I was asked recently if I could forward the five books or research papers that had the most influence on my style. Unfortunately, it’s really difficult to say that “these five research papers have had the most influence on me as a trader” because I tend to take small ideas or nuggets from a variety of sources and attempt to integrate them into a whole unit. Likewise, I have read some decent books, but most are just gawdawful trash - especially the most popular ones! (sort of like the most popular investment blogs, eh?)

But, if I were asked to select five research papers that provide a good introduction to the techniques and attitudes I use in my trading, from the papers that I have on my laptop (and am allowed to share), then these five would make the list. No particular sort order here.

I always thought it was kinda cheesy to mirror somebody else’s PDFs on your own website (T-Lo, you listening?), and Google is your friend, just keyword search advanced and file type “PDF,” you’ll find the papers … don’t expect everything on a silver platter …

Clifford S. Asness - The Interaction of Value and Momentum Strategies

Both value and momentum strategies are effective, although value measures and momentum measures are negatively correlated. Thus, pursuing a value strategy entails, to some extent, buying firms with poor momentum. Equivalently, buying firms with good momentum entails, to some extent, pursuing a poor-value strategy. In most cases, holding momentum constant leads to a more effective value strategy. That is, the value strategy works best when not forced to short the effective momentum strategy. Similarly, holding value constant leads to a generally superior momentum strategy.

J.P. Morgan - Exploiting Cross-Market Momentum
Subtitled “Investment Strategies: No. 14,” it’s sort of a sales flier for one of their products, but it’s good information, nonetheless.

The strategy is based on an allocation decision within a diversified set of asset classes. It is thus a tactical asset allocation rule based on momentum.

Andrew W. Lo and Pankaj N. Patel - 130/30: The New Long-Only
I used this paper to develop a retail trading system, based on the “Credit Suissé Alpha Factors” described in it. See my TRPITS, reloaded post.

Joseph D. Piotroski - Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers

This paper examines whether a simple accounting-based fundamental analysis strategy, when applied to a broad portfolio of high book-to-market firms, can shift the distribution of returns earned by an investor. I show that the mean return earned by a high book-to-market investor can be increased by at least 7½ percent annually through the selection of financially strong high BM firms while the entire distribution of realized returns is shifted to the right. In addition, an investment strategy that buys expected winners and shorts expected losers generates a 23 percent annual return between 1976 and 1996 and the strategy appears to be robust across time and to controls for alternative investment strategies.

Frank Sortino, Mark. Kordonsky and Hal Forsey - Evidence-Based Portfolio Management
This is a working paper, not intended for publication, but it is out there on the internets.

After reading Dr. Sharpe’s new text book [2006], we find he still makes all the old assumptions of a linear relationship between a risk free asset and a market portfolio under equilibrium conditions. Alpha and beta live on dressed in the state preference framework developed by Kenneth Arrow [1953]. Yes, that was about the same time Markowitz developed the mean-variance model. In this pristine world rational investors make choices based on their preferences and tolerance for risk. As Pfeffer might say, “this is a shiny new cure?” Sharpe replaces Markowitz’s view of uncertainty (a bell shaped curve) with a discrete distribution, making the heroic assumptions that one knows each state of the world that could occur and the probability of its occurrence. We believe the advances proposed by Aitchinson and Brown at Cambridge University offer a more realistic way to describe uncertainty.

While we join those who laud Rudd and Sharpe and welcome their new approaches, we would ask, “Where is the evidence?” Until there is some evidence that these new theories work, we recommend revisiting Fishburn’s approach: find out what the investor needs to accomplish his or her goal and measure risk and reward relative to the target return that will accomplish the goal. We have published a considerable amount of evidence for the past two decades showing that this model works better than any alternative.

Here’s a lagniappe for you:

Professor Mark Soliman - Trading Strategies and Fundamental Analysis
If you can find this guy on the webs, you’ll have found the syllabus for Stanford University’s Accounting 508 class from the Graduate School of Business, pre-term 2004. It’s not really a paper, but the syllabus references thirty-four different articles and research papers, all detailing valuable “accounting anomalies” that can be used to filter fundamentally strong stocks for trading or investment.

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