VIETNAM FIXED INCOME MARKET Project for Fixed Income Securities course Hàn Khánh Phương Dương Khánh Ngọc Nguyễn Kim Ngân Nguyễn Phúc Trọng Phạm Lương Nữ Hoàng Table of Contents I. INTRODUCTION AND OVERVIEW THE VIETNAM FIXED INCOME MARKET 3 II. TIMELINE 4 III. VIETNAM’S PRIMARY MARKET AND SECONDARY MARKET 5 IV. STATE OF FIXED INCOME MARKET IN VIETNAM 6 I. INTRODUCTION AND OVERVIEW THE VIETNAM FIXED INCOME MARKET The bond market (also known as the credit, or fixed income market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and private expenditures. The "bond market" usually refers to the government bond market, because of its size, liquidity, relative lack of credit risk and, therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve. The yield curve is the measure of "cost of funding". The Securities Industry and Financial Markets Association (SIFMA) classify the broader bond market into five specific bond markets. * Corporate * Government & agency. * Municipal *......

Words: 1610 - Pages: 7

Free Essay

...I was trading in a risk free market called Treasury bill and Treasury bond. They are called risk-free because the government backs them up. Due to the fact that the government is never expected to back from its credits, the security is labelled risk free. In this trading, there were 3 tradable securities, 2 risk free Treasury bill and 1 Treasury bond. I was given an endowment of $1,000,000 dollars at the starting and I could buy long and sell short. Total time of the trade was 5 minutes (312 seconds). First Treasury bill (TB6M) expires in 6 months and the second one (TB12M) expires in 1 year. A 6-month period time was 312 seconds (5 min) which equals to 1 period. The strategy I applied in the beginning of the first period was similar to that of liquidity traders, in which I was actively trading the TB6M Treasury bill continuously at limit orders to cause price fluctuations. The reason I was focusing on the 6 month Treasury bill was because at the end of the first period, they close out for $100 dollars. I was actively trading it on limit orders to cause price fluctuations which allowed me to get close to mid-market prices. Near the end of the 1st period, I purchased them to my full capacity of my margin loan. Since I was actively trading I missed out on the risk free interest which was compounded on cash and it was paid weekly (12 seconds), for the first period it was 7% (weekly rate 0.1302%) percent and then for second period it changed to 9%(weekly rate 0.1659%). At the end...

Words: 498 - Pages: 2

Premium Essay

...Lab 7 VBA Fixed Income Financial Model ------------------------------------------------- In this lab, you will start to build VBA application related to Fixed Income Financial Model Part 1: Commonly Used Financial Functions There are many EXCEL functions that you may use in FI Financial Modeling. In this lab, we explore the following functions: 1. RATE 2. PV 3. PRICE 4. YIELD 1. RATE The Rate function calculates the interest rate required to pay off a specified amount of a loan, or reach a target amount on an investment, over a given period. Alternately, it calculates the return you will have to earn in order to accumulate a certain amount of money by making a number of equal periodic investments. The syntax of the function is: RATE( nper, pmt, pv, [fv], [type], [guess] ) Where the arguments are as follows: nper | The number of periods over which the loan or investment is to be paid | pmt | The (fixed) payment amount per period | pv | The present value of the loan / investment | [fv] | An optional argument that specifies the future value of the loan / investment, at the end of nper payments . If omitted, [fv] takes on the default value of 0 | [type] | An optional argument that defines whether the payment is made at the start or the end of the period The [type] argument can have the value 0 or 1, meaning: 0 - the payment is made at the end of the period 1 - the payment is made at the beginning of the period If the......

Words: 805 - Pages: 4

Free Essay

...1. PRIMARY MARKETS The primary markets vary from one market to another. The major difference In Treasury debt markets dealers bid in auctions conducted by the Fed, to obtain the Treasury debt securities in the primary markets. In all other debt markets, dealers underwrite by forming syndicates to eventually distribute the securities to investors. dealers' several functions, (a) assessing the demand for the debt issue (b) pricing the issue (c) hedging inventory positions (d) distributing securities to Ultimate investors 2. Treasury markets In Treasury markets primary markets are characterized by an important set of players known as primary dealers. They are banks and securities brokerages that trade in U.S. Government securities with the Federal Reserve System. They have a direct phone line with the Fed and participate in the open market operations. Bank-related primary dealers must be in compliance with Tier I and Tier II capital standards under the Basel Capital Accord Primary dealers are expected to participate meaningfully in both the Fed’s open market operations and Treasury auctions and to provide the Fed’s trading desk with market information 3. Corporate debt Corporate bonds can be placed in public bond markets by registering with the SECURIEs and Exchange Commission (SEC). The underwriters typically use a“firm commitment ’’ contract to distribute the debt securities to various institutional buyers. n some......

Words: 278 - Pages: 2

Premium Essay

...Question 1 Are interest rate changes predictable? Interest rates are not entirely predictable but can be inferred from present interest rate prices. For example, when current interest rates are exceptionally low, future interest rates can be expected to rise and vice versa. Question 2 Consider a two year coupon bond which pays an annual coupon of 5% with a principal value of $100. Using the zero coupon bonds B(0, 1) and B(0, 2): 1. What is the strategy to replicate the coupon bond? 2. What is the strategy to hedge the coupon bond? PV of 2 year coupon bond = 5 B(0,1) + 105 B(0,2) 1. To replicate the bond, I should buy 5 units of B(0, 1) bonds and 105 units of B(0, 2) bonds. 2. To hedge the bond, I should do the opposite and sell 5 units B(0, 1) bonds and 105 units B(0, 2) bonds. Question 3 Consider three zero coupon bonds; B(0, 1)=0.95, B(0, 2)=0.90, and B(0, 3)=0.85: 1. What is the zero rate term structure? B(0,T) = e-rT/365 r(0,T) = -ln( B(0,T))365/T r(0,1) = -ln 0.95 = 0.0513 r(0,2) = -(ln 0.90)/2 = 0.0527 r(0,3) = -(ln 0.85)/3 = 0.0542 2. What is the forward rate term structure at one year intervals? In other words, f(0, 1, 2) and f(0, 2, 3). f(0,1,2) = B(0,1) / B(0,2) – 1 = 0.95/0.9 – 1 = 0.05556 f(0,2,3) = B(0,2) / B(0,3) – 1 = 0.90/0.85 – 1 = 0.05882 3. Name two other possible term structures that can be inferred. The other term structures are discount rate and simple interest rate structures. Question 4 The current date is......

Words: 727 - Pages: 3

Premium Essay

...Part Ⅰ Portfolio Overview Holding Period: 09/14/2010 ~ 11/30/2010 76 days Settlement Date: 09/14/2010 Position: 6 of 6 Part Ⅱ Securities Analysis *CN Government Bond 10-year is based on CNY. CNY per USD=6.74690 as of 09/14/10; CNY per USD=6.66730 as of 11/30/10 CNY per USD=6.64110 as of 10/15/10 1. CN Government Bond 10-Year The yield and price were relatively stable during the first 30 days of my holding period until Oct. 19th when the People’s Bank of China increased its benchmark rate by 0.25 percentage point on in order to take control of the stubborn inflation. The yield increased and the price fell. However Chinese RMB has been appreciating from 6.74590 USD/CNY to 6.66730 USD/CNY during my holding period. The foreign exchange gains partially offset the loss of market value of the bond. The rate of return is 1.269%. I will sell the bond because the Chinese government has potential to continuously increase the interest rate and besides the US dollar shows a strong appreciation trend recently. 2. US. Government Bond 10-Year There are several factors contributed to the fluctuation of the price and yield of Treasury. In early September, the interest rate for 2-7 year treasury notes have declined to record low level, causing the market value of the portfolio increased. The decline of the price of Treasuries at the end of September is due to profit-taking after recent gains. The yield surged and the price decreased after Fed announcement of QEⅡ. I......

Words: 405 - Pages: 2

Premium Essay

...Fixed Income Securities Tools for Today’s Markets Second Edition BRUCE TUCKMAN John Wiley & Sons, Inc. Copyright © 2002 by Bruce Tuckman. 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 transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, e-mail: permcoordinator@wiley.com. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and speciﬁcally disclaim any implied warranties of merchantability or ﬁtness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and......

Words: 146024 - Pages: 585

Premium Essay

...Fixed Income Risk Management Second Assignment QUESTION 1 Maturity 0.5 1 1.5 Interest Rate 0.01 0.016 0.02 0.022 Discount Factor 0.9940 0.9841 0.9704 0.9570 Pz(0.T) 99.4018 98.4127 97.0446 95.6954 2 Table 1- Zero option prices A. Given the current term structure of interest rates, we can easily derive the prices of zero-coupon bonds. As the interest rates are continuously compounded, the formulas used to calculate the discount factors and the zero prices are: ������(������, ������) = ������ −������(������,������)(������− ������) ������������ (������, ������) = 100 × ������(������, ������) B. Assuming Ɵi=1% and σ=1.50%, we can set up the Ho-Lee model, which implies the following 3-step interest rate tree (where each step is = 0.5): 1 1.20% 2.76% 0.64% 2 4.32% 2.20% 0.08% Table 2- Ho-Lee interest rate tree 3 5.88% 3.76% 1.64% -0.48% At each node, the interest rate was calculated using ������������+1,������ = ������������,������ + ������������ × ∆ + ������ × √∆ For upward movements, and ������������+1,������+1 = ������������,������ + ������������ × ∆ − ������ × √∆ For downward movements. The risk neutral probability of an upward or downward movement is set at p*=1/2. The model implied zero-coupon prices are then computed using the different step bond trees (Table 14 in the Appendix). The following table shows the comparison between the implied and the term structure zero-coupon prices for each maturity: the Check row contains the difference......

Words: 1880 - Pages: 8

Premium Essay

...at par an initial issue of bonds and held them to maturity. Over the maturity, the interest rates rose at which the coupons income was invested. Compare the realized return to the yield to maturity of bond at the time of purchase: B a. Realized return greater than YTM b. Realized return equal to YTM c. Realized return less than YTM d. Cannot infer from given information 2. XYZ Corp issues two bonds with 30-year maturities both of which are callable at $1100. The first bond is a deep discount bond issued at $500 has a coupon rate of 5% (semi-annual payments) and a yield to maturity of 7.4%. The other bond is issued at par value and its coupon rate is 8.6%. e. Find yield to maturity for second bond. If market rates are expected to fall drastically over time, which bond would investors prefer to hold? Why? i/y=8.6, 第二问不会 3. ABC Corp bonds trade at $960, have a face value of $1000 and 5 years to maturity. These bonds pay coupon rate of 7% with semi-annual payments. Calculate the following: f. Current yield 1000*7%/960=7.29% g. Yield to maturity (on BEY basis) and Effective yield to maturity Fv=1000, pv=-960, pmt=35, n=10, BEY=3.9930*2=8.00% h. Calculate the effective yield to maturity. EAY=(1=0.04)^2-1=8.16% i. Total return on bond for an investor with a 3-year investment horizon and a reinvestment rate of 6% annually over the period. Further, it is known that at the end of 3 years the 7%......

Words: 1493 - Pages: 6

Premium Essay

...FIN 443 Portfolio Report: Week 4 * Fixed Income * Japan’s Central Bank has instituted negative interest rates. It’s now the fifth major central bank to do so. * The Fed met after Japan’s decision and released a more conservative statement compared to their earlier actions of this year so far. * Treasury yields were down especially for the 5 and 10 year treasuries. * Last week the fed committee had a meeting and one of the biggest things that was observed from the meeting was that the committee will monitor global and economic development due to the recent uncertainty of potential global growth. * The fed had a general outlook for increasing interest rates, but for now they will be looking at income as a performance driver in the market. * Puerto Rico came up with a plan on Monday to reduce its debt by approximately 46%. Not many details about the plan were released, but from what we have found its obvious and of great importance to have great and high level of participation for all involved. Puerto Rico has by May first to pay the a large debt service payment. * FX * Preliminary Q4 earnings of Great Britain’s GDP indicated a .5% growth, totalling to 2.2% growth for the full year. * British exit from the European Union more likely as British voters fear immigration and instability of the EU. * The European Central Bank remains under pressure from financial markets to provide even more monetary......

Words: 300 - Pages: 2

Premium Essay

...Discuss the economic relationships between consumption, national income and investment. Aggregate demand is heavily determined by the state of consumption, the spending on consumer goods and service over a period of time; Furthermore income and investment have a very volatile connection with consumption. National income is the total level of output of a country and is calculated by C+I+G+(X-M)= AD however there is three ways in which we can be interpreted. Firstly The expenditure method is the worth of household spending of goods and services, secondly national output is the amount flowing between goods and services from firms to households; finally there is the national income which is the value of income to households from land, capital and labour from firms. The three components must be identical not just equal. Investment is the expenditure on capital goods, that then are used to provide other goods or services. Investment can be effected by the accelerator effect as an increase in nation income results in an increase in investment, however for this theory to take place its not the rate of interest that determines the level of investment but real spending within the economy. Consumption influences national income as it has many determinate’s, however it is important to determine that income is a flow ands wealth is a stock. National income is strongly controlled by confidence as the higher the confidence people feel, the more they will spend. Confidence can be......

Words: 691 - Pages: 3

Premium Essay

...at time 0 and holds it until maturity. • As the amounts of the payments she receives are diﬀerent at diﬀerent times, one way to summarize the horizon is to consider the weighted average of the time of the cash ﬂows. • We use the present values of the cash ﬂows (not their nominal values) to compute the weights. • Consider an investment that generates cash ﬂows of amount Ct at time t = 1, · · · , n, measured in payment periods. Suppose the rate of interest is i per payment period and the initial investment is P . 3 • We denote the present value of Ct by PV(Ct ), which is given by Ct . PV(Ct ) = t (1 + i) and we have P = n X (8.1) PV(Ct ). (8.2) t=1 • Using PV(Ct ) as the factor of proportion, we deﬁne the weighted average of the time of the cash ﬂows, denoted by D, as D = = n X t=1 n X t " PV(Ct ) P twt , # (8.3) t=1 where PV(Ct ) wt = . P 4 (8.4) P • As wt ≥ 0 for all t and n wt = 1, wt are properly deﬁned weights t=1 and D is the weighted average of t = 1, · · · , n. • We call D the Macaulay duration, which measures the average period of the investment. • The value computed from (8.3) gives the Macaulay duration in terms of the number of payment periods. • If there are k payments per year and we desire to express the duration in years, we replace t in (8.3) by t/k. The resulting value of D is then the Macaulay duration in years. Example 8.1: Calculate the Macaulay......

Words: 7983 - Pages: 32

Premium Essay

...© CSI GLOBAL EDUCATION INC. (2011) 7•1 Chapter 7 Fixed-Income Securities: Pricing and Trading © CSI GLOBAL 7•2 EDUCATION INC. (2011) 7 Fixed-Income Securities: Pricing and Trading CHAPTER OUTLINE How are Price and Yield of a Bond Calculated? • Calculating the Fair Price of a Bond • Calculating the Yield on a Treasury Bill • Calculating the Current Yield on a Bond • Calculating the Yield to Maturity on a Bond What is the Term Structure of Interest Rates? • The Real Rate of Return • The Yield Curve What are the Fundamental Bond Pricing Properties? • The Relationship Between Bond Prices and Interest Rates • The Impact of Maturity • The Impact of the Coupon • The Impact of Yield Changes • Duration as a Measure of Bond Price Volatility What are Bond-Switching Strategies? How does Bond Market Trading Work? • Clearing and Settlement • Calculating Accrued Interest © CSI GLOBAL EDUCATION INC. (2011) 7•3 What are Bond Indexes? • Canadian Bond Market Indexes • Global Indexes Summary LEARNING OBJECTIVES By the end of this chapter, you should be able to: 1. Defi ne present value and the discount rate, and perform calculations relating to the time value of money, bond pricing and yield. 2. Defi ne a real rate of return and a yield curve, and evaluate three theories of interest rate determination. 3. Analyze the impact of fi xed-income pricing properties on bond prices. 4. Explain the rationale for bond switching and describe bond-switching......

Words: 11227 - Pages: 45

Free Essay

...Fixed-Income Portfolio Selection Kay Giesecke∗ and Jack Kim† Stanford University June 29, 2009; this draft January 11, 2012‡ Abstract The equity portfolio selection problem is the subject of a substantial literature. Though equally important in practice, the selection problem for a ﬁxed-income portfolio of corporate and government bonds, industrial loans and credit derivatives, is less well-understood. The ﬁxed-income portfolio problem presents unique challenges: the risk of issuer default induces skewed return distributions, the correlation of defaults inﬂuences the tail of the portfolio return distribution, and credit derivative positions have complex risk/return implications. This paper addresses the static selection problem for a ﬁxed-income portfolio. We optimize the total mark-to-market value of the portfolio at the investment horizon. This value incorporates the intermediate premium and default cash ﬂows of long and short cash and derivative positions, and the survival-contingent market value of these positions at the horizon. The selection problem is cast as a polynomial goal program that involves a two-stage constrained optimization of preference weighted moments of the portfolio mark-to-market. The decision variable is the vector of contract notionals. A capital constraint guarantees the solvency of the investor. The multi-moment formulation addresses the non-Gaussian distribution of the portfolio mark-tomarket. It is also computationally tractable, because we......

Words: 19189 - Pages: 77