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The Economics of Security Analysis

Author

Listed:
  • Kewei Hou

    (Fisher College of Business, The Ohio State University, Columbus, Ohio 43210; China Academy of Financial Research, Shanghai 200030, P.R.China)

  • Haitao Mo

    (E.J. Ourso College of Business, Louisiana State University, Baton Rouge, Louisiana 70803)

  • Chen Xue

    (Lindner College of Business, University of Cincinnati, Cincinnati, Ohio 45221)

  • Lu Zhang

    (Fisher College of Business, The Ohio State University, Columbus, Ohio 43210; National Bureau of Economic Research, Cambridge, Massachusetts 02138)

Abstract

The investment capital asset pricing model, in which expected returns vary cross-sectionally with investment, profitability, and expected growth, provides an equilibrium foundation for Graham and Dodd’s security analysis. The q 5 model is a good start to explaining prominent security analysis strategies, such as Abarbanell and Bushee’s fundamental signals, Frankel and Lee’s intrinsic to market, Greenblatt’s “magic formula,” Asness et al.’s quality minus junk, Bartram and Grinblatt’s agnostic analysis, operating cash flow to market, and Penman and Zhu’s expected-return strategy as well as best performing active discretionary funds, such as Buffett’s Berkshire Hathaway.

Suggested Citation

  • Kewei Hou & Haitao Mo & Chen Xue & Lu Zhang, 2024. "The Economics of Security Analysis," Management Science, INFORMS, vol. 70(1), pages 164-186, January.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:1:p:164-186
    DOI: 10.1287/mnsc.2022.4640
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