Camillo Lento

Investment information content in Bollinger Bands

This article tests the profitability of Bollinger Bands (BB) technical indicators. It is found that, after adjusting for transaction costs, the BB are consistently unable to earn profits in excess of the buy-and-hold trading strategy. However, the profitability is improved using a contrarians approach.

A Combined Signal Approach to Technical Analysis on the S&P 500

This paper examines the effectiveness of nine technical trading rules on the S&P 500 from January 1950 to March 2008 (14,646 daily observations). The annualized returns from each trading rule are compared to a naive buy-and-hold strategy to determine profitability. Over the 59 year period, only the moving-average cross-over (1,200) and (5,150) trading rules were able to outperform the buy-and-hold trading strategy after adjusting for transaction costs. However, excess returns were generated by employing a Combined Signal Approach (CSA) on the individual trading rules. Statistical significance was confirmed through bootstrap simulations and robustness through sub-period analysis.

Using VIX Data to Enhance Technical Trading Signals

The purpose of this article is to provide new insights into the relationship between technical analysis and implied market volatility (VIX) by calculating technical trading rules with the VIX price data, as opposed to the stock prices. Three trending trading rule signals are calculated on the prices of three major US indices and the VIX prices. The results reveal that the trading signals calculated with the VIX level provide large, statistically significant profits that are in excess of the profits from the traditional computation. Sub-period analysis reveals that technical trading rules were most (least) profitable during the period with the highest (lowest) volatility levels.

A Synthesis of Technical Analysis and Fractal Geometry - Evidence from the Dow Jones Industrial Average Components

The profitability of technical analysis has been investigated extensively, with inconsistent results. This paper seeks to develop new insights into the profitability of technical trading rules through a synthesis of fractal geometry and technical analysis. The Hurst exponent (H) emerged from fractal geometry as a means to detect long-term dependencies in a time series; the same dependencies that technical analysis should be able to identify and exploit to earn profits. Two tests of the synthesis are conducted using the thirty Dow Jones Industrial Average components. Firstly, the financial series are classified into three groups based on their H to determine if a higher (lower) H results in higher returns to trending (contrarian) trading rules. Secondly, the relationship between H and profits to technical analysis are estimated through OLS regression. Both tests suggest that the fractal nature of a time series explains a significant portion of the profits generated by technical analysis.

Combined signal approach: evidence from the Asian–Pacific equity markets

This article tests the profitability of the Combined Signal Approach (CSA) (Lento and Gradojevic, 2007) in the Asian–Pacific equity markets. The CSA is based on the premise that the consensus agreement of profitable trading signals should outperform any single signal. The results present further evidence that the CSA improves the profitability of individual trading rules and consistently earns profits in excess of the buy-and-hold trading strategy. The significance of the results is tested through a bootstrap simulation.

Promoting active learning in introductory financial accounting through the flipped classroom design

Purpose – The purpose of this paper is to describe a classroom design for introductory financial accounting that promotes active learning through a flipped classroom approach. A course learning management system, white-board voice-over video applications, an online homework manager and online tutorials pre-packaged with the course textbook were all adopted to facilitate the flipped classroom. The in-class sessions were refocussed around active learning strategies, including case analysis, concept mapping, solving comprehensive problems, mini lectures with bookends, and small group discussions. Design/methodology/approach – A quasi-experimental design, combined with student surveys, are utilized. A Wilcoxon rank-sum test is used to assess the significance of any difference in student performance between a lecture-based course (control group, n=92) and the flipped classroom course (experimental group, n=97). Student performance is measured based on final exams and overall course grades. Findings – The resul...

Does the market price the nature and extent of earnings management for firms that beat their earnings benchmark

This study investigates whether the abnormal returns at the quarterly earnings announcement date varies according to the market’s expectations of the nature (informative vs opportunistic) and extent of discretionary accruals for firms that meet or beat expectations (MBE). In doing so, this study introduces an innovative model that measures the market’s expectation of the informativeness of earnings at the earnings announcement date and assesses the impact on the abnormal return for the interaction between the nature and expected extent of earnings management. A large sample of Standard & Poor’s (S&P) 500 firms that meet or exceed their earnings expectation over the period of 1998 to 2007 is analyzed. The results reveal that the expected extent of earnings management has a positive (negative) relation with the abnormal return when earnings management is informative (opportunistic).

Improving non-parametric option pricing during the financial crisis

Financial option prices have experienced excessive volatility in response to the recent economic and financial crisis. During the crisis periods, financial markets are, in general, subject to an abrupt regime shift which imposes a significant challenge to option pricing models. In this context, swiftly evolving markets and institutions require valuation models that are capable of recognizing and adapting to such changes. Both parametric and non-parametric pricing models have shown poor forecast ability for options traded in late 1987 and 2008. Surprisingly, the pricing inaccuracy was more pronounced for non-parametric models than for parametric models. To address this problem, we propose a novel hybrid methodology - modular neural network-fuzzy learning vector quantization (MNN-FLVQ) model - that uses the Kohonen unsupervised learning and fuzzy clustering algorithms to classify the S&P 500 stock market index options, and thereby detect a regime shift. In our empirical application, the results for the 2008 financial crisis demonstrate that the MNN-FLVQ model is superior to the competing methods in regards to option pricing during regime shifts.

Filter Rules: Follow the Trend, or Take the Contrarian Approach?

This article compares a trending approach to the filter trading rule against a contrarian approach. It is found that, after adjusting for transaction costs, the contrarian approach consistently outperforms the trending approach and is able to earn returns in excess of the buy-and-hold trading strategy. The significance and the robustness of the results are supported by a bootstrap simulation and sub-period analysis, respectively.

Earnings benchmarks, earnings management and future stock performance of Chinese listed companies reporting under ASBE-IFRS

Prior literature has revealed three key earnings benchmarks: earnings level; earnings change; and analysts’ expectations. The purpose of this paper is twofold. First, the authors seek to establish which earnings benchmark induces the largest extent of earnings management. Second, the authors explore the implications of earnings management on firm future performance. Both of these purposes are investigated for Chinese listed companies during China’s IFRS/ISA reporting era.,The authors rely upon the unique regulations and incentives for Chinese listed companies in order to develop four testable hypotheses. Next, the authors employ both logistic and ordinary least squares regressions to test the hypotheses.,The results suggest that Chinese listed firms have the highest level of income increasing discretionary accruals around the earnings level benchmark, followed by the earnings change benchmark. The authors do not find any evidence of earnings management to beat analysts’ expectation. In addition, the authors find evidence that Chinese listed firms with relatively high level of earnings management and low earnings exhibit relatively weak future stock performance.,The findings are the first to document an earnings management benchmark hierarchy with respect to the extent of income increasing discretionary accruals, while simultaneously establishing a link between earnings management and firm future stock performance, for Chinese listed companies. The findings are valuable for regulators and investors by suggesting that management intervention in the reporting process during China’s IFRS/ISA reporting era may act to circumvent delisting regulations and cloud earnings signal for firms that beat certain earnings benchmarks.