Showing papers on "Market capitalization published in 2006"

Exchange Rates, Equity Prices, and Capital Flows

Abstract: We develop an equilibrium model in which exchange rates, stock prices and capital flows are jointly determined under incomplete forex risk trading. Incomplete hedging of forex risk, documented for US global mutual funds, has three important implications: 1) exchange rates are almost as volatile as equity prices when the forex liquidity supply is not infinitely price elastic; 2) higher returns in the home equity market relative to the foreign equity market are associated with a home currency depreciation; 3) net equity flows into the foreign market are positively correlated with a foreign currency appreciation. The model predictions are strongly supported at daily, monthly and quarterly frequencies for 17 OECD countries vis-a-vis the US. Moreover, correlations are strongest after 1990 and for countries with higher market capitalization relative to GDP, suggesting that the observed exchange rate dynamics are indeed related to equity market development.

Asset Pricing Models and Financial Market Anomalies

Abstract: This article develops a framework that applies to single securities to test whether asset pricing models can explain the size, value, and momentum anomalies. Stock level beta is allowed to vary with firm-level size and book-to-market as well as with macroeconomic variables. With constant beta, none of the models examined capture any of the market anomalies. When beta is allowed to vary, the size and value effects are often explained, but the explanatory power of past return remains robust. The past return effect is captured by model mispricing that varies with macroeconomic variables. The capital asset pricing model (CAPM) of Sharpe (1964) and Lintner (1965) has long been a basic tenet of finance. However, subsequent work by Basu (1977), Banz (1981), Jegadeesh (1990), and Fama and French (FF) (1992) suggests that cross-sectional differences in average returns are determined not only by the market risk, as prescribed by the CAPM, but also by firm-level market capitalization, book-to-market, and prior return. Some interpret the predictive ability of these variables as evidence against market efficiency. Support for market efficiency has been provided by Fama–French (1993, 1996) who show that, except for the momentum effect, the impact of security characteristics on expected returns can be explained within a risk-based multifactor model. However, there is still an ongoing debate about whether expected returns are explained by risk factors or by non-risk firm characteristics. The failure of the CAPM has also been attributed to its static nature, and, thus, to its incomplete description of asset prices. Indeed, both theoretical and empirical work support the use of dynamic pricing models. For example, Hansen and Richard (1987) show that even if the static CAPM fails, a dynamic version of the CAPM could be perfectly valid. In addition, Gomes, Kogan, and Zhang (henceforth GKZ) (2003) develop a

Why Has CEO Pay Increased so Much

Abstract: This paper develops a simple competitive model of CEO pay. A large part of the rise in CEO compensation in the US economy is explained without assuming managerial entrenchment, mishandling of options, or theft. CEOs have observable managerial talent and are matched to assets in a competitive assignment model. Under very general assumptions, using results from extreme value theory, the model determines the level of CEO pay across firms over time, and the pay-sensitivity relations. The model predicts a cross-sectional constant-elasticity relation between pay and firm size. It also predicts that the level of CEO compensation should increase one for one with the average market capitalization of large firms in the economy. Therefore, the six-fold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies. The model can also be used to study other large changes at the top of the income distribution, and offers a benchmark for calibratable corporate finance. We find a minuscule dispersion of CEO talent, which nonetheless justifies large pay levels and differences. The empirical evidence is broadly supportive of our model. The size of large firms explains many of the patterns in CEO pay, in the time series, across industries and across countries.

Stock Market Development and Economic Growth: The Case of Selected African Countries

Abstract: This paper studies the effect of stock market development on economic growth in 14 African countries in a dynamic panel data modelling setting. Results largely show a positive relationship between stock market development and economic growth. Further analyses, based on the level of economic development and stock market capitalization, are also conducted. The results reveal that the positive influence of stock market development on economic growth is significant for countries classified as upper middle income economies. On the basis of market capitalization groupings, stock market developments play a significant role in growth only for moderately capitalized markets. The general trend in results shows that low income African countries and less developed stock markets need to grow more and develop their markets to elicit economic gains from stock markets.

Terrorism and the Stock Market

Abstract: This paper examines the stock price impact of terrorist attacks. Using an official list of terrorism-related incidents compiled by the Counterterrorism Office of the U.S. Department of State, we identify 75 attacks between 1995 and 2002 in which publicly traded firms are targets. An event-study analysis around the day of the attacks uncovers evidence of a statistically significant negative stock price reaction of -0.83%, which corresponds to an average loss per firm per attack of $401 million in firm market capitalization. A cross sectional analysis of the abnormal returns indicates that the impact of terrorist attacks differs according to the home country of the target firm and the country in which the incident occurred. Attacks in countries that are wealthier and more democratic are associated with larger negative share price reactions. Most interestingly, we find that human capital losses, such as kidnappings of company executives, are associated with larger negative stock price reactions than physical losses, such as bombings of facilities or buildings. We discuss the implications of these findings for existing research on terrorism and for current policy debates regarding terrorism re-insurance programs.

Stock Market Development and Economic Growth: Evidence from Côte D'Ivoire

Abstract: The present paper investigates the relationship between the development of the Ivorian stock market and the country's economic performance. Stock market development indicators were identified and used to calculate the Ivorian stock market development index. A set of control variables were also identified. The empirical results suggest that gross domestic product and stock market development are cointegrated when the control variables are included in the analysis. That is, there is a long-run relationship between these variables taken together. Moreover, there is a unidirectional causality running from stock market development to economic growth.

Board Members and Company Value

Abstract: This essay surveys research about the value of individual members of boards of directors. When directors join or exit corporate boards, company stock prices respond, often in magnitudes of 1% of firm value or more. Related research shows that when a significant event impacts the stock price of one company, the effects are transmitted to other companies that share board members in common with the primary company. Share price reactions are sensitive to variables such as a director’s occupation, independence, and professional qualifications. Together, this evidence suggests that a well-functioning market for directors might already exist, making direct regulation unnecessary and possibly counter-productive.

China's Stock Market: A Marriage of Capitalism and Socialism

Abstract: The rise of China's stock market during the 1990s was nothing short of breathtaking. For more than 30 years after 1949, China was a centrally planned economy in which virtually all enterprises were state owned or collectively owned. Investments were centrally planned and funded by government fiscal grants as well as by loans from the state-owned monobank system as dictated by the government's central credit plan. In the late 1980s, as part of enterprise reforms that took place during China's gradual transition to a market economy, local governments in China started experimenting with selling shares of collectively owned enterprises directly to domestic individuals in order to raise equity capital. Curbed trading of enterprise shares soon began and was quickly followed by over-the-counter (OTC) trading in more organized but still informal exchanges. In 1991, two stock exchanges, one created by the Shanghai municipal government and the other by the Shenzhen municipal government, were launched, with the central government's formal approval. Between 1992 and 2003, the market raised a total of 796.79 billion yuan of equity capital. At the end of 2003, China's stock market had 1,287 listed enterprises and more than 70 million investor accounts (CSRC 2004). Table 1 summarizes the growth of the Chinese stock market since its inception. The market experienced tremendous growth with total (negotiable) market capitalization increasing from 353.1 (86.16) billion yuan at the end of 1993 to 4,245.77 (1,317.85) billion yuan at the end of 2003. (1) Along with the growth in market capitalization, the market also enjoyed a high level of liquidity, with trading volume increasing from 68.13 billion yuan in 1992 to 6,082.67 billion yuan in 2000. The two exchanges now boast a modem infrastructure with a computerized automated trading system, a high-speed nationwide satellite communications system backed by digital data networks, a paperless depository, and an efficient clearing and settlement system. (2) In about a decade, China built a respectable stock market from scratch. Stock market development in China took off in the early 1990s, roughly at the same time as it did in other transitional economies (Pistor, Raiser, and Gelfer 2000). But China's stock market is performing better than the markets of most other transitional economies, when comparisons are made using standard measures of stock market performance, including the number of listed firms, market capitalization, liquidity, and fundraising capacity (Pistor and Xu 2005: 191). (3) By the end of 2000, while many stock markets in transitional economies were plagued by low market capitalization and low liquidity, China's total stock market capitalization had swelled to more than US$507 billion. That made China's stock market capitalization the second largest in Asia, after Japan's. China's stock market had three unique features that made its rapid development unique and interesting. First, the government used it largely as a fundraising vehicle for funding state-owned enterprises (SOEs). (4) As a result, most listed enterprises were state controlled, with only one-third of the enterprises' equity capital sold to private shareholders during initial public offerings (IPOs). The other two-thirds of the equity capital raised was held either by state asset management agencies or by SOEs themselves. In an effort to prevent the loss of state control over listed enterprises, the government forbade trading of state-owned shares on China's two exchanges, and the shares could be transferred only after approval from state asset management authorities had been obtained, which made these shares effectively nontradable. The transfer of state-owned shares to private shareholders was rare in the 1990s. At the end of the 1990s, more than 90 percent of the enterprises listed on China's two stock exchanges remained state controlled, with state-owned entities as their controlling shareholders. …

The determinants of voluntary disclosures in malaysia: the case of internet financial reporting

Abstract: Previous research suggests that there is a rather heterogeneous use of the Internet as an instrument for investor relations strategies and corporate reporting among Malaysian firms [i.e. types of informati on disclosed (Ruhaya, Nafisah & Normahiran, 2000; Noor & Mohamad, 2000), qualitative nature of Internet reporting (Nik & Amdan, 2001) and benefits of reporting on the websites (Salleh, Nariah, Mazlin & Shireejit, 2000). This study has investigated whether the differences in Internet Financial Reporting (IFR) policies might be due to a firm’s specific characteristics. Given there is no mandatory requirement for IFR disclosure, the study adopts the traditional voluntary disclosure variables in an attempt to e xplain such practices by Malaysian main board listed firms in Kuala Lumpur Stock Exchange (KLSE). A total of 100 firms were selected based on their market capitalization for the year 2001. All selected firms were analyzed via their web sites or linkage to KLSE web site if present and traceable. The regression results show that firm size, leverage, growth, foreign share ownership and shareholders concentration were directly attributed to the adoption of IFR by the listed firms. In conclusion, a bigger firm, a more leveraged firm, a high growth firm, a firm with high foreign share ownership and a firm with highly concentrated shareholders has a higher tendency to adopt IFR.

The Day-of-the-Week Effect: New Evidence from the Chinese Stock Market

Abstract: We study the day-of-the-week effect for A shares and B shares traded on the Shanghai and Shenzhen stock exchanges in China. We find that average Monday returns from A-share indexes are significantly negative during the third and fourth weeks, as in the U.S. market. However, average Tuesday returns on most of the A-share and B-share indexes are negative during the second week of the month. Even after controlling for autocorrelation and the spillover impact from regional and international markets, the day-of-the-week effect in the Chinese market remains significant.

Financial globalization, governance, and the evolution of the home bias

Abstract: Despite the disappearance of formal barriers to international investment across countries, we find that the average home bias of U.S. investors towards the 46 countries with the largest equity markets did not fall from 1994 to 2004 when countries are equally weighted but fell when countries are weighted by market capitalization. This evidence is inconsistent with portfolio theory explanations of the home bias, but is consistent with what we call the optimal insider ownership theory of the home bias. Since foreign investors can only own shares not held by insiders, there will be a large home bias towards countries in which insiders own large stakes in corporations. Consequently, for the home bias to fall substantially, insider ownership has to fall in countries where it is high. Poor governance leads to concentrated insider ownership, so that governance improvements make it possible for corporate ownership to become more dispersed and for the home bias to fall. We find that the home bias of U.S. investors decreased the most towards countries in which the ownership by corporate insiders is low and countries in which ownership by corporate insiders fell. Using firm-level data for Korea, we find that portfolio equity investment by foreign investors in Korean firms is inversely related to insider ownership and that the firms that attract the most foreign portfolio equity investment are large firms with dispersed ownership.

The Information Content of Stock Split Announcements: Do Options Matter?

Abstract: We provide a new test of the informational efficiency of trading in stock options in the context of stock split announcements. Stock split announcements are generally associated with positive abnormal returns. After controlling for market returns, market capitalization, book-to-market ratio, and trading volume, we find that the abnormal returns around stock split announcements are significantly lower for NYSE/Amex stocks that are optioned than for stocks that are not optioned. This is consistent with the hypothesis that the prices of optioned stocks embody more information, diminishing the impact of the stock split announcement. This provides new evidence of the beneficial effects of options on their underlying stocks.

Pricing efficiency of exchange traded funds in Taiwan

Abstract: The first and to date the only Taiwanese exchange traded fund (ETF), the Taiwan Top 50 Tracker Fund (TTT), was introduced in June 2003 and used the Taiwan 50 Index as its benchmark asset, which includes the top 50 listed companies by total market capitalisation. This study introduces the characteristics and underlying index of the TTT. Empirical results indicate that the TTT is pricing efficient, and trading of the TTT produces almost identical returns to the Taiwan stock market. As the MSCI Emerging Markets Index covers Taiwan, international capital includes the Taiwan market in their global asset allocation. The TTT provides a convenient instrument replicating the performance of Taiwan stock market.

Analyst Forecast Dispersion and Future Stock Return Volatility

Abstract: In this paper, we examine the relationship between analysts' forecast dispersion and future stock return volatility using monthly data for a cross section of 160 US firms from 1981 to 1996. We find that there is a strong and positive relationship between analysts' forecast dispersion and future return volatility. The dispersion measure has incremental information content even after accounting for market volatility. These results are robust across sub-sample periods and sub-samples based on based on number of analysts following a firm, forecast dispersion and market capitalization. There is also a strong seasonal relationship between the dispersion measure and future volatility. The importance of dispersion on future return volatility is high in January and the first few months of the year, and declines thereafter. Such information content of analysts' earnings forecast dispersion is of great importance for active portfolio management, option pricing and arbitrage trading strategies.

Short-term Contrarian Strategies in the London Stock Exchange: Are They Profitable? Which Factors Affect Them?

Abstract: This paper provides evidence on short-term contrarian profits and their sources for the London Stock Exchange. Profits are decomposed to sources due to factors derived from the Fama and French (1996) three-factor model. For the empirical testing, size-sorted sub-samples are used, and adjustments for infrequent trading and bid-ask biases are also made. Results indicate that UK short-term contrarian strategies are profitable and more pronounced for extreme market capitalization stocks. These profits persist even when the sample is adjusted for market frictions, risk, seasonality, and irrespective of whether equally-weighted or value-weighted portfolios are employed. The most important factor that drives contrarian profits appears to be investor overreaction to firm-specific information.

Warnings from the Enron Message Board

Abstract: As Enron collapsed in the Summer and Fall of 2001, most Wall Street analysts maintained either buy or strong buy recommendations for Enron common stock. The largest bankruptcy in U.S. history was often described as coming without warning, as $60 billion in market capitalization vanished. We searched postings on the Yahoo! Enron Message Board between 1997 and 2001 for warnings of a crash to come. We found a compelling four-year history of Enron as told by apparent insiders through anonymous posts. Excerpts of 129 posts from Enron's Yahoo! message board, describing a disturbing corporate culture at Enron, include repeated warnings to investors to get out while they can.

Public Enforcement of Securities Laws: Preliminary Evidence

Abstract: The consequence of economic actors ignoring their legal obligations, such as laws that protect outside investors in firms, is a recurring issue. Recent work in finance examines the relative importance for investor protection of private enforcement on the one hand―via disclosure and lawsuits among contracting parties―and public enforcement on the other―via financial, regulatory and even criminal rules and penalties. Much legal scholarship has seen private enforcement of securities laws as poorly designed, with firms—and hence wronged shareholders—-often bearing the cost of insiders’ errors and disclosure failure. To better investigate the importance of public and private enforcement, we here develop an enforcement variable based on the securities regulators’ staffing levels and budgets. We then examine financial outcomes around the world―such as stock market capitalization, trading volumes and number of domestic firms and IPOs―in light of these measures of public enforcement and find that more intense public enforcement regularly correlates with strong financial outcomes. Moreover, in horse races between our measures of public enforcement and the usual measures of private enforcement, public enforcement is typically at least as important as private enforcement in explaining important financial market outcomes around the world. Hence, we caution against using the current explanations that rely on the strength of private enforcement to the exclusion of public enforcement in making public policy around the world. We conclude by speculating why public enforcement may well prove to be as, or more, important than private enforcement in explaining world-wide financial outcomes. Public Enforcement of Securities Law: Preliminary Evidence Howell E. Jackson & Mark J. Roe Introduction 1 I. Public and Private Enforcement? 4 A. Private Remedies 4 B. Public Enforcement 6 C. Measuring Public Enforcement: Staffing and Budgets 7 II. Results 12 A. Public Enforcement and Market Size 12 B Prior Public Enforcement Measures 14 C Limitations to Prior Public Enforcement Indices 15 D. Staffing and Budgets vs. Prior Public Enforcement Measures 16 E. Financial Variables Associated with Dispersed Ownership 18 F. Limits to Both Private and Public Enforcement: Intermediate Financial Variables 21 G. The Direction of Causality? 22 H. Legal Origin and Regulatory Intensity 23 III. Discussion 25 A. Channels from Public Enforcement to Financial Outcomes 25 B. The Potential Importance of Public Enforcement 26 C. Developing Better Measures of Public Enforcement 27 D. Public Enforcement and Private Enforcement 28 Conclusion 28 Figure 1: Securities Regulators per Million of Population 32 Figure 2: Securities Budgets per Billion of U.S. Dollars of GDP 32 Figure 3: Civil versus Common Law Staffing 33 Figure 4: Civil versus Common Law Budgets 33 Table 1: Securities Enforcement Variables 10 Table 2: Summary Statistics on Public Enforcement Variables 11 Table 3: Pair-wise Correlation Matrix for Key Variables 12 Table 4: New Enforcement Variables and the Size of Capital Markets 13 Table 5: Reformulation of LLS Regressions on Public Enforcement 17 Table 6: Reformulation of Other LLS Regressions 18 Table 9: Regressions with LLS Dependent Variables Associated with Private Control 20 Table 10: Regressions with New World Bank Indices as Dependent Variables 21 Table 7: Public Enforcement and Common Law Origins 23 Table 8: Nested Regressions: Dependent Variable as 2004 Market Capitalization to GDP 25 Public Enforcement of Securities Laws: Preliminary Evidence Howell E. Jackson & Mark J. Roe

Why Has CEO Pay Increased So Much

Abstract: This paper develops a simple competitive model of CEO pay. It appears to explain much of the rise in CEO compensation in the US economy, without assuming managerial entrenchment, mishandling of options, or theft. CEOs have observable managerial talent and are matched to assets in a competitive assignment model. The marginal impact of a CEO's talent is assumed to increase with the value of the assets under his control. Under very general assumptions, using results from extreme value theory, the model determines the level of CEO pay across firms and over time, and the pay-sensitivity relations. We predict that the level of CEO compensation should increase one for one with the average market capitalization of large firms in the economy. Therefore, the eight-fold increase of CEO pay between 1980 and 2000 can be fully attributed to the increase in market capitalization of large US companies. The model predicts the cross-section Cobb-Douglass relation between pay and firm size and can be used to study other large changes at the top of the income distribution, and offers a benchmark for calibratable corporate finance

International Diversification with Large- and Small-Cap Stocks

Abstract: To the extent that investors diversify internationally, large-cap stocks receive the dominant share of fund allocation. Increasingly, however, returns to large-cap stocks or stock market indices tend to co-move, mitigating the benefits from international diversification. In contrast, stocks of locally oriented, small companies do not exhibit the same tendency. In this paper, we assess the potential of small-cap stocks as a vehicle for international portfolio diversification during the period 1980-1999. We show that the extra gains from the augmented diversification with small-cap funds are statistically significant for both in-sample and out-of-sample periods and remain robust to the consideration of market frictions.

The gender composition of boards after an IPO

Abstract: Purpose – The purpose of this paper is to empirically analyse the change in the gender composition of the boards of large Australian companies, after listingDesign/methodology/approach – This study investigates the gender composition of the boards of large Australian companies at the time of the initial public offering (IPO) and subsequently as these companies mature into established public companies It also investigates industry influences and organizational size influences on the board composition at the time of the IPO and subsequentlyFindings – No significant change is found in the proportion of male and female directors holding directorships at the time of the IPO and some five to eight years later when the company is recorded as a top 500 company (by market capitalization) on the Australian lists This implies that the capital market is generally satisfied by the gender composition of boards from the time of the IPOOriginality/value – This paper follows extends on previous work which provides ev

Interactive user interface for displaying information related to publicly traded securities

Abstract: An interactive user interface for displaying information about a plurality of publicly traded securities (e.g., stocks) at one time is disclosed. According to various embodiments, the interface may comprise (i) a two-dimensional chart comprising an x-axis and a y-axis, (ii) a first field for specifying a first metric related to the publicly traded securities for the x-axis, and (iii) a second field for specifying a second metric related to the publicly traded securities for the y-axis. An icon (e.g., a circle or a bubble) may be positioned on the chart at the x and y coordinates for each of the publicly traded companies based on the selected x-axis and y-axis metrics. In addition, the size of the icons may be representative of a third metric related to the publicly traded securities such as, for example, the market capitalization of the companies that issued the securities. Also, an interior feature of the icons (e.g., the color or hatching) may be representative of a fourth metric related to the publicly traded securities, such as the rating for the securities.

Fluxo de Capital Estrangeiro e Desempenho do Ibovespa

Abstract: In this paper it is discussed and empirically tested the influence of foreign investors flow of resources on the Ibovespa index of the Sao Paulo Stock Exchange from January 1995 to july 2005. Other important variables are considered in the test, including a stock index of the United States, internal and external interest rates, the markets liquidity, exchange rate and country risk. The foreign influence is measured by the difference between the purchases and sells of foreign investors in the market of their participation in the Brazlian market capitalization. The effect of the inflow of resources was not detected straightly, but through an increase of the liquidity, what is compatible with the hypothesis that the foreign investors represent an increase of the base of stockholders of the domestic companies. The inflow of resources, on the other hand, anticipates the behavior of index. Country risk, exchange rate and liquidity of the market were important to explain variations of the Ibovespa.

The Interplay Between the Thai And Several Other International Stock Markets

Abstract: The paper analyses the effect of various international stock market price indices and some relevant macroeconomic variables on the Thai stock market price index, using a GARCH-M model and monthly data from January 1988 to December 2004. It is found, inter alia, that (a) changes in stock market returns in Singapore, Malaysia and Indonesia in the pre-1997 Asian crisis, and changes in Singapore, the Philippines and Korea in the post-1997 era instantaneously influenced returns in the Thai stock market; (b) changes in the price of crude oil negatively impacted on the Thai stock market only in the pre-Asian crisis period; (c) volatility clustering (i.e. ARCH and GARCH effects) as well as a GARCH-M model were statistically significant only in the pre-1997 era; and (d) stock markets outside the region had no significant immediate impact on monthly aggregate returns in the Thai stock market.

Active investment manager portfolios and preferences for stock characteristics

Abstract: The present study investigates the stock characteristic preferences of institutional Australian equity managers. In aggregate we find that active managers exhibit preferences for stocks exhibiting high-price variance, large market capitalization, low transaction costs, value-oriented characteristics, greater levels of analyst coverage and lower variability in analyst earnings forecasts. We observe stronger preferences for higher volatility, value stocks and wider analyst coverage among smaller stocks. We also find that smaller investment managers prefer securities with higher market capitalization and analyst coverage (including low variation in the forecasts of these analysts). We also document that industry effects play an important role in portfolio construction.

Stock market liberalisations in the South Asian region

Abstract: This study attempts to conduct an investigation of the characteristics of the South Asian stock markets including the effects of the opening of these markets. These markets were liberalised in early 1990s as a part of the economic reforms started in the South Asian region about two decades ago. The analysis is conducted for four countries in the South Asia, Bangladesh, India, Pakistan, and Sri Lanka, covering the period from 1980 to 2003. The analysis is done with the help of tables, regression analysis, Event Window analysis, and Error Correction Functions. The analysis indicates significant development in stock markets indicators such as market capitalisation and trading value in the region following liberalisation measures. However, the development in stock markets in South Asia does not seem to influence the real sector and the stock markets are still playing a minor role in their respective economies. The integration analysis suggests that the markets in South Asia are integrated with major markets, that is, of USA, UK, and Japan. There is clear evidence that the markets in India and Pakistan are affected by the major as well as the regional markets in the long run. In the short run, however, the markets appear to be independent of one another

Picking Stocks with Emergent Self-organizing Value maps

Abstract: Picking stocks that are suitable for portfolio management is a complex task. The most common criteria are the price earnings ratio, the price book ratio, price sales ratio, the price cash flow ratio, and market capitalization. Another approach called CAN SLIM relies on earnings growth (quarterly and annual earnings growth) of companies; the relative strength of the stock prices; the institutional sponsorship; the debt capital ratio, the shares outstanding, market capitalization, and the market direction. The main issue with the traditional approaches is the proper weighting of criteria to obtain a list of stocks that are suitable for portfolio management. This paper proposes an improved method for stock picking using the CAN SLIM system in conjunction with emergent self-organizing value maps to assemble a portfolio of stocks that outperforms a relevant benchmark. The neural network approach discussed in this paper finds structures in sets of stocks that fulfill the CAN SLIM criteria. These structures are visualized using UMatrix and used to construct portfolios. Portfolios constructed in this way perform better the more the CAN SLIM criteria were fulfilled. The best of the portfolios constructed by emergent self-organizing value maps outperformed the S&P500 Index by about 12% based on two months of out-of-sample testing.

Estimating Preferences Toward Risk: Evidence from Dow Jones

Abstract: What do investor utility functions look like? We show how returns on a stock and prices of call options written on that stock can be used jointly to recover utility of wealth function of the marginal investor in the stock We study whether non-standard preferences have an impact sufficiently large that it is present in the stock prices Using options on the stocks in the Dow Jones Index, we show support for non-concave utility functions with reference points proposed by Kahneman and Tversky, Friedman and Savage, and Markowitz The evidence for Kahneman and Tversky Prospect Theory value function, and Friedman and Savage and Markowitz utility functions is much stronger than the support for the standard concave utility function Together the utility functions with convex regions and with reference points account for 80% of the market capitalization of the sample stocks This is the first study to report findings of these utility functions using the prices of individual stocks (nonexperimental data) We also investigate a closely related question of whether different assets reflect different risk preferences We find evidence showing that different stocks reflect different types of investor utility function