This paper proposes a new method of forming basis assets. We use return correlations to sort securities into portfolios and compare the inferences drawn from this set of basis assets with those drawn from other benchmark portfolios. The proposed set of portfolios appears capable of generating...

We assess the profitability of momentum strategies using a stochastic discount factor approach. In unconditional tests, approximately half of the strategies' profitability is explained. In conditional tests we see a further slight decline in profits. We argue that the risk of these strategies...

In this paper, we assess the profitability of momentum trading strategies using a stochastic discount factor approach. We estimate the stochastic discount factor from a set of basis assets, assuming that the law of one price (or, alternatively, no-arbitrage) holds, and simultaneously assess the...

The bid-ask spread is an important element of investors' transactions costs. Theoretical papers decompose the spread into adverse selection, inventory cost, and order processing cost components. The order processing cost component compensates the stock exchange specialist for providing immediacy...

In recent years, several researchers have argued that the stock market consistently overreacts to new information, which, in turn, results in price reversals. B. N. Lehmann (1990) and others showed that a contrarian can make substantial profits in the short run by simply buying losers and...

We examine how analysts respond to public information when setting stock recommendations. We model the determinants of analysts' recommendation changes following large stock price movements. We find evidence of an asymmetry following large positive and negative returns. Following large stock...