Finance is experiencing a revolution. Research showing which analytical methods work has become readily available through online databases and modern computer technology makes it possible to automate tasks that previously required large analytics departments with heavy systems and many analysts that only large banks and hedge funds could afford. Norquant wants to help investors by making these analyzes available in a user-friendly way in the form of daily updated ratings.
Effective markets
Research shows that the markets are very efficient. That is to say, there are almost no investors, analysts or traditional funds that in the long run can do better than the market by picking specific stocks or by going out and out of the market. Of course, based on pure statistics, there will always be some players who have done better than the market for a while, but it is therefore practically impossible to find in advance those who will do well in the future.
Index funds
For many investors, the solution would be to buy cheap index funds. These yield a return that is slightly lower than the indices over time. However, modern Nobel Prize-winning research shows that it is possible to get the entire market return, plus an excess return over time, by systematically choosing stocks with specific characteristics, or so-called factors.
Factors
The most important factors, which is widely agreed in research, explain over 95% of the return on equity portfolios, and these are the factors that Norquant uses for our daily analyzes and ratings of more than 7,000 shares.
“The most important factors, which is widely agreed in research, explain over 95% of the return on equity portfolios”
Momentum
The Momentum factor shows that the stocks that have done the best in the last 3 to 12 months are also most likely to do the best in the future.
Value
The value factor shows that shares with the lowest share price in relation to the book value (eg book value “price / book” or earnings “p / e”) in the long run do better than shares that are priced high.
Size
Small companies, that is, those with the lowest market value, over time do on average better than those with the highest market value.
Risk
Stocks with the highest risk, that is, those that have shown the largest fluctuations, make it on average worse than the stocks that have swung the least.
Other factors
In addition to these factors used as the standard factors in academic finance, there are many more factors and effects that also increase the likelihood of better returns. Some examples of this that Norquant uses in practice are 1 month Reversal, Seasonality and Post Earnings Announcement Operation.
The Reversal factor shows that stocks overreact in the short term. The stocks that have done the best in the past month tend to do poorly next month.
The Seasonality factor shows that stocks have an increased likelihood of doing well in the months they have done well in the past.
Post Earnings Announcement Operations (PEAD) shows that companies that respond positively to numbers often continue to rise over the next few weeks, and the opposite by a negative reaction.
New factors and methods Research has been published on hundreds of different factors and there are constantly studies of new factors and ways to combine and time these factors. An exciting area in this research where rapid changes are happening now is the use of so-called Artificial Intelligence and Machine Learning.