June 2009

Picking Up Pennies for Profit
There’s more to “buy low, sell high” than just buying low and selling high. Twitchy markets spew endless, jittery streams of temporary highs and retreating lows. Which low is the “buy” low? When is the “sell” high? A sellers’ high today may be humdrum in a week. Noontime buyers’ rock-bottom low might not impress an hour later. Given these fluctuations in stock prices and the recalibration of highs and lows, traders probe the peaks and valleys in search of patterns and values. New research by Robert Korajczyk (Professor of Finance at the Kellogg School of Management), Kellogg alumnus Ronnie Sadka (Professor of Finance at Boston College), and Steven L. Heston (Professor of Finance at the University of Maryland) reveals surprising patterns that can help predict daily peaks in stock price. This work was deemed so influential in the field of quantitative investment that it was awarded the 2009 Crowell Prize by PanAgora Asset Management.

Steven L. Heston

Robert Korajczyk

Ronnie Sadka

September 2007

Pricing a Global Measure of Liquidity Risk
Most of us are not willing to bear risk without compensation. For a long time, return volatility has been almost synonymous with financial risk, but now we know that this not the only consideration. For instance, when we have an asset in our portfolio, no matter how volatile it is, we would like to be in a position to sell it at any time without incurring high penalties. We prefer assets for which we will always be able to get our money back if we suddenly need it or if the market experiences a downturn. Thus, it makes good sense to think that investors will require a relatively higher expected return if the asset they are holding is illiquid, i.e. difficult to trade.

Robert Korajczyk

Ronnie Sadka

April 2007

Cashed Out
Korajczyk and Sadka, a professor at the University of Washington, looked at how trading costs affect the profitability of investment strategies that rely on these patterns of momentum. They focused in particular on how large a momentum-based fund would have to be before the cost of trading drives profits to zero. Their findings were published in a June 2004 article in the Journal of Finance.

Robert Korajczyk

Ronnie Sadka