Bufn758Q—Quantitative Investment Strategy
Name & Student ID #:_____________________ Professor Wermers
1. Briefly discuss the two momentum strategies of Numeric Investors.
First approach – Based on past changes in analysts’ estimates, where they would cluster their forecasts of company earnings, and would revise their earnings estimates incrementally instead of big jumps. This would force analysts to update their estimates and would make consensus estimates move up and down predictably over time. Numeric calculates the recent rate of change of analysts’ earnings per share estimates for a given stock. Companies with large increases in analysts’ estimates were good buys and companies with large decreases in analysts’ estimates were candidates for selling short.
Second approach – Forecasting future changes based on company announcements of quarterly earnings that were significantly different from the consensus of analysts’ expectations. After a company announced unexpectedly high or low quarterly earnings, analysts would make revisions to their estimates within the next few days. Numeric considered an earnings surprise significant if the difference between the actual and the consensus forecast of earnings per share was significant if analysts’ estimates were all clustered within three pennies per share. Numeric would look at the significance of an earnings surprise by looking at the reaction of the company’s stock price to the announcement. If it increases, it would signal that the earnings were indicative of good future outcomes for the company.
Both Estrend score and Earnings surprise score combined in a weight average to form a stock’s momentum score. Earnings tend to be most effective during the days immediately after the announcement. Estrend was most effective after some time has passed and when there was little direct news.
2. Briefly discuss the value strategy of Numeric Investors.
Fair Value model...
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