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Recent Research: Highlights from July 2013

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"Framing Lifetime Income"
The Journal of Retirement (Summer 2013)
Jeffrey R. Brown, Jeffrey R. Kling, Sendhil Mullainathan, and Marian V. Wrobel

We provide evidence that individuals optimize imperfectly when making annuity decisions, and that this result is not driven by loss aversion. Annuities are more attractive when presented in a consumption frame rather than in an investment frame. Highlighting the purchase price in the consumption frame does not alter this result. The level of habitual spending has little interaction with preferences for annuities in the consumption frame. In an investment frame, consumers prefer annuities with principal guarantees; this result is similar for guarantee amounts below, at, and above the purchase price. We discuss implications for the retirement services industry and its regulators.

"Liquidity Risk and Momentum Spillover from Stocks to Bonds"
The Journal of Fixed Income (Summer 2013)
Hai Lin, Junbo Wang, and Chunchi Wu

This article investigates the role of liquidity risk in the momentum spillover from stocks to bonds by using a large data sample. The evidence strongly suggests that liquidity risk is an important determinant of momentum spillover returns. This finding is robust to controls for effects of trading liquidity, credit risk, behavioral factors, and bond characteristics. On average, liquidity risk explains about 40% of momentum spillover profits for investment-grade bonds and 55% for speculative-grade bonds over the 16-year sample period. A significant portion of momentum spillover returns can be viewed as compensation for investors’ exposure to liquidity risk when engaging in trading this anomaly.

"The Performance of Simple Dynamic Commodity Strategies"
The Journal of Alternative Investments (Summer 2013)
Devraj Basu and Joëlle Miffre

The authors construct real-time trading strategies based on the dynamic theories of Cootner [1960], Stoll [1979], and Hirshleifer [1990]. These strategies are constructed using the aggregate positions of hedgers. For a sample of 10 liquid commodities they find broad support for these dynamic theories. The active long flat strategies outperform buy and hold strategies, even during a commodity bull market, suggesting that these actively managed strategies are better investments than passive indexes. The results illustrate the importance of being able to capture “phases of backwardation” even during a commodity bull market.

"Do Opening Stock Prices Contain Information Content?"
The Journal of Trading (Summer 2013)
Harlan Platt and Licheng Cai

Some traders employ strategies based on taking advantage of opening price gaps. Using a large data set of company-specific trading days, we explore the question of whether, after opening with a price gap, securities tend to continue to trade in the direction of the gap or whether they trade in the reverse direction. We also compare the opening price level following a price gap to the intraday high and low price.

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