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On Persistence in Mutual Fund Performance
Abstract
Using a sample free of survivor bias, the author demonstrates that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual funds' mean and risk-adjusted returns. Darryll Hendricks, Jayendu Patel, and Richard Zeckhauser's (1993) 'hot hands' result is mostly driven by the one-year momentum effect of Narasimham Jegadeesh and Sheridan Titman (1993), but individual funds do not earn higher returns from following the momentum strategy in stocks. The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds. The results do not support the existence of skilled or informed mutual fund portfolio managers. Copyright 1997 by American Finance Association.
... Mutual funds performance is well documented in the finance literature. During the 1990s, studies like (Brown & Goetzmann, 1995;Hendricks, Patel & Zeckhauser, 1993;Wermers, 1997;Carhart, 1997) found evidence of persistence over a short-term duration like one to three years. Whereas Elton, Gruber and Blake (1996) reveal little evidence that persistence of performance over the long-term horizon. ...
... We employ Fama-French's (1993) methodology for constructing factor-mimick-ing portfolios, such as size, value, and momentum factors. We follow Carhart's (1997) four-factor methodology to construct the WML factor. All the data are collected from the Bloomberg database. ...
... (1), where � represents the ize factor (Small minus Big), and � refers to the value factor (Low minus High). urther, the study uses the Carhart (1997) four-factor model to discover the persistence perormance using the following equation (3). ...
The present study verifies the short-term persistence performance of equity mutual fund returns. The study considers 47 equity funds' monthly excess returns spanning from January 2000 to December 2019. The study employs prominent asset pricing models such as Jensen (1968) one-factor model, Fama-French (1993) three-factor model, and Carhart (1997) four-factor model to capture the short-term persistence of equity mutual fund returns. The results show that Jensen’s one-factor and Fama-French three-factor models are explaining a better persistence performance in the Indian context.
... For example, "Common risk factors in the returns on stocks and bonds," co-authored by Fama and French (1993), holds the highest co-citation count, accompanied by other papers authored by Fama (1973Fama ( , 1992Fama ( , 1996Fama ( , 2015, which dominate the cluster. Additionally, papers such as "On persistence in mutual fund performance" by Carhart (1997) and "Illiquidity and stock returns: cross-section and time-series effects" by Amihud (2002) are also relevant in the field. All these studies explore the factors that may influence stock returns and have implications for stock market efficiency. ...
... Regarding the analysis of the most influential articles, the first group of papers with a high citation count include "Multifactor explanations of asset pricing anomalies," cited 2,852 times, "Industry costs of equity," cited 2,798 times, "A five-factor asset pricing model," cited 2,304 times, and "Market efficiency, long-term returns, and behavioral finance," cited 2,126 times. Notably, these contributions are authored by Fama and French (1996, 1997. Furthermore, our analysis revealed that papers with a high number of citations per year in the last five years are associated with current trending topics. ...
The nonlinear nature of financial data series and the intricate incorporation of data into market prices necessitate a comprehensive exploration of key research findings, prevailing trends, intense debates, and subfields in the market behavior realm. Studies exploring the way in which technical analysis can exploit the deviation from market efficiency in stock markets, based on new prediction techniques (machine learning, deep learning, and artificial intelligence), are lacking. This study presents a comprehensive bibliometric assessment of market behavior using the Scopus database from 1972 to 2022. A thorough assessment process, which included keywords, filters, and data cleaning, was employed to narrow down the literature from 30,551 to 8,289 relevant papers. The research framework delineates seven primary themes that underpin this study: market efficiency, behavioral finance, technical analysis, volatility, fractals, asset pricing, and price discovery. For practitioners, investors, and policymakers, our study presents evidence regarding emerging themes, such as technical analysis, adaptive market hypothesis, and machine learning, which diverges from the findings of the proponents of equilibrium models based on investors' rationality. Moreover, an in-depth inquiry into the role of technical analysis in shaping portfolio investment presents a promising future research avenue.
... The next three specifications directly account for the volatility and the correlation with the market; to calculate abnormal returns, we use CAPM, Fama and French (1993) three-factor model (FF3), and also 17 See "Documentation for data on intangible capital and Total q from Peters and Taylor". augment FF3 with the Carhart's (Carhart (1997)) momentum (FF3&MOM). 18 ...
... The rest of the returns oscillate around zero but the cumulative impact is insufficient to offset the large drops leading to a large cumulative decline as documented in the main text. Fama and French (1993) three factor model augmented with the Carhart (1997) momentum. Event window is [-5;30], N=72. ...
Intangible capital plays a crucial role in economic growth and impacts firm value. Trade secrets form a key component of intangible capital, yet little is known about their market value. Using a hand-collected sample of U.S. court cases on trade secret impairments filed under the Economic Espionage Act, we provide an economically and statistically significant estimate of trade secrets' value; approximately 1.33-1.74% of firm market capitalization corresponding to the average value loss of $1.6-2.1 billion. Aggregating across all firms in our sample, the total loss in market value amounts to more than $190 billion in the first 30 trading days after the event, over the period 1996 to 2019. Firms more likely to suffer a trade secrets impairment are large, with lower leverage, and with higher-value patents. In the three-year period after the impairment, victim firms respond by acquiring other smaller firms, as a potential attempt to reduce losses associated with the impairment.
... Some of the evidence suggest that fund specific characteristics such as fees and age of the fund, size of the fund have significant effect on the performance of the fund. Ippolito 1989;Gruber & Blake, 1993;Droms & Walker, 1996;Carhart, 1997;Christensen, 2003;Bhatti & Ariff, 2015). There is also a segment of research which analyse the managerial characteristics such as education, experience and age of the fund manager in determining the performance of the fund. ...
... They concluded that there was no persistent relationship between portfolio turnover and fund performance. Carhart, (1997) found negative relationship between turnover and performance which was supported by Elton et al. (2012) and Lobao and Gomes, (2015). Sheng-Ching Wu (2014) examined paper to study the interaction between mutual fund performance and portfolio turnover. ...
The performance of three thematic mutual funds is compared in this study between March 2009 and December 2018, during evaluation and the study, we have collected quarterly data during these years. Four metrics—portfolio turnover, expense ratio, fund manager tenure, and experience—were used to compare the plan's returns. Each of these independent variables significantly affects the dependent variable, which is the returns on mutual funds. After applying the Pearson Correlation Coefficient method to the data we had collected, we found some interesting results. The study found that, out of the four variables, fund age and the fund manager's tenure had an adverse relationship with returns, whereas portfolio turnover and past performance had a positive relation. We think this research will be very helpful in understanding the impact of these variables on fund's return
... To address this, they introduced size and value factors that significantly enhanced the performance of the model. Subsequently, the four-factor model was further expanded to include the momentum factor, ultimately displaying a lower pricing error than the three-factor model [38]. This improvement was also reported in other studies [39,40]. ...
This study examines the intricate relationship between ESG considerations and risk profiles of firms by presenting a comprehensive analysis of total, systematic, and idiosyncratic risks. Using 7834 firm-year observations from 2011 to 2022 in the Korean market, the findings reveal that ESG engagement effectively reduces total, systematic, and idiosyncratic risks. Especially noteworthy is the fact that the reduction in systematic risk, a discovery associated with ESG engagement in medium-sized firms, remains concealed when examining only the total risk. During the COVID-19 crisis, ESG remained valuable in lowering total and idiosyncratic risks but paradoxically increased systematic risk in certain circumstances. These findings emphasize the risk-mitigating potential of ESG, advocating customized strategies based on firm size. They also underscore the resilience of firms that are dedicated to ESG practices during a crisis. Investors may enhance risk-adjusted returns and mitigate overall portfolio risk by integrating ESG factors into their investment strategies, with the importance of tailoring such strategies emphasized, while governments should develop policies incentivizing ESG engagement and allocating resources for ESG-related initiatives.
... These stocks can be identified on basis of size, value or momentum. This study intends to analyse the presence of cross-sectional anomalies in the Indian stock market, taking into consideration portfolios created through cross classification ofsize, value and momentum.The study employs Carhart four factor model (Carhart, 1997). The model analyses the return of the stocks based on four factors namely market risk premium, size, value and momentum.The momentum factor represents one of the behavioural aspects, presumed to form strategies that could outperform the market. ...
... Therefore, it is evidentthat the conventional 12-for-1 and 12-for-3 strategies outperform their market proxy in terms of the return, beta coefficient, and the three risk-adjusted performance measures. That is a good result, since Firth (1977), Carhart (1997), Abdel-Kader and Qing (2007) and Benos and Jochec (2011) concluded that the majority of mutual funds could not outperform their respective market proxies. Moreover, the results are in line with Cavaglia et al. (2000), Vardharaj and Fabozzi (2007) and Basu (2009,2011), who argued that the sector allocation strategy may be considered an important strategy to maximise returns. ...
This research examined whether the historical sector compositions could be used to develop the optimal forward-looking sector allocation strategies for a conventional portfolio on Bursa Malaysia over the out-of-sample period from 1 December 2006 to 30 November 2017. The optimal sector allocation strategy was developed to find each sector weight in the portfolio that maximised the Sharpe ratio in the preceding 12-months to estimate the optimal sector allocation for the following month (12-for-1 strategy), as well as for the following three months (12-for-3 strategy). The results indicated the roles of the financial, plantation, and consumer sectors were noteworthy in both kinds of strategies over the majority of the study period. However, during the global crisis period of 2007/2008, the plantation sector was the safest investment to invest in. The research also found that the historical sector compositions can be used efficiently to develop the optimal forward-looking sector allocation strategies for a conventional portfolio in Bursa Malaysia.
... Although FF3 enhanced our understanding of average returns, it encountered challenges. Notably, Carhart [27] addressed the momentum effect by proposing a four-factor model that incorporated a momentum factor. Despite these advancements, FF3 faced limitations in explaining the relationship between corporate investment styles and cross-sectional returns. ...
Deep learning, a pivotal branch of artificial intelligence, has increasingly influenced the financial domain with its advanced data processing capabilities. This paper introduces Factor-GAN, an innovative framework that utilizes Generative Adversarial Networks (GAN) technology for factor investing. Leveraging a comprehensive factor database comprising 70 firm characteristics, Factor-GAN integrates deep learning techniques with the multi-factor pricing model, thereby elevating the precision and stability of investment strategies. To explain the economic mechanisms underlying deep learning, we conduct a subsample analysis of the Chinese stock market. The findings reveal that the deep learning-based pricing model significantly enhances return prediction accuracy and factor investment performance in comparison to linear models. Particularly noteworthy is the superior performance of the long-short portfolio under Factor-GAN, demonstrating an annualized return of 23.52% with a Sharpe ratio of 1.29. During the transition from state-owned enterprises (SOEs) to non-SOEs, our study discerns shifts in factor importance, with liquidity and volatility gaining significance while fundamental indicators diminish. Additionally, A-share listed companies display a heightened emphasis on momentum and growth indicators relative to their dual-listed counterparts. This research holds profound implications for the expansion of explainable artificial intelligence research and the exploration of financial technology applications.
... Carhart [4] did the Three-Factor Model by adding a momentum factor. This momentum factor primarily considers the trend in stock price changes and attempts to explain stock price movements through market expectations and emotions. ...
This literature review provides a comprehensive overview of key developments in quantitative trading theory, machine learning-based financial time series forecasting, deep learning-based financial time series forecasting, and modern quantitative investment strategies. It highlights seminal contributions from renowned scholars and researchers in the field. This review first explores the Efficient Market Hypothesis (EMH) proposed by Eugene Fama in 1970 and its empirical validation, which lays the foundation for understanding stock market dynamics. It then focuses on the application of machine learning to financial time series forecasting, including Hulls Delta strategy, Hujll Js multifactor model regression series, and Junhua Chens seminal work in 2009, which emphasizes the role of machine learning in solving the challenges of financial time series data. Finally, an overview of the development of deep learning in financial time series forecasting is presented, including the comprehensive model of Bowie et al., the success of Junhua Chens Deep Belief Network (DBN), and the sequence data processing capabilities of the Multi-stage Attention Network (MAN) model. In terms of modern quantitative investment strategies, it covers research areas such as EBIT/EV-based stock ranking studies, higher-order moment analysis, frequent trading strategies, and investor sentiment indicators. In summary, this literature review showcases the evolution of quantitative trading theory, the emergence of machine learning and deep learning in financial time series forecasting, and the development of modern quantitative investment strategies, offering valuable insights and tools for investors, researchers, and practitioners in financial markets.
... This model underscored the predictive capacity of these factors concerning stock returns [1]. Building upon this foundation, Carhart integrated a momentum factor, further amplifying the predictive potency of multi-factor stock selection strategies [2]. Asness, Moskowitz, and Pedersen's research offered compelling evidence that multi-factor stock selection strategies consistently yield substantial excess returns on a global scale, with certain factors exhibiting commonalities across diverse markets [3]. ...
In this study, we introduce a four factor equal-weight scoring model, utilizing SSE A-shares from 2019 to 2023, aimed at identifying stocks of high investment potential. We innovatively incorporate the E/I factor to assess the intrinsic investment value of stocks, integrating it with PEG, RSI, and beta to ensure a comprehensive information capture. While assuming the feasibility of short-selling in the A-share market, our proposed strategy offers insights for future statistical arbitrage strategies in this market, underscoring the significance of risk hedging. Our preliminary analysis suggests that the influence of the four factors on a stock's intrinsic value is not strictly linear. Consequently, we employ a factor rating approach to enhance their explanatory power regarding a stock's intrinsic investment value. Initial results indicate that while our original strategy effectively manages risk, it compromises on returns. However, post-adjustment, the refined scoring model demonstrates robust profitability, yielding an annual return of 23.967078% and a Sharpe ratio of 1.146165. These findings validate the efficacy of our proposed strategies, offering traders a novel investment direction.
... This study underscores the potential negative impacts of frequent trading in mutual funds. Moreover, Carhart's study on the performance persistence of mutual funds indicates that funds with high expenses and high turnover tend to underperform, suggesting that a strategy focused on holding long-term positions can be more beneficial (Carhart, 1997). Adopting a long-term view offers cost savings and improved performance. ...
This paper examines the "Coffee Can Portfolio" approach within the contemporary asset management context, contrasting its long-term investment philosophy against modern financial risk management strategies. It delves into historical and behavioral finance perspectives, exploring the efficacy of holding stocks over extended periods, and the psychological barriers such as loss aversion and the disposition effect that often hinder investors from holding on to winning stocks. Through a literature review and case studies of the Voya Corporate Leaders’ Trust Fund and Berkshire Hathaway's long-term holdings, the paper evaluates the practical applications and challenges of implementing the Coffee Can Portfolio approach. It addresses the role of diversification, Value at Risk (VaR), and portfolio construction in managing financial risks associated with a Coffee Can Portfolio approach. The findings underscore the importance of initial stock selection, patience, behavioral finance understanding, and the judicious use of risk management tools in crafting a resilient long-term portfolio. The paper’s comprehensive analysis aims to bridge the gap between theoretical investment strategies and real-world portfolio management, offering insights into achieving superior financial outcomes through disciplined, long-term investment practices.
... ............................................................................................. (Dowd, 2000) أكد حين مسبقا إلى تشير التي شارپ لنموذج العديدة األمثلة بعض وجود على مغالطة. ات ار قر إلى بالتبعية تؤدي قد وبالتالي متفاوتة، النموذج هذا باستخدام املحسوبة النسب أن سبورجين أكد (Spurgin, 2001, p. 38 ............................................................................................. (Treynor & Black, 1973) املالي الوسط في الحقا عرف شارپ لنسبة جديدا بعدا ـ" ب ا نسبة ملعلومة ش مقترح تقييم طريقة النسبة هذه تشبه ،" ارپ (Sharpe, 1966) (Treynor & Black, 1973) أن أكدا للت القابل الخطر على يقوم أن يجب النشطة للمحفظة األمثل االنتقاء قييم كما فقط، السوق خطر على وليس غودوين ركز (Goodwin, 1998) ............................................................................................. (Breloer et al., 2016) لوحده أسمالية الر األصول لتسعير األحادي النموذج استخدام أن ............................................................................................. (Fama & French, 1992, 1993 األربع العوامل نموذج أو لكارهارت (Carhart, 1997) . اجزيك وكر كونور أكد السياق، نفس وعلى (Connor & Korajczyk, 1986) أن مع تماما متناسق جينسين معامل لنظرية ي التنافس التوازن نسخة قبل من املطورة اجحة باملر التسعير روس (Ross, 1976) . ...
This study aims to examine the role of international diversification in portfolio improvement using international index funds. By analyzing 21 advanced and 16 emerging markets between 2012 and 2021, the study found a positive correlation between international market funds, with the intensity of the correlation varying from strong among developed markets to weak among emerging markets. In addition, international index funds were found to be effective at tracking the indexes of their related markets, enabling them to mimic market trends effectively. The study's performance testing of international funds indicated that American, Danish, and New Zealander funds had varying performances in terms of return and risk and outperformed both local and global market indexes. Combining these components generated the best fit, maximizing the return of the international portfolio while reducing its associated risk. Keywords: international diversification; financial portfolio improvement; international index funds; international financial markets.
... Sharpe ratio = The multi-factor model that is used in this paper is a five-factor model including the market benchmark, along with factors to capture small scale risk exposure and bankruptcy risk proposed by Fama and French(1993), the momentum risk factor that was introduced by Carhart (1996) and a timing risk factor as given by Bollen and Busse (2001). The following regression equation describes the model. ...
This study investigates the risk-return spectrum of investment for going green and sustainability practice in India. This paper analyses three sustainability focused index from Indian equity market viz. S&P BSE GREENEX, S&P BSE CARBONEX and S&P BSE ESG 100. Statistical and financial rates, ratios and latest five-factor model of asset pricing are used for the said purpose. ESG 100 index turned out to be outperformer whereas the other two gave slightly less return than the market benchmark. Volatility is found to be similar to that of the market for all the indexes. Significant increment of wealth of green investors during and after the COVID-19 pandemic period is another notable finding of the study. Results of this paper indicate that investors are getting more return compared to market if they invest in stocks that perform well in sustainability criterion.
... Example: Regressing DΔSHS h i,t on the social trading transaction buy pressure indicator DΔTrans Buy i,t with 25th-percentile regressions yields a coefficient of 0.229 with statistical significance at the one percent level (corresponding to a bootstrapped standard error for the coefficient estimate of 0.025). 9 Idiosyncratic volatility is measured as the standard deviation of the residuals obtained by fitting the Carhart (1997) four-factor model to a time-series of daily stock returns of the previous six months. 10 Idiosyncratic skewness is measured in accordance with Harvey and Siddique (2000) and Kumar (2009). ...
This study examines the impact of the COVID-19 pandemic on the S&P 500 Index through accounting return on equity. Previous literature examines the impact of the pandemic on the United States economy, government restrictions, and global market reaction. Accounting return on equity is employed due to the unmediated impact it has on shareholder wealth. The data obtained from Compustat comprise all available companies listed in the S&P 500 Index. This analysis stems from the first reported case of COVID-19 in the United States, January 21, 2020 and concludes on December 31, 2021. Significant (p-value < 0.0001) evidence conveys that the index had a strong negative initial response. However, the index recovered expeditiously. A multivariable regression model is employed to determine if the recovery led to inflated stock prices. For the purpose of this study, inflated stock prices are interpreted as return on equity is more pronounced than the intrinsic value of the companies that they represent. The results provide significant (p-value < 0.0001) evidence that return on equity is inflated on December 31, 2021. Controlled variables in this analysis include book to market, enterprise value multiple, price to operating earnings, price to earnings, price to sales, price to cash flow, total debt to total assets, total debt to equity, asset turnover, and price to book.
This study examines the association between the environmental, social, and governance (ESG) performance and firm risk in U.S. financial firms. We find a significant negative association between the composite ESG performance and total, idiosyncratic, and systematic risks after controlling for firm and year fixed effects and other risk predictors. We also examine the effect of each pillar of ESG on this relationship and find that “S” and “G” exhibit a significant negative relationship with both systematic and idiosyncratic risks of firms, while “E” is only associated with systematic risk. Lastly, we demonstrate that ESG performance is negatively associated with the extent to which leverage contributes to firm risk, supporting our premise that ESG alleviates financial risk. Overall, we provide empirical evidence of potential risk management benefits of ESG in the financial industry.
The economic effect of climate hazard events varies by time and by location. This paper investigates how climate shocks to local property markets transmit to capital markets and provides evidence of the extent to which forward‐looking climate risk is capitalized into the public valuations of those property markets. We first quantify the exposure of real estate portfolios to locations that recently experienced climate events ( Event Exposure ). Using an event study framework, we find that, in the post‐event period, a one‐standard‐deviation increase in ex‐ante Event Exposure is associated with a 0.2–1.4 percentage points decrease in quarterly stock returns. Cross‐sectional analyses reveal that differences in return effects can be explained by variation in the extent to which the area focuses on climate change. Similarly, we find that forward‐looking climate risk assessment negatively affects firm valuations only in markets with a focus on climate change. Consistent with these findings, we provide evidence that climate events (shocks) induce retail investors (noise traders) to decrease their stock holdings and that blockholders tend to take the opposite side in these transactions. We also show that conditioning on consumer sentiment helps to explain cross‐sectional variation in the response of stock returns to climate events.
This research focuses on asset pricing with market microstructure, capturing transaction costs and seasonality. It delves into the impact of non-stationarity with active trading on efficient markets with fulfilled expectations and market clearing. The study meticulously analyzes skewed and fat-tailed data distributions of returns and volatilities and their clusters. It investigates the interaction between market makers and individual investors, considering spreads for asymmetric investors. By utilizing two years of 1-minute high-frequency trading data, the performance of GOOGL stock and diversified portfolios evaluates the model and prediction. It captures liquidity and price impact, providing insights into investor liquidity, asymmetry, and seasonality effects. Furthermore, the research highlights the effectiveness of technical strategies despite challenges posed by market efficiency. Notably, it introduces the phenomenon of market maker's reluctance to trade for the avoidance of the risk of adverse selection during trading hours, which can lead to flash crashes and singularity events.
Synopsis
The research problem
The purpose of this study was to examine the market reaction to sell-side analyst recommendation revisions issued under an integrated reporting (IR) approach.
Motivation
Advocates of this corporate reporting approach argue that IR enhances capital markets’ information environment by rendering investors better able to assess the value creation process of a firm. Recent empirical studies corroborate this argument. Considering the central role of financial intermediaries, we investigated whether the informativeness of analyst recommendation revisions is associated with the adoption of IR and the quality of integrated reports.
The test hypotheses
We tested whether the informativeness of analyst recommendation revisions decreases or increases after the mandatory adoption of an IR approach. Furthermore, we tested whether the informativeness is negatively or positively related to the quality of the released integrated report after the mandatory adoption of an IR approach.
Target population
We focused on the South African capital market, which is the only setting where IR is mandated. We utilized a sample of 3,201 recommendation revisions made within a 3-year window around the mandatory IR adoption.
Adopted methodology
This study used ordinary least square (OLS) regressions and applied difference-in-differences as well as instrumental variable approaches.
Analyses
We modeled the market reaction to the recommendation revisions as a function of the period in which the recommendations are announced (i.e., pre- or post-adoption), along with other factors affecting market reaction. In subsequent tests, we also modeled the market reaction to the recommendation revisions as a function of the quality of a firm’s integrated report.
Findings
We found strong evidence that analysts’ revisions exhibited economically and statistically significantly lower information content under IR. Moreover, we found that upgrades and downgrades issued in the post-adoption period were less informative when issued for firms with high-quality integrated reports. Overall, results showed that the benefit of acquiring advice from analysts became more marginal under an IR approach.
The idiosyncratic volatility (IVol) effect is robust to restricting the sample to New York Stock Exchange (NYSE) firms (once the proper listing indicator is used) and to excluding from the sample small, illiquid, and low-price stocks. The idiosyncratic volatility effect is also unlikely to stem from the short-run reversal, as the IVol effect stays significant for about six months and seems stronger for high turnover firms, which do not exhibit short-term reversal. The IVol effect also does not seem to weaken postpublication.
This paper was accepted by Lukas Schmid, finance.
Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.04140 .
The paper suggests retrospective analysis of investment premiums valuation models. Their place in contemporary theory of international portfolio investing is defined. Main phases of these models' evolution are revealed, uppermost considering incorporation of local and international factors of expected returns. Basic features of these phases are discovered. Dominance of the CAPM model in the framework of expected returns valuation concept is validated. This model is underlying major part of the science in this field development, particularly zero beta model and intertemporal model. Gnoseological conditions of models including international factors of securities premiums origin and development are identified. Specific attention is paid to models considering currency risk factor – one of the key factors of expected returns in international investment environment. Major events of the world economy that actualized the necessity of considering currency risks while valuing investment premiums are singled out. International capital asset pricing model as one that incorporates currency risk factor during expected returns valuation in the best way is examined. Comparative analysis of international CAPM and the approach of using the traditional model in international market is carried out. Although no evident advantage of any is fixed, existing empirics proves that the latter is much more convenient in terms of its usage, and is actually used much more often. The rationale of methodological priority of using the term "premium" rather than "expected return" is presented. Methodological indifference between the terms "price" and "expected return" in the current context is reported.
We study how granting shareholders an advisory compensation vote affects the subsequent demand for shareholder voting rights. We find that the voting premium decreases when shareholders are given the right to disapprove firm compensation plans, consistent with shareholders preemptively negotiating concessions, which results in a diminished need to use their votes. Potential concessions extend beyond compensation; firms that experience a decrease in voting premiums also experience changes to investment and dividend policy, as well as the number of independent directors. The same firms experience positive abnormal stock returns over the following year.
Purpose
The primary objective of this study is to determine how concentrated ownership affects stock returns by country and scale (by market capitalization), like large, medium, and small-cap firms in selected developed economies of the world.
Design/methodology/approach
Using a dataset comprising 12,751 annual observations from 850 listed companies from developed economies from 2004 to 2018, the study employs panel data models and instrumental variable estimation to mitigate endogeneity bias.
Findings
The findings reveal a significant and positive correlation between ownership concentration and expected returns on corporate equities in developed economies. Furthermore, the study categorizes firms into distinct size categories and finds nuanced differences in the relationship between ownership concentration and stock returns across large, medium, and small-cap enterprises. The results of the study reveal that ownership concentration (by country) and scale (Large, medium, and small) have a significant and positive impact on the stock returns of firms in developed economies.
Practical implications
the practical implications of this study extend to investors, firms, policymakers, regulators, and other stakeholders involved in the financial markets. By considering these implications, stakeholders can make informed decisions to enhance market efficiency, investor protection, and overall market integrity.
Originality/value
To the authors' understanding, this study is the first to examine the impact of concentrated ownership on excessive stock returns across countries and scales, with an explicit focus on large, medium, and small companies in select developed economies worldwide.
During the development of information systems, security, and safety considerations often take a back seat to market pressures, demanding shorter development cycles, faster releases, and new product features. Unfortunately, right until a cyber-incident, the price of the trade-off between security and safety and other market imperatives is unclear and, given the general rarity of cyber-incidents, often under-estimated. Fortunately, calculating the security and safety side of the trade-off is the domain of expertise of actuaries in insurance companies offering cyber insurances. It used to be an after-thought for most companies since the 2013 Target data breach, which cost nearly 300 million but was covered at 30% by insurance payout. Since then, insurance for risks of information systems malfunctions has become standard for most companies, and premium reduction has become a primary driver for improving cybersecurity costs for companies. The role of this chapter is to transpose what we have learned about the insurance of cyber-incidents over the last couple of decades and use it as a basis to produce a qualitative forecast of the insurance outlook for a security and safety landscape involving LLMs.
Consensus analyst target prices are widely available online at no cost to investors. In this paper, we examine how the amount of dispersion in the individual target prices comprising the consensus affects the predictive association between the consensus target price and future returns. We find that returns implied by consensus target prices and realized future returns are positively correlated when dispersion is low, but they become highly negatively correlated when dispersion is high. Further analyses suggest that the differing effect of dispersion stems from incentive-driven staleness in price targets by some analysts after bad news. As a stock performs poorly and some analysts are slow to update their target prices, dispersion increases, and the consensus target price becomes too high. This has important implications for how consensus analyst target prices should inform investment decisions. We show that a hedge strategy taking a long (short) position in stocks with the highest predicted returns among stocks with the lowest (highest) dispersion earns more than 11% annually. Finally, we show that the negative correlation between consensus-based predicted returns and future realized returns for high-dispersion stocks exists mainly for stocks with high retail interest, suggesting that unsophisticated investors are misled by inflated target prices that are available freely online.
This paper was accepted by Suraj Srinivasan, accounting.
Funding: The authors acknowledge financial support from Indiana University and Yale University.
Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2021.03549 .
We show that the persistent use of momentum investment strategies by mutual funds has important implications for the performance persistence and survivorship bias controversies. Using mutual fund portfolio holdings from a database free of survivorship bias, we ¯nd that the best performing funds during one year are the best performers during the following year, with the exception of 1981, 1983, 1988, and 1989. This pattern corresponds exactly to the pattern exhibited by the momentum e®ect in stock returns, ¯rst documented by Jegadeesh and Titman (1993) and recently studied by Chan, Jegadeesh, and Lakonishok (1996). Our evidence points not only to the momentum e®ect in stock returns, but to the persistent, active use of momentum strategies by mutual funds as the reasons for performance persistence. Moreover, essentially no persistence remains after controlling for the one-year momentum e®ect in stock returns. We also explain why most recent studies have found that survivorship bias is a relatively small concern. Funds that were the best performers during one year are the worst performers during the following year whenever the momentum e®ect in stock returns is absent, and these funds tend to disappear with a frequency not appreciably lower than that of consistently poor performers. Therefore, the pool of non-surviving funds is more representative of the cross-section of all funds than previously thought. Speci¯cally, we ¯nd a di®erence of only 20 basis points per year in risk-adjusted pre-expense returns between the average fund and the average surviving fund.
Recent evidence suggests that past mutual fund performance predicts future performance. We analyze the relationship between volatility and returns in a sample that is truncated by survivorship and show that this relationship gives rise to the appearance of predictability. We present some numerical examples to show that this effect can be strong enough to account for the strength of the evidence favoring return predictability.
The authors examine predictability for stock mutual funds using risk-adjusted returns. They find that past performance is predictive of future risk-adjusted performance. Applying modern portfolio theory techniques to past data improves selection and allows the authors to construct a portfolio of funds that significantly outperforms a rule based on past rank alone. In addition, they can form a combination of actively managed portfolios with the same risk as a portfolio of index funds but with higher mean return. The portfolios selected have small but statistically significant positive risk-adjusted returns during a period where mutual funds in general had negative risk-adjusted returns. Copyright 1996 by University of Chicago Press.
We investigate the informational efficiency of mutual fund performance for the period 1965–84. Results are shown to be sensitive
to the measurement of performance chosen. Wefind that returns on S&P stocks, returns on non-S&P stocks, and returns on bonds
are significant factors in performance assessment. Once we correct for the impact of non-S&P assets on mutual fund returns,
wefind that mutual funds do not earn returns that justify their information acquisition costs. This is consistent with results
for prior periods.
Recent evidence suggests that past mutual fund performance predicts future performance. We analyze the relationship between
volatility and returns in a sample that is truncated by survivorship and show that this relationship gives rise to the appearance
of predictability. We present some numerical examples to show that this effect can be strong enough to account for the strength
of the evidence favoring return predictability.
This paper documents that strategies that buy stocks that have performed well in the past and sell stocks that hav e performed poorly in the past generate significant positive returns o ver three- to twelve-month holding periods. The authors find that the profitability of these strategies are not due to their systematic risk or to delay ed stock price reactions to common factors. However, part of the abnorm al returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented. Copyright 1993 by American Finance Association.
This study analyzes the extent to which mutual funds purchase stocks based on their past returns as well as their tendency to exhibit 'herding' behavior (i.e., buying and selling the same stocks at the same time). The authors find that 77 percent of the mutual funds were 'momentum investors,' buying stocks that were past winners; however, most did not systematically sell past losers. On average, funds that invested on momentum realized significantly better performance than other funds. The authors also find relatively weak evidence that funds tended to buy and sell the same stocks at the same time. Copyright 1995 by American Economic Association.
Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not explained by the CAPM, they are called anomalies. We find that, except for the continuation of short-term returns, the anomalies largely disappear in a three-factor model. Our results are consistent with rational ICAPM or APT asset pricing, but we also consider irrational pricing and data problems as possible explanations.
This chapter discusses the problem of selecting optimal security portfolios by risk-averse investors who have the alternative of investing in risk-free securities with a positive return or borrowing at the same rate of interest and who can sell short if they wish. It presents alternative and more transparent proofs under these more general market conditions for Tobin's important separation theorem that “ … the proportionate composition of the non-cash assets is independent of their aggregate share of the investment balance … and for risk avertere in purely competitive markets when utility functions are quadratic or rates of return are multivariate normal. The chapter focuses on the set of risk assets held in risk averters' portfolios. It discusses various significant equilibrium properties within the risk asset portfolio. The chapter considers a few implications of the results for the normative aspects of the capital budgeting decisions of a company whose stock is traded in the market. It explores the complications introduced by institutional limits on amounts that either individuals or corporations may borrow at given rates, by rising costs of borrowed funds, and certain other real world complications.
Book-to-market ratio (BE/ME), market equity (ME), and one- year past return (momentum) (MOM) help explain the cross- section of expected individual stock returns within the U.S. and within other countries. Examining equity markets as a whole, in contrast to individual stocks, we uncover strong parallels between the explanatory power of these variables for individual stocks and for countries. First, country versions of BE/ME, ME, and MOM help explain the cross-section of expected country returns. Second, the January seasonal in ME's explanatory power for stocks also appears for countries. Third, portfolios formed by sorting stocks and countries on these variables produce similar patterns in profitability before and after the portfolio formation date.
A great many people provided comments on early versions of this paper which led to major improvements in the exposition. In addition to the referees, who were most helpful, the author wishes to express his appreciation to Dr. Harry Markowitz of the RAND Corporation, Professor Jack Hirshleifer of the University of California at Los Angeles, and to Professors Yoram Barzel, George Brabb, Bruce Johnson, Walter Oi and R. Haney Scott of the University of Washington.
This paper identifies five common risk factors in the returns on stocks and bonds. There are three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity. There are two bond-market factors, related to maturity and default risks. Stock returns have shared variation due to the stock-market factors, and they are linked to bond returns through shared variation in the bond-market factors. Except for low-grade corporates, the bond-market factors capture the common variation in bond returns. Most important, the five factors seem to explain average returns on stocks and bonds.
This article employs the 1975-84 quarterly holdings of a sample of mutual funds to construct an estimate of their gross returns. This sample, which is not subject to survivorship bias, is used in conjunction with a sample that contains the actual (net) returns of the mutual funds. In addition to allowing the authors to estimate the bias in measured performance that is due to the survival requirement and to estimate total transaction costs, the sample is used to test for the existence of abnormal performance. The tests indicate that the risk-adjusted gross returns of some funds were significantly positive. Copyright 1989 by the University of Chicago.
The main purpose of this study is the development of a model for evaluating the performance of portfolios of risky assets taking into account the effects of differential risk on required returns. The portfolio evaluation model developed here incorporates these risk aspects explicitly by utilizing and extending recent theoretical results by Sharpe (1964) and Lintner (1965) on the pricing of capital assets under uncertainty. Given these results, a measure of portfolio performance (which measures only a manager's ability to forecast security prices) is defined as the difference between the actual returns on a portfolio in any particular holding period and the expected returns on that portfolio conditional on the riskless rate, its level of systematic risk, and the actual returns on the market portfolio. Criteria for judging a portfolio's performance to be neutral, superior, or inferior are established. A measure of a portfolio's efficiency is also derived, and the criteria for judging a portfolio to be efficient, superefficient, or inefficient are defined. I also show that it is strictly impossible to define a measure of efficiency solely in terms of ex post observable variables. I define two forms of the efficient market hypothesis, the weak form and the strong form (following terminology introduced by Harry Roberts, who used these terms in an unpublished speech entitled Clinical vs. Statistical Forecasts of Security Prices, given at the Seminar on the Analysis of Security Prices sponsored by the Center for Research in Security Prices at the Univ. of Chicago, May 1967. One can define a weakly efficient market in the following sense: Consider the arrival in the market of a new piece of information concerning the value of a security. A weakly efficient market is a market in which it may take time to evaluate this information with regard to its implications for the value of the security. Once this evaluation is complete, however, the price of the security immediately adjusts (in an unbiased fashion) to the new value implied by the information. In such a weakly efficient market, the past price series of a security will contain no information not already impounded in the current price. In such a market, forecasting techniques which use only the sequence of past prices to forecast future prices are doomed to failure. The best forecast of future price is merely the present price plus the normal expected return over the period. The available evidence suggests that it is highly unlikely that an investor or portfolio manager will be able to use the past history of stock prices alone (and hence mechanical trading rules based on these prices) to increase his profits. However, the conclusion that stock prices follow the weak form of the efficient market hypothesis allows for an investor to increase his profits by improving his ability to predict and evaluate the consequences of future events affecting stock prices. This brings us to the strong form definition of an efficient market, that is, one in which all past information available up to time t is impounded in the current price. If security prices conform to the strong form of the hypothesis, no analyst will be able to earn above-average returns by attempting to predict future prices on the basis of past information. The only individual able to earn superior returns will be that person who occasionally is the first to acquire a new piece of information not generally available to others in the market. But as Roll (1968) argues, in attempting to act immediately on this information, this individual will insure that the effects of this new information are quickly impounded in the security's price. Furthermore, if new information of this type arises randomly, no individual will be able to assure himself of systematic receipt of such information. Therefore, while an individual may occasionally realize such windfall returns, he will be unable to earn them systematically through time. While the weak form of the hypothesis is well substantiated by empirical evidence, the strong form of the hypothesis has not as yet been subjected to extensive empirical tests. The model developed in this paper allows us to submit the strong form of the hypothesis to such an empirical test - at least to the extent that its implications are manifested in the success or failure of one particular class of extremely well-endowed security analysts. I use the portfolio evaluation model developed here to examine the results achieved by the managers of 115 open end mutual funds. The main conclusions are: 1) The observed historical patterns of systematic risk and return for the mutual funds in the sample are consistent with the joint hypothesis that the capital asset pricing model is valid and that the mutual fund managers on average are unable to forecast future security prices. 2) If we assume that the capital asset pricing model is valid, then the empirical estimates of fund performance indicate that the fund portfolios were inferior after deduction of all management expenses and brokerage commissions generated in trading activity. When all management expenses and brokerage commissions are added back to the fund returns and the average cash balances of the funds are assumed to earn the riskless rate, the fund portfolios appeared to be just neutral. Thus, on the average the resources spent by the funds in to forecast security prices do not yield higher portfolio returns than those which could have been earned by equivalent risk portfolios selected (a) by random selection policies or (b) by combined investments in a market portfolio and government bonds. 3) I conclude that as far as these 115 mutual funds are concerned, prices of securities seem to behave according to the strong form of the efficient market hypothesis. That is, it appears that the current prices of securities completely capture the effects of all information available to these 115 mutual funds. Although these results certainly do not imply that the strong form of the hypothesis holds for all investors and for all time, they provide strong evidence in support of that hypothesis. 4) The evidence also indicates that, while the portfolios of the funds on the average are inferior and inefficient, this is due mainly to the generation of excessive expenses.
Any admissible portfolio performance measure should satisfy four minimal conditions: it assigns zero performance to each reference
portfolio and it is linear, continuous, and nontrivial. Such an admissible measure exists if and only if the securities market
obeys the law of one price. A positive admissible measure exists if and only if there is no arbitrage. This article characterizes
the (infinite) set of admissible performance measures. It is shown that performance evaluation is generally quite arbitrary.
A mutual fund data set is also used to demonstrate how the measurement method developed here can be applied.
This article presents evidence on persistence in the relative investment performance of large, institutional equity managers. Similar to existing evidence for mutual funds, we find persistent performance concentrated in the managers with poor prior-period performance measures. A conditional approach, using time-varying measures of risk and abnormal performance, is better able to detect this persistence and to predict the future performance of the funds than are traditional methods. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
The net returns of no-load mutual growth funds exhibit a hot-hands phenomenon during 1974-87. When performance is measured by Jensen's alpha, mutual funds that perform well in a one year evaluation period continue to generate superior performance in the following year. Underperformers also display short-run persistence. Hot hands persists in 1988 and 1989. The success of the hot hands strategy does not derive from selecting superior funds over the sample period. The timing component -- knowing when to pick which fund -- is significant. These results are robust to alternative equity portfolio benchmarks, such as those that account for firm-size effects and mean reversion in returns. Capitiling on the hot hands phenomenon, an investor could have generated a significant, risk-adjusted excess return of 10% per year.
Several recent studies suggest that equity mutual fund managers achieve superior returns and that considerable persistence in performance exists. This study utilizes a unique data set including returns from all equity mutual funds existing each year. These data enables the author to more precisely examine performance and the extent of survivorship bias. In the aggregate, funds have underperformed benchmark portfolios both after management expenses and even gross of expenses. Survivorship bias appears to be more important than other studies have estimated. Moreover, while considerable performance persistence existed during the 1970s, there was no consistency in fund returns during the 1980s. Copyright 1995 by American Finance Association.
The relative performance of no-load, growth-oriented mutual funds persists in the near term, with the strongest evidence for a one-year evaluation horizon. Portfolios of recent poor performers do significantly worse than standard benchmarks; those of recent top performers do better, though not significantly so. The difference in risk-adjusted performance between the top and bottom octile portfoli os is six to eight percent per year. These results are not attributable to known anomalies or survivorship bias. Investigations with a differen t (previously used) data set and with some post-1988 data confirm the finding of persistence. Copyright 1993 by American Finance Association.
Firm sizes and book-to-market ratios are both highly correlated with the average returns of common stocks. Eugene F. Fama and Kenneth R. French (1993) argue that the association between these characteristics and returns arise because the characteristics are proxies for nondiversifiable factor risk. In contrast, the evidence in this article indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the comovements of these stocks with pervasive factors. It is the characteristics rather than the covariance structure of returns that appear to explain the cross-sectional variation in stock returns. Copyright 1997 by American Finance Association.
Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not explained by the capital asset pricing model, (CAPM), they are called anomalies. The authors find that, except for the continuation of short-term returns, the anomalies largely disappear in a three-factor model. Their results are consistent with rational intertemporal CAPM or arbitrage pricing theory asset pricing but the authors also consider irrational pricing and data problems as possible explanations. Copyright 1996 by American Finance Association.
The authors explore performance persistence in mutual funds using absolute and relative benchmarks. Their sample, largely free of survivorship bias, indicates that relative risk-adjusted performance of mutual funds persists; however, persistence is mostly due to funds that lag the S&P 500. A profit analysis indicates that poor performance increases the probability of disappearance. A year-by-year decomposition of the persistence effect demonstrates that the relative performance pattern depends upon the time period observed and it is correlated across managers. Consequently, it is due to a common strategy that is not captured by standard stylistic categories or risk adjustment procedures. Copyright 1995 by American Finance Association.
There occurs on some occasions a difficulty in deciding the direction of causality between two related variables and also whether or not feedback is occurring. Testable definitions of causality and feedback are proposed and illustrated by use of simple ...
The use of predetermined variables to represent public information and time-variation has produced new insights about asset pricing models but the literature on mutual fund performance has not exploited these insights. This paper advocates conditional performance evaluation in which the relevant expectations are conditioned on public information variables. The authors modify several classical performance measures to this end and find that the predetermined variables are both statistically and economically significant. Conditioning on public information controls for biases in traditional market timing models and makes the average performance of the mutual funds in the authors' sample look better. Copyright 1996 by American Finance Association.
This paper analyzes how mutual fund performance relates to past performance. These tests are based on a multiple portfolio benchmark that was formed on the basis of securities characteristics. The authors find evidence that differences in performance between funds persist over time and that this persistence is consistent with the ability of fund managers to earn abnormal returns. Copyright 1992 by American Finance Association.
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Variables that explain stock returns, Unpublished Ph.D. dissertation, Graduate School of Business
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Momentum strategies, Forthcoming
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Conditioning manager alphas on economic information: Another look at the persistence of performance, Working paper, University of Washington School of Business Administration, Seattle, Wash
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