Turnkey Research Digest--02/16/2012

Alpha Research

Real Estate Prices During the Roaring Twenties and the Great Depression
  • Blowout!
Using new data on market-based transactions we construct real estate price indexes for Manhattanbetween 1920 and 1939. During the 1920s prices reached their highest level in thethird quarter of 1929 before falling by 67 percent at the end of 1932 and hovering around thatvalue for most of the Great Depression. The value of high-end properties strongly co-movedwith the stock market between 1929 and 1932. A typical property bought in 1920 would haveretained only 56 percent of its initial value in nominal terms two decades later. An investmentin the stock market index (including dividends) would have outperformed an investment in atypical property (including net rental income), by a factor of 5.2 over our time period.

Why Fears about Municipal Credit are Overblown
  • Very interesting piece on municipal bond market--they were right, or have been thus far...
Geographic Momentum
  • Related to conglomerate spreads and economic links spreads. Very promising idea.
Do investors pay attention to foreign market conditions when they evaluate multinational corporations? Using geographic segment disclosures by U.S. multinational companies, I find that stock prices do not promptly incorporate information regarding changes in foreign market conditions, which in turn generates return predictability in the cross-section of firms with foreign operations. A simple trading strategy that exploits geographic information yields risk adjusted return of 139 basis points per month, or 16.68% per year. The predictability cannot be explained by firm's own momentum, industry momentum, post-earnings-announcement drift, or exposure to emerging market risk. Consistent with the investors' inattention hypothesis, I further document that firms with less analyst coverages, firms with lower institutional holdings, small and medium sized firms, and firms with more complex foreign sales compositions, exhibit stronger return predictability. This paper is the first to document the predictable link between foreign country level index returns and firm level stock returns.

Volkswagen and Porsche: One Family, Two Car Companies, & a Battle for Corporate Control
  • The greatest short squeeze in recent memory!
This case provides background material about the takeover attempt of one of the world’s largest automobile manufacturers, Volkswagen, by the small sports car manufacturer, Porsche. It covers the period from spring 2005 through August 2009. This drama ends in a complete reversal, the acquisition of Porsche by Volkswagen. The case includes such topics as options, disclosure regulations, short sales, corporate governance, corporate strategies, and family owned firms. It exemplifies the impact of an economic culture, especially that of stakeholder versus shareholder economies. This case material is unique since it contrasts these two perspectives, thus illustrating that there are multiple points of view behind apparent 'facts.'

Exploiting Option Information in the Equity Market
  • Seems to be a flurry of research these days related to option market prices and their influence on equity market prices. This is just one in the series.
Public option market information contains exploitable information for equity investors for an investable universe of liquid large-cap stocks. Strategies based on several option measures predict returns and alphas on the underlying stock. Transaction costs are an important factor given the high turnover of these strategies, but significant net alphas can be obtained when using a simple transaction cost reducing approach. These findings suggest that information diffuses from the option market into the underlying stock market.