Eta Analysis

Two types of information can explain the market price of most equity securities: information related to the overall economy and information related to unique company characteristics. For most stocks, mutual funds and indices the economic component explains over 80% of the asset price; however, most financial research focuses on unique company and industry characteristics (the remaining 20% portion) and ignores the overall economic factors (the 80% portion). EconomicInvestor’s Eta® Analysis addresses the 80% portion.

What Eta Analysis Is

Eta Analysis is a patented and proprietary analytical tool developed by EconomicInvestor that identifies how specific components of the economy impact the price of a stock, fund, index, or portfolio.

This model measures how 18 key macroeconomic factors (MacroRisk Factors) impact an asset. From the applied economic analysis, numerical ratings are computed to summarize the asset’s overall economic exposure and to indicate appreciation potential. Eta Analysis provides specific tools to help investors act directly on economic information.

The model was developed using an extensive statistical process with data from the early 1980s and has since undergone rigorous back-testing and regular scrutiny. The 18 MacroRisk Factors were identified in this process as the set of macroeconomic factors which best represented the impact of the economy upon all stocks, mutual funds and indices. Using this model, we obtain an R2 of over 80% for more than 90% of the securities and indices covered in our database (meaning that at least 80% of asset price is economy determined, leaving 20% or less to reflect company or industry specific information). Portfolios built using EconomicInvestor’s Eta Analysis tools are routinely examined against, and have consistently outperformed, benchmarks employing historical data covering a span of 18 years (over bull and bear markets).

Currently, Eta Analysis is available for all stocks traded on the three major U.S. exchanges (NYSE, NASDAQ, and AMEX), most mutual funds, and over 2,000 indices.  A three-year trading history is required for the Eta model; securities with a shorter trading history will be covered by Eta Analysis only after three years of data are available.

What Eta Analysis Is Not

Most research is dedicated to fundamental analysis, such as forecasting earnings or screening on company and industry financial data. Eta Analysis does not replace fundamental analysis. By combining the information in traditional research with our MacroRisk analysis the investor has a unique opportunity to further enhance the investment process.

It is also important to note that Eta Analysis is not technical analysis, which looks only at price/returns history. Our analysis is macro-quantitative, applying a well-tested macroeconomic model to the assets in our database. This gives a view of asset value which is much more robust than that of technical analysis and focuses not merely on the variation of price itself, but on economic forces which impact value.

A Truly Unique Model

As far as we know there are no other sources that provide a truly comparable, tested model that addresses both risk and appreciation potential. However, some attempt to address risk with 40 or more factors by creating weightings to identify possible return variance by utilizing applications built on the APT (arbitrage pricing theory). Our model focuses on the price itself with the same set of 18 factors across all assets, with substantially better explanatory power (measured by R squared).