Through the Lens of Investment Anomalies: Profitable Investment Strategies Throughout Business Cycles
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Publisher:The Ohio State University
Series/Report no.:The Ohio State University. Department of Finance Honors Theses; 2017
Market efficiency is a topic that has been thoroughly questioned and examined by various economists and market strategists. Market efficiency has been challenged, as anomaly research has exposed its limitations within the investment process. Economists and researchers continue to study the puzzling nature of asset pricing anomalies and examine various factors’ predictive power in understanding where these anomalies come from and how they impact securities’ performance over time. The purpose of this study is to further examine asset price anomalies, the development of investment strategies, and the success of each investment strategy throughout economic upward and downward trends. The methodology includes: identifying anomaly factors that have proven their ability to generate excess returns above the market, creating investment portfolios that mimic each investment strategy, and analyzing the relationship between the anomaly signal and the firm’s total return over time, specifically throughout varying stages of a business cycle. The anomaly variables tested include: momentum, value-versus-growth, investment, profitability, intangibles, and trading frictions, all of which were examined across three definitive time periods: pre-financial crisis (2000-2006), the financial crisis (2007-2008), and post financial crisis (2009-2013). The results of the analysis indicate that there is statistically significant evidence that there are factors linked to investment strategies that produce abnormal returns specific to each sample period. In other words, based upon the research provided in this study, conclusions can be made about the relationship between economic conditions and effectiveness of investment strategies and about market efficiency itself. The understanding of anomalies and those factors that influence them are important to investors, as they seek to generate positive returns on their assets. More importantly, the ability to comprehend how markets function, anticipate market outcomes, and formulate fruitful investment strategies is powerful for not only investors, but also for the economic systems across the globe.
Undergraduate Research Thesis in Business: 3rd Place
Academic Major: Finance