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The "CAPS" Prediction System and Stock Market Returns

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  • Christopher Avery
  • Judith A. Chevalier
  • Richard J. Zeckhauser

Abstract

We study the predictive power of approximately 2.5 million stock picks submitted by individual users to the "CAPS" website run by the Motley Fool company (www.caps.fool.com). These picks prove to be surprisingly informative about future stock prices. Indeed, a strategy of shorting stocks with a disproportionate number of negative picks on the site and buying stocks with a disproportionate number of positive picks produces a return of over nine percent per annum over the sample period. These results are mostly driven by the fact that negative picks on the site strongly predict future stock price declines; positive picks on the site produce returns that are statistically indistinguishable from the market. A Fama French decomposition suggests that these results are largely due to stock-picking rather than style factors or market timing.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17298.

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Date of creation: Aug 2011
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Handle: RePEc:nbr:nberwo:17298

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Cited by:
  1. Godfrey Charles-Cadogan, 2012. "Alpha Representation For Active Portfolio Management and High Frequency Trading In Seemingly Efficient Markets," Papers 1206.2662, arXiv.org.

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