A ton of academic financial research gets uploaded to SSRN, NBER, etc. every day promising high returns with less risk in places where you never thought to look and in things that you never thought to trade. However, if it were really that good, why would anybody make it public?
It pays to be skeptical in finance.
The first thing you should do when you come across a paper promising untold wealth is to build the simplest backtest that you can, taking the findings in the paper at face value, on the set of instruments you can realistically trade and check if it holds up.
For example, there’s a paper on intraday trading, Intraday Momentum: The First Half-Hour Return Predicts the Last Half-Hour Return (SSRN), that shows how the first half-hour return on the market (the SPY ETF) predicts the last half-hour return. However, as an Indian investor, trading the SPY like this is unrealistic. So, the first thing you should do, is check if the results hold on the indices that you can trade.
And it doesn’t. It didn’t pan out the first time we tried, and it didn’t pan out the second: Intraday Momentum, an Update.
You should always do your own research (DYOR).
Markets this Week
Once in a while, Reliance wakes up and decides to do the funniest thing…
… the long-end got hammered in the US. Jitters ahead of elections?
More here: country ETFs, fixed income, currencies and commodities.
Links
Research
The Real Effects of Mutual Funds’ Stock Selections (SSRN)
Initial purchase positions by skilled fund managers in a firm signal their conviction not only in the firm but also in its industry, making industry valuation more informative. Upon observing these signals, a firm’s sensitivity of investment to industry Q increases by 8.4%. Our findings suggest that the real effects of skilled fund managers’ stock selection extend beyond their portfolio firms.
Is there an April Effect in Stock Returns? (SSRN)
This paper examines the extent that retirement account inflows around the April 15th U.S. income tax filing deadline affect U.S. equity prices. This paper examines if money flowing into retirement accounts around the April 15th deadline produce a calendar-based stock-return pattern. Results show large and significant April effects with event-window daily returns as much as eight times larger than daily returns for the rest of the year. Results hold for both U.S. and international stock indexes.
Learning from news, information flow, and financial markets (SSRN)
Neuroscience reveals that human brain activity and cognitive load exhibit an inverted V-shape relationship, showing a turning point, beyond which agents are unable to process additional information. Information overload exhausts investors' processing capacity, making the extracted information imprecise. Increased estimation risk, in turn, leads to higher market risk premium. Information overload also has cross-sectional effects: stocks that are difficult to value and require large learning efforts have higher expected returns.
Automating Short-Term Payroll Savings (NBER)
Automatic enrollment is often used to increase retirement savings. What are the effects of using it to increase short-term savings? Participation was 48 percentage points higher under automatic enrollment than opt-in enrollment.
Destabilizing Digital "Bank Walks" (NBER)
We find that when the Fed funds rate increases, deposits flow out faster, and the cost of deposits increases more in banks that offer a mobile app and brokerage services. Correcting for digital betas and deposit outflows results in a deposit franchise value that is 14-22% lower for digital-broker banks relative to traditional banks.
Third Places and Neighborhood Entrepreneurship (NBER)
We examine whether the introduction of Starbucks cafés into U.S. neighborhoods with no coffee shops increased entrepreneurship. We find that tracts that received a Starbucks saw an increase in the number of startups of 5.0% to 11.8% (or 1.1 to 3.5 firms) per year, over the subsequent 7 years.
Deep learning models reveal replicable, generalizable, and behaviorally relevant sex differences in human functional brain organization (pnas)
Leveraging recent advances in artificial intelligence and large multicohort fMRI datasets, we identify highly replicable, generalizable, and behaviorally relevant sex differences in human functional brain organization localized to the default mode network, striatum, and limbic network.
The female fingerprints of brain activity were quite different from the male fingerprints of resting brain activity, with no overlap. These findings strongly suggest that what’s going on in a woman’s brain at rest is significantly different from what’s going on in a man’s brain at rest. (psychologytoday).
Investing & Economics
India
Half the adult Indian population does not meet the World Health Organisation’s (WHO) guidelines on sufficient physical activity. The prevalence of insufficient physical activity among Indian adults has risen sharply from 22.3% in 2000 to 49.4% in 2022. This means unchecked, 60% of our population would be unfit by 2030 and at risk of disease from not doing enough physical activity. (indianexpress)
RBI: Rapid rise in derivative trading in India could pose several challenges (reuters). Also, SEBI warns of rising risks from derivative trading frenzy (reuters).
India's government bonds will gradually become a part of JPMorgan's widely tracked emerging market debt index (reuters)
Infrastructure firms are struggling to get skilled and unskilled manpower as workers are swayed by the construction boom in the Middle East and Russia, and are heading there for a higher compensation. (livemint)
Quant mutual fund front-running case: Clients pulled ₹1,398cr days after SEBI probe (livemint).
RoW
A new global money laundering network has evolved that marries two powerful financial forces — the huge stockpiles of cash being accumulated by the Mexican drugs cartels from selling drugs in the US, and the rapidly growing volumes of capital seeking an escape route from China.
“dollars don’t leave the US, pesos don’t leave Mexico, and renminbi does not leave China”, Urben explains. “Encrypted communications [allow] all of this to happen instantly”.
The new money laundering network fuelling the fentanyl crisis (ft, fortune)
Inside the Chinese-funded and staffed marijuana farms springing up across the U.S. (npr)
Amazon plans to launch discount store in bid to fend off Temu and Shein (cnbc)
In EVs, China hasn’t sought to create specific national champions. It wanted winners but didn’t want to pick them. It was more of a ‘let one hundred EV makers bloom’ approach. (bloomberg)
What A Century Does to Moviegoing and Why It Matters (matthewball)