Here is the latest installment on recentstudiespublished by finance professors. This weeks entries find: stocks in indexes tend to move together, investors in local companies dont outperform, and Google searches may not help investors. There are also two papers on mutual-fund performance, one from leading financial scholars Eugene Fama and Kenneth French, and the other from two Harvard University researchers. The previous (kick-off) installment in this series was on September 30.
1. Style Related Comovement: Fundamentals or Labels?by Brian H. Boyer, offers evidence that stocks included in indexes move together simply because of their membership in the index, rather than their fundamentals.
2. Individual Investors and Local Bias, by Mark Seasholes and Ning Zhu, finds that investors holding stocks in companies headquartered near their place of residence do not display any informational advantages on those picks; worse, their purchases of local stocks underperform their sales of local stocks.
3. Searching for Liquidity: Public Interest and the Liquidity of Stocks, by Matthias Bank, Martin Larch and Georg Peter, looks at investors who query Google for information on a company, and infer the average naive Internet search [company name only] provides investors with no new information that isnt already discounted in the market.
4. Luck versus Skill in the Cross Section of Mutual Fund Returns, by Eugene F. Fama and Kenneth R. French, reports on simulations that suggest few mutual funds outperform sufficiently to cover costs — but if costs are backed out, there is evidence of inferior and superior performance in the extreme tails of the cross-section of mutual-fund estimates.
5. Differentiating Skill and Luck in Financial Markets with Streaks, by Andrew Mauboussin and Samuel Arbesman, discovers that streaks of outperformance (S&P 500 as benchmark) within a data set of 5,500 mutual funds are more prevalent than the number of streaks generated by a null model, indicating differential skill among investors.
Next Post in Series: What the scholars are saying (III)