[R-sig-finance] Using R in equity research

Jim McLoughlin jimmcloughlin at earthlink.net
Mon Jun 7 20:18:30 CEST 2004


> It seems to me that there are numerous tools available
> in R that can be put to good use in more mundane
> research tasks, things like determining sensitivities
> of earnings to economic growth and interest rates, or
> the sensitivity of price to sales ratios to
> profitability, leverage, and growth, or using ancova
> and time series data to estimate quarterly margins for
> a given company or industry. I've not yet seen a
> "cookbook" for accomplishing this kind of research.

I think the ultimate goal of this kind of research is still to explain 
the cross section of returns, or to differentiate future winners from 
losers.  While you may be interested in earnings, price sales ratios, 
etc, these are really intermediate results.  Once you have these 
numbers, the question is: now that  have better earnings / sales 
estimates, how should I use them?  I would look at this as more of a 
two step problem: 1) trying to obtain better forecasts of earnings, 
etc; 2) using these forecasts to explain the cross section of returns 
ala fama french, or to form portfolios of winners/losers.

There is a lot of research going along these lines, and it is one of 
the reasons Accounting is such a hot field these days.  Much of the 
accounting research is concerned with using fine grained balance sheet 
items as building blocks to better estimates of earnings, residual 
income, return on assets, etc.

I don't have exact references handy (and a lot of what I've read are 
working papers), but some of the names to check out are

Charles Lee (Cornell) - 

Stephen Penman (Columbia) - there are specific papers by Ou and Penman, 
and Nassem and Penman

David Hirshleifer (Ohio State) - 

I think the Accounting literature is where you will find the gap 
bridged between fundamental "CFA" style analysis and more rigorous 


Jim M

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