WHAT HAPPENED TO THE QUANTS IN 2007?????

GROUP 5

Outline

Weekly Group Update Update on Table 6 (2007 paper) Update on Table 2 (2007 paper) Plans for the 2008 paper

Overview of Table 6

Table 6 Focuses on the year by year average daily

returns of the contrarian trading strategy applied to US common stocks.

The following calculations were made Average Daily Return for 1998 Return Multiplier for 1998 Required Leverage Ratio 1998

Overview of Table 6

Steps of Code Step 1: Read only the data from excel file Step 2: Filter the data for shares with

share prices less than $5 and more than $2000

Step 3: Beginning on the first trading day of January 1998, compute the returns for each stock using Rit-k., based on what was available the previous day

Step 4: Sum all Rit−k for 1998 and divide by the total number of securities.

Overview of Table 6

Steps of Code (continued) Step 5: Compute the weight for each

security Step 6: Take absolute value of all weights

and sum. Then divide N to generate the total dollar investment

Step 7: Calculate the average return

Table 6 Average Daily Return 1998 : 0.57% Average Daily Return 1998 (our

calculation) : 0.41%

Average Daily Return 1999 : 0.44% Average Daily Return 1998 (our

calculation) : 0.27%

Comparison of Results

Observation: We have more companies than the authors. For instance, in 1999 we have 7612 companies while the authors have 4736.

Goal for Next Week

Table 6 Complete the table for 2000 – 2007.

Progress on Table 2

Table 2 The goal was to calculate average daily

returns, standard deviation of daily returns, and annualized Sharpe ratio for 1995 – 2007.

This required us to first split the companies into deciles based on their market cap (table 1), then perform the above calculations within each decile.

Based on the recommendation from last week, we computed the market caps for each company using the data available for the first trading day of the year.

We used Matlab code to split the companies into deciles and calculated the average market cap and average price for each decile (results of table 1).

Progress on Table 2

Comparison of Results for 1999

Average Market Capitalization ($MM)

Decile 1

Decile 2

Decile 3

Decile 4

Decile 5

Decile 6

Decile 7

Decile 8

Decile 9

Decile 10 All

All Count

Author23 50 83 126 200 310 507 905 2086 22002 2764 4736

Team21 48 77 115 177 280 447 770 1676 17182 2079 6400

Average Price ($)Decile 1

Decile 2

Decile 3

Decile 4

Decile 5

Decile 6

Decile 7

Decile 8

Decile 9

Decile 10 All

All Count

Author10.31 11.79 12.87 14.14 16.58 21.01 24.13 31.62 36.99 54.04 23.8 4736

Team11.29 12.11 12.93 14.47 15.95 19 23.88 29.99 35.51 53.39 22.85 6400

Observation: We have more companies than the authors. This could be a problem.

Goals for Next Week

Table 2 If our method of generating the data for

table 1 is correct, we will continue to work with the deciles that we already computed.

We are already in the process of modifying our Matlab code to calculate the average daily returns, standard deviation of daily returns and annualized Sharpe ratio (Table 2) for each decile.

Goals for Next Week

Generate tables 3 , 5 , 7 using the same Matlab code Table 3: Reports the unleveraged daily

returns of the contrarian strategy for July 30, 2007 – August 31, 2007.

Table 5: Reports the daily returns of the contrarian strategy for August 1998 – September 1998

Table 7: Reports the leveraged daily returns of the contrarian strategy for July 30, 2007 – August 31, 2007 Using a leverage ratio of 8: 1 (i.e., multiply the entries in table 3 by 8/2=4)

2008 Paper

Our goal is to reproduce figure 1 & 2 in this paper.

Figure 1: Shows the cumulative daily returns for the Market, SMB, HML, Momentum Factors, and Contrarian Strategy from 1/3/07 – 12/31/07.

Figure 2: Shows the cumulative performance of 5 equity market neutral portfolios constructed from 1/3/07 – 12/31/07.

2008 Paper

Market SMB, HML, and Momentum factor data were downloaded from Kenneth French website. http://mba.tuck.dartmouth.edu/pages/fa

culty/ken.french/ CRSP was used to get daily returns

for stocks from 1/3/07 – 12/31/07. NYSE website was used to get

volume data.

Calculations for Figure 2

The following calculations will be made for Figure 2: Book to Market Factor: Earnings to Price Factor: Cashflow-to-Market Factor: Price Momentum Factor: Earnings Momentum Factor:

We will also generate the daily regressions and the 5-day moving averages.

Question??