I am excited to announce a new feature to World Beta readers – a weekly review of some of the top academic working papers in quant research.
I mentioned AlphaLetters a few weeks ago when discussing a paper that CXO had reviewed. AlphaLetters is a bi-weekly subscription newsletter focused on summarizing the deluge of quant-based working papers in investment research.
They screen over 10,000 finance papers yearly from the major finance research resources (including finance research portals, leading finance journals, university working paper websites and conference/association websites) and identify papers based on which investment professionals can build profitable strategies and improve their portfolio management. They publish summaries on what they consider to be the top 5 papers, and the topics range from new investment strategies (e.g. accrual strategy) to portfolio construction (e.g. refining portfolio optimization). For each paper they usually include the source (web address), a short summary and comments.
You can download a sample issue here, and request a free trial on their website or at Trial@AlphaLetters.com . An example from the sample issue is below.
They have graciously agreed to let us post a small sample of their research on a weekly basis. Look for the first post soon!
Category: Strategy, Consumer-supplier correlation
Title: Economic Links and Predictable Returns
Author: Lauren Cohen, Andrea Frazzini
Source: Yale University working paper
Link: http://www.econ.yale.edu/~af227/pdf/cofraz.pdf
Strategy summary:
Long stocks with high recent customer stocks’ return (customer defined as those to which this company is supplying goods/services), short otherwise.
AlphaLetters comments:
1. Why important
This paper is based on a simple, convincing idea that good/bad news on a customer company should be reflected in the stock price of its supplier company. If the stock prices of customer companies suffer, so should those of supplier companies since their businesses are fundamentally interconnected. The authors found that in reality such news are not impounded into stocks prices timely, and the reasons may be investors’ collectively limited capability to digest new information.
This is another great example that more alpha can come from data items/data sources that’s not yet widely studied.
2. Data source
The supplier-customer relationship information is from the Compustat segment files, and one needs to program to identify the cusip or ticker of customer companies. Other stock-related information is from standard Compustat/CRSP
3. Next steps
The industry profile of the long-short portfolio is yet to be studied, and it may potentially be a big issue for some investment managers to use this strategy. For example, retail industry companies would not have customer companies, so the long-short portfolio should presumably contain no or few retail stocks.
The authors claim that the abnormal excess return is not from stock momentum and industry momentum. A closer look at the correlation with other existing signals will be interesting.
