In our new 'Lit Crit' column, Kevin Coldiron reviews some of the literature of note on investment topics
Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds. William Fung and David A. Hsieh, The Review of Financial Studies, Summer 1997, Vol. 10, No. 2, pp. 275-302. http://www.oup.co.uk/revfin/
Despite the somewhat daunting title this is a very accessible article (no Greek letters and intuitive explanations of more technical elements). Although published a year ago, its content is very topical for institutional investors. An increasing number of pension funds are considering investment in alternative" strategies such as long/short and market-neutral funds. The paper describes a useful framework for understanding the styles followed by alternative strategies.
Japan's Trap and Further Notes on Japan's Liquidity Trap. Paul Krugman, Research notes available on: http://www.mit.edu/~krugman/#hard
Insightful and easy to read analyses of the economic difficulties faced by Japan. To recharge the economy, the Bank of Japan has been printing money and the government has run huge deficits. Neither approach has worked. Krugman's proposed solution that that Bank of Japan "credibly promise to be irresponsible" (to generate expectations of future inflation), is unconventional. For those raised on the idea that price stability is always good, these are challenging ideas.
International Momentum Strategies. K. Geert Rouwenhorst,
The Journal of Finance, Vol LIII, No. 1, February 1998.
Is the trend really your friend? Rouwenhurst investigates the performance of momentum strategies across 12 European countries over an almost 20-year period. He finds evidence that groups of stocks with above-average return in the recent past continue to outperform in the near-term future (around one year). This phenomenon holds across all 12 countries and does not appear to be driven by size effects. By providing evidence that the momentum effects noticed previously in the US market also exist in Europe, the paper offers comfort to investors who systematically bet on recent winners. Why should such an inefficiency continue to persist? A subject for future research.
Kevin Coldiron is head of European research, Barclays Global Investors in London"