Origins of trading alpha

(Last Updated On: August 25, 2016)

Origins of trading alpha

Abstract from this research paper:

We argue that an important contributing factor into market inefficiency is the lack of a robust mechanism for the stock price to rise if a company has good earnings, e.g., via buybacks/dividends. Instead, the stock price is prone to volatility due to rather random perception/interpretation of earnings announcements (among other data) by market participants. We present empirical evidence indicating that dividend paying stocks on average are less volatile, even factoring out market cap. We further ponder possible ways of increasing market efficiency via 1) instituting such a mechanism, 2) a taxation scheme that would depend on holding periods, and 3) a universal crossing engine/exchange for mutual and pension funds (and similar long holding horizon vehicles) with no dark pools, 100% transparency, and no advantage for timing orders.

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