Journal of Investment Strategies

Ali Hirsa
Professor, Columbia University & Managing Partner, Sauma Capital LLC

Welcome to the fourth issue of the fourteenth volume of The Journal of Investment Strategies, which contains three research papers.

In the first paper in this issue, “Stock market performance and gross domestic product innovations”, Marwan Alzoubi examines the impact of real (ie, inflationadjusted) economic activity on stock prices on the Amman Stock Exchange in 1993– 2023 using the autoregressive distributed lag (ARDL) bounds test. Gross domestic product (GDP) has a profound effect on stock prices: a 1% increase in real GDP leads to an almost 4% increase in stock prices. This result provides a strong indication that stock prices follow rather than lead GDP, consistent with a large body of empirical evidence from developed countries. Interest rate and inflation rate effects on stock prices are negative and significant in both the short and long run, while domestic credit is not significant in the long run. The interest rate has the strongest impact on stock prices: an increase of 1% leads to a decrease in stock prices of more than 5%. The independent variables appear to jointly cause short-term movements in stock prices; all the variables are significant, and the error correction term is very high and significant, confirming the long-term relationship. This study contributes to the empirical literature on the relationship between GDP and stock prices in developing countries. Its findings could be useful to both policy makers and investors, and the Central Bank of Jordan could consider incorporating financial stability into its monetary policy objectives.

The issue’s second paper, “A study on investors’ behavioral patterns: examining influential factors with a focus on the mediating role of risk tolerance” by Anita Kumari, Sonali Kadam, Kailash Nath Tripathi and Jay Prakash Verma, examines the complex relationships between stock market investment behavior, risk tolerance and investor personality traits. Using structural equation modeling and a sample of 467 investors, the authors analyze the direct and indirect effects of agreeableness, conscientiousness, extroversion, neuroticism and openness on investment behavior and risk tolerance. Their results show that agreeableness significantly influences investment behavior but has no effect on risk tolerance. Conscientiousness positively affects both investment behavior and risk tolerance, while extroversion negatively affects investment behavior but positively influences risk tolerance. Neuroticism positively influences both, while openness positively affects investment behavior but has no effect on risk tolerance. Mediation analysis demonstrates the pivotal role of risk tolerance in explaining the relationship between personality traits and investment behavior. Agreeableness and openness do not mediate investment behavior via risk tolerance, while conscientiousness and neuroticism partially mediate investment behavior and extroversion fully mediates it. Overall, the findings suggest that personality traits influence investment decisions through different direct and indirect pathways, with risk tolerance serving as an important psychological mechanism. This research provides useful insights for financial advisors and policy makers in navigating the complex landscape of investor behavior and informing tailored strategies in behavioral finance.

In “Risk-neutral return distributions as investment opportunities”, our final paper, Dilip B. Madan and King Wang develop methods for assessing investment value based on information embedded in risk-neutral distributions. While these distributions, by construction, have a zero mean rate of return at their calibration maturities, this need not hold for the distribution of the next move. Because the concept of the next move is vacuous for many traditional limit-law models fitted to option prices, the authors employ recently developed finite-activity models to extract the distribution of the sum of the next five moves. The resulting mean returns are often positive and are adjusted for risk to determine conservative and positive financial valuations using convex sets of risk acceptability and monetary utility. The authors first develop fast algorithms to determine scale-optimized valuations. Then, indexes of value are constructed using geometrically weighted averages of the daily extracted indexes and applied to a variety of trading strategies, where they are observed to improve performance metrics relative to a benchmark.

The editorial board and I extend our sincere gratitude to you, our valued readers, for your unwavering support and interest in our journal. We are delighted to present an expanding collection of practical papers on diverse topics related to modern investment strategies, contributed by both academic and industry experts.