Online Research » Eta Analysis » What is Eta Analysis?

What is Eta Analysis?

Stocks, mutual funds, indices, and other investments are affected by two main information-sets. One is the economy, and the other is industry-specific or firm-specific details. Most financial research concentrates on the second of these, ignoring the economic factors. This is unfortunate for you as an investor, because economic information typically explains at least 80 percent of an asset's price! This means that the best research until now could only explain twenty percent or less of what an asset would do and why. But not anymore.

EconomicInvestor's Eta Analysis addresses the portion of an asset that is influenced by the economy. These patented and proprietary analytical tools identify how specific components of the economy impact the price of a stock, fund, index, or portfolio. With this model, we can typically explain at least 80 percent of an asset's price.

EconomicInvestor's Eta Analysis Model

The Eta Analysis model uses 18 key macroeconomic and financial variables to determine an asset's riskiness and potential for appreciation. These variables are called MacroRisk Factors. We can measure the sensitivity of an asset to each of these MacroRisk Factors; we call these 18 sensitivities the asset's Eta Measures. The higher an Eta Measure is, the more the asset's price responds when that economic variable changes. The higher an Eta Measure is, the more risky the investment.

The sum of the absolute values of any statistically significant Eta Measures for a particular asset is called its Composite MacroRisk Index, or CMRI. This index gives you a useful measure of how much exposure a particular asset has to the economy. EconomicInvestor's Eta Analysis tools can help you as an investor act directly on economic information.

The Eta Analysis model was developed using an extensive statistical process with data from the early 1980s. It has since undergone rigorous back-testing and regular scrutiny. During this process, we identified the main macroeconomic and financial variables that best represented the impact of the economy on all stocks, mutual funds, and indices. These became our 18 MacroRisk Factors. Using our model, we obtain an R squared of over 80% for more than 90% of the securities and indices covered in our database. The Eta Analysis model works. Portfolios using this model are regularly tested against, and have consistently outperformed, benchmarks that employ data covering a span of 18 years. The EconomicInvestor Eta Analysis model is successful in both bear and bull markets.

Currently, Eta Analysis is available for all stocks traded on the major U.S. exchanges (NYSE, NYSE Arca, NASDAQ, and AMEX), most mutual funds, and over 2,000 indices. A three-year trading history is required for our model; EconomicInvestor's Eta Analysis will cover securities with a shorter trading history once three years of data become available.

What Eta Analysis Is Not

Eta Analysis does not replace fundamental analysis, it adds to it. Fundamental analysis, such as forecasting earnings or screening on company and industry financial data, is still an important part of investment. But by adding Eta Analysis to your list of tools, you can drastically improve and enhance the investment process.

It is also important to note that Eta Analysis is not technical analysis, which looks only at price and returns history of an asset. We apply our well-tested macroeconomic model to the assets in our database, and produce macro-quantitative analysis. This view of asset value is far more robust than technical analysis. Eta Analysis doesn't merely concentrate on past variations in an asset's price; its foci are the economic forces that impact an investment's value.

Eta Analysis: A Truly Unique Model

As far as we know, there are no other sources that provide investors with a model that is truly comparable to ours - a model that is well tested, and addresses both risk and appreciation potential. Our model uses the same 18 MacroRisk Factors to test every asset, so we can compare and contrast assets in a meaningful way. We don't try to predict the future by looking at the past - at EconomicInvestor.com we simply know that The Economy Matters, and it can give you a Better Window on the Future.