Center For Research In Security Prices Research Articles

A LINEAR-PROGRAMMING PORTFOLIO OPTIMIZER TO MEAN–VARIANCE OPTIMIZATION

In the Markowitz mean–variance portfolio optimization problem, the estimation of the inverse covariance matrix is not trivial and can even be intractable, especially when the dimension is very high. In this paper, we propose a linear-programming portfolio optimizer (LPO) to solve the Markowitz optimization problem in both low-dimensional and high-dimensional settings. Instead of directly estimating the inverse covariance matrix [Formula: see text], the LPO method estimates the portfolio weights [Formula: see text] through solving an [Formula: see text]-constrained optimization problem. Moreover, we further prove that the LPO estimator asymptotically yields the maximum expected return while preserving the risk constraint. To offer a practical insight into the LPO approach, we provide a comprehensive implementation procedure of estimating portfolio weights via the Dantzig selector with sequential optimization (DASSO) algorithm and selecting the sparsity parameter through cross-validation. Simulations on both synthetic data and empirical data from Fama–French and the Center for Research in Security Prices (CRSP) databases validate the performance of the proposed method in comparison with other existing proposals.

Robust Testing for Bollinger Band, Moving Average and Relative Strength Index

We test whether the moving average  indicator is profitable in trend following and compare the result with common momentum indicators such as Relative Strength Index (RSI) and Bollinger Band (BB). Our sample runs from January 1, 1963, through December 31. 2019. We test whether the signals generated are profitable and compare their success in timing the portfolios based on the previous year's volatility using the Center for Research in Security Prices (CRSP) data. We note the portfolios sorted by volatility to be trend following and use common entry points for timing them. We find all indicators to be more profitable than the Buy and Hold (BH). The moving average (MA) has the strongest return, while BB and RSI show positive return they do worse than the MA. The results hold across all portfolio deciles sorted by both size and volatility. The indicators for RSI and BB are robust to other specifications for entry and parameters. We also show price level analysis for both RSI and BB as well as a trailing three year analysis for the volatility deciles and moving average.

Performance pay sensitivity: Do top management incentives align with shareholder value creation?

Arising from the principal-agent consideration, Jensen and Murphy (1990b) studied the pay-performance sensitivity (including pay, options, stockholdings, and dismissal) for chief executive officers (CEOs) in the 1980s. They found that CEO wealth changes $3.25 for every $1,000 change in shareholder wealth. In this study, we revisit the issue of the linkage between CEO pay and performance but with the difference that we only include observable measures in the pay-performance sensitivity estimate. Our data on executive compensation stems from the ExecuComp database on S&P 1500 firms, and the performance data from the Center for Research in Security Prices (CRSP) database (total: 23,737 firm-year observations). We find that CEO wealth changes $5.34 for every $1,000 change in shareholder wealth. Almost all of this sensitivity is attributed to compensation through stock options and the CEO’s inside stockholdings. Today, the incentives generated by stock options have increased thirteen times, and the total pay-performance sensitivity has almost doubled in value, compared to when Jensen and Murphy (1990b) estimated the pay-performance sensitivity in the 1980s for the first time. Despite the increased pay performance sensitivity, we hypothesize that internal and external political forces negatively affect the CEO’s performance incentives. Compensation constraints reduce the pay performance sensitivity and hereby the incentives for the CEO to maximize shareholder wealth. Further research on how CEO wealth varies with absolute and relative corporate performance is required to determine if the CEO’s incentives are consistent with shareholder wealth maximization.

Dynamic Peer Groups of Arbitrage Characteristics

We propose an asset pricing factor model constructed with semiparametric characteristics-based mispricing and factor loading functions. We approximate the unknown functions by B-splines sieve where the number of B-splines coefficients is diverging. We estimate this model and test the existence of the mispricing function by a power enhanced hypothesis test. The enhanced test solves the low power problem caused by diverging B-splines coefficients, with the strengthened power approaching one asymptotically. We also investigate the structure of mispricing components through Hierarchical K-means Clusterings. We apply our methodology to CRSP (Center for Research in Security Prices) and Compustat data for the U.S. stock market with one-year rolling windows during 1967–2017. This empirical study shows the presence of mispricing functions in certain time blocks. We also find that distinct clusters of the same characteristics lead to similar arbitrage returns, forming a “peer group” of arbitrage characteristics.

Stock market implications of Fed's balance sheet size

PurposeConsidering the relationship between the central bank balance sheet and unconventional monetary policy after the 2008 financial crisis, it is crucial to see how the unconventional monetary policy, given near-zero interest rates, affects future stock market performance. This paper analyzes the impact of the Fed's balance sheet size on stock market performance.Design/methodology/approachTo analyze the Fed's balance sheet size's long-term stock market implications, this paper uses the asset pricing framework of market return predictability such as Ordinary least squares (OLS) and Generalized method of moments (GMM) analysis.FindingsFindings in this paper suggest that the Fed's balance sheet size, deflated by asset market wealth, presents evidence of return predictability during 1926–2015 that is robust against standard controls. These results can be explained through the redistribution of risk and the wealth channels of monetary policy transmission. The changing balance sheet size of a central bank (1) affects systemic risk, yields and expectations and (2) signals the future direction of monetary policy and thus economic outlook.Research limitations/implicationsThe main implication of these findings is that policymakers should avoid a severe imbalance between a central bank's balance sheet size and assets market wealth.Originality/valueThe empirical evidence in this paper documents a century-old relation between the Fed's balance sheet size and US stock market return using the Fed's balance sheet data for the last 100 years and stock market returns from the Center for research in security prices (CRSP) database.

A Dynamic Semiparametric Characteristics-based Model for Optimal Portfolio Selection

This paper develops a two-step semiparametric methodology for portfolio weight selection for characteristics- based factor-tilt and factor-timing investment strategies. We build upon the expected utility maximization framework of Brandt (1999) and Ait-sahalia and Brandt (2001). We assume that asset returns obey a characteristics- based factor model with time-varying factor risk premia as in Li and Linton (2020). We prove under our return- generating assumptions that in a market with a large number of assets, an approximately optimal portfolio can be established using a two-step procedure. The first step finds optimal factor-mimicking sub-portfolios using a quadratic objective function over linear combinations of characteristics-based factor loadings. The second step dynamically combines these factor-mimicking sub-portfolios based on a time-varying signal, using the investor’s expected utility as the objective function. We develop and implement a two-stage semiparametric estimator. We apply it to CRSP (Center for Research in Security Prices) and FRED (Federal Reserve Economic Data) data and find excellent in-sample and out-sample performance consistent with investors’ risk aversion levels.

Do Stocks With Dividends Outperform the Market: Evidence From the 2011-2020 Business Cycle

This study compared the returns of stocks with dividends with the returns of the market. It compared the S&P 500 Dividend Aristocrat Index with the Center for Research in Security Prices (CRSP) U.S. Total Stock Market Index. In addition, a comparison was made between the SPDR S&P Dividend ETF (SDY), as a proxy for the S&P 500 Dividend Aristocrat Index and the Vanguard Total Stock Market Index Fund ETF Shares (VTI), as a proxy for the CRSP U.S. Total Market Index.

Tax avoidance and stock price crash risk: mitigating role of managerial ability

PurposeThe purpose of this paper is to examine whether the quality of management can mitigate the positive association between corporate tax avoidance and firm-specific stock price crash risk (SPCR).Design/methodology/approachThe study is based on data from the Center for Research in Security Prices (CRSP), Compustat and ExecuComp and focuses on US-listed firms from 1980 to 2016. The authors employ ordinary least squares (OLS) regression as the baseline methodology and use five measures of tax avoidance and three measures of SPCR. Propensity score matching (PSM) and two-stage least squares methodologies are employed to address endogeneity concerns.FindingsThe authors find that more able managers weaken the positive relationship between tax avoidance and SPCR. The results suggest that the benefits of efficient tax management are more likely in firms with a more able management team as the likelihood of SPCR due to tax avoidance practices is reduced in such firms.Practical implicationsThis study has important practical implications for investors who are concerned about firms that engage in tax planning activities that can reduce corporate taxes, but at the same time increase the SPCR. Considering the compelling arguments and the “dark” side of more able managers who may engage in opportunistic behaviour, the study provides useful evidence in support of more able managers.Originality/valueThis paper contributes to the SPCR literature by examining the effect of managerial ability on the likelihood of tax avoidance causing SPCR. Able managers are likely to lower the risk faced by investors and are less likely to extract rent and manipulate information. Therefore, the findings of this study have implications for investors by informing them of the negative value implications of tax avoidance and how they can be mitigated by hiring more able managers.

Data quality problems troubling business and financial researchers: A literature review and synthetic analysis

The data quality of commercial business and financial databases greatly affects research quality and reliability. The presence of data quality problems can not only distort research results, destroy a research effort but also seriously damage management decisions based upon such research. Although library literature rarely discusses data quality problems, business literature reports a wide range of data quality issues, many of which have been systematically tested with statistical methods. This article reviews a collection of the business literature that provides a critical analysis on the data quality of the most frequently used business and finance databases including the Center for Research in Security Prices (CRSP), Compustat, S&P Capital IQ, I/B/E/S, Datastream, Worldscope, Securities Data Company (SDC) Platinum, and Bureau van Dijk (BvD) Orbis and identifies 11 categories of common data quality problems, including missing values, data errors, discrepancies, biases, inconsistencies, static header data, standardization, changes in historic data, lack of transparency, reporting time issues and misuse of data. Finally, the article provides some practical advice for librarians to facilitate their scholarly communications with researchers on data quality problems.

A Dynamic Network of Arbitrage Characteristics

We propose an asset pricing factor model constructed with semi-parametric characteristics-based mispricing and factor loading functions. We approximate the unknown functions by B-splines sieve where the number of B-splines coefficients is diverging. We estimate this model and test the existence of the mispricing function by a power enhanced hypothesis test. The enhanced test solves the low power problem caused by diverging B-spline coefficients, with the strengthened power approaches to one asymptotically. We also investigate the structure of mispricing components through Hierarchical K-means Clusterings. We apply our methodology to CRSP (Center for Research in Security Prices) and FRED (Federal Reserve Economic Data) data for the US stock market with one-year rolling windows during 1967-2017. This empirical study shows the presence of mispricing functions in certain time blocks. We also find that distinct clusters of the same characteristics lead to similar arbitrage returns, forming a “peer group” of arbitrage characteristics.

United States Stock Market Response to FDA Approval of New Dermatologic Drugs

The Food and Drug Administration (FDA) has approved several new dermatologic drugs in the last decade. The public response to their approval has not yet been evaluated. To analyze the United States stock market response surrounding FDA approval of new dermatologic drugs between 2008 and 2018. A list of 34 FDA approved dermatologic drugs for publicly traded companies was compiled from the CenterWatch New Dermatology Drugs List and the FDA Annual Reports on New Drugs. Company and stock market data was acquired from the Center for Research in Security Prices (CRSP) United States Stock database. Cumulative abnormal returns (CAR) were calculated as the difference between raw returns and expected value-weighted returns. Data analyses were performed using SAS 9.4 (Cary, NC). The average CAR for the 21-day window period surrounding FDA approval of new dermatologic drugs was +1.71%. Drugs approved for the treatment of hyperhidrosis (+17.7%), bacterial skin infections (+7.18%), and rosacea (+6.83%) added the most market value. The market value added to private or internationally traded companies could not be assessed. FDA approval of dermatologic drugs generally has a positive market response. Information on market reaction may provide important insights for investors, pharmaceutical companies, and researchers. J Drugs Dermatol. 2020;19(6): doi:10.36849/JDD.2020.5033.

REVISITING BOOKBUILDING VERSUS AUCTION IPOS: A PERSPECTIVE OF INFORMATIONALLY EFFICIENT PRICES IN THE AFTERMARKET

AbstractWe compare price efficiency between auction and bookbuilding initial public offerings (IPOs). Our empirical results fail to support the prevailing conjecture that bookbuilding IPOs are more price efficient than auction IPOs. We find statistical insignificance between two IPO samples or weak evidence for the opposite hypothesis. We add to the evidence that auctions yield aftermarket price efficiency equal to that of bookbuilding or are statistically indifferent when measured by market microstructure and Center for Research in Security Prices (CRSP) data. We also examine whether underlying price efficiency forces reflect the relative presence of informed institutional and retail investors, aftermarket price support, and divergence of investor expectations.

Risk appetite, idiosyncratic volatility and expected returns

This paper examines the variations in idiosyncratic volatility in stock returns over time, and evaluates the role of investor sentiment in explaining these variations. This study uses Fama and French's (2015) 5-factor model to calculate the idiosyncratic volatility with data from the Center for Research in Security Prices (CRSP) for 1980–2016, and analyzes the effects of investors' risk appetite reflected by market-based, press-based, and survey-based proxies for investor sentiment on the relationship between expected returns and idiosyncratic volatility. The findings demonstrate that risk appetite plays a significant role in explaining and predicting variations in this relationship over time. Specifically, when risk appetite increases, there is a shift from safer to more speculative stocks that is translated into positive effect on the relationship between expected returns and idiosyncratic volatility. In contrast, a lack of appetite for risk has the opposite effect. The results are robust using different subsamples and econometric procedures.

Impact of competition on fund disclosures and consumer search costs

PurposeThe purpose of this paper is to investigate the impact of competition in financial markets on the frequency of portfolio disclosures by mutual funds and its implications for consumer search costs.Design/methodology/approachThe empirical analysis merges the Center for Research in Security Prices (CRSP) survivorship bias-free mutual fund database, the Thompson Financial CDA/ Spectrum holdings database and the CRSP stock price data. The sample covers the time period between 1993 and 2010 and OLS and logistic regressions are used to investigate the impact of competition on fund disclosures.FindingsThis paper finds that mutual fund disclosures decrease with market competition and this effect is amplified for funds holding illiquid assets. These results provide empirical support for the findings of Carlin et al. (2102). Mutual funds use portfolio disclosures as a marketing tool to attract investments in a tournament-like market, where superior relative performance and greater visibility are rewarded with convex payoffs. With competition, the likelihood of receiving new investments decreases for each fund and funds respond by reducing costly voluntary disclosures. The disclosure costs are higher for funds holding illiquid assets, and hence, the effect is stronger for them.Originality/valueThis paper has important policy implications for disclosures in a market where relative performance matters. The traditional view is that competition induces voluntary disclosure because entities would like to differentiate themselves from competitors, and hence, competition should increase market transparency. However, this paper sheds light on the negative consequence of competition in a tournament-like mutual fund market.

Do stocks outperform Treasury bills?

The majority of common stocks that have appeared in the Center for Research in Security Prices (CRSP) database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing 4% of listed companies explain the net gain for the entire US stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly diversified active strategies most often underperform market averages.

The value of waivers from the affordable care act

ABSTRACTThe Affordable Care Act requires health insurance plans to offer coverage without annual limits. This requirement began to be enforced in September of 2010, but some employers received special waivers that delayed the start of enforcement for them. Using data from the Center for Research in Security Prices (CRSP), we conduct an event study of the stock prices of these companies as their waivers were announced. We find that waivers do not lead to a statistically significant increase in the stock prices of waiver recipients.

The Missing New Funds

Many papers in the mutual fund literature rely on a sample that matches the Center for Research in Security Prices (CRSP) mutual fund database with the fund holdings data from Thomson Reuters (TR) s12 database. I document that about 58% of newly founded U.S. equity mutual fund share classes in the CRSP mutual fund database from 2008 to 2015 cannot be matched to the TR database. Funds that are missing from the TR database tend to be smaller, have higher turnover ratios, receive higher fund flows, and have higher four-factor alphas. These differences are robust within same cohorts of funds. Index funds and exchange-traded funds are more likely to be omitted than actively managed funds. This paper was accepted by Tyler Shumway, finance.

Study of REIT ETF beta

PurposeThe aim of this study is to examine real estate investment trust exchange-traded funds (REIT ETFs) and test for the existence of the “asymmetric beta puzzle” phenomenon in these financial instruments that are relatively new and are gaining popularity. The “asymmetric beta puzzle” phenomenon is used to identify the hedging and diversification benefits of a financial instrument. “Asymmetric beta puzzle” exists when betas in declining markets are higher than betas in advancing markets.Design/methodology/approachTo study 14 REIT ETFs by using monthly and daily Center for Research in Security Prices (CRSP) data. Capital asset pricing model (CAPM) and Fama–French three-factor model were used to estimate betas in REIT ETFs and those in advancing and declining markets. Both the S&P 500 and the CRSP value-weighted indices were used in the beta estimation. Two hypotheses with regard to betas in both advancing and declining markets were defined and tested to test for the existence of the “asymmetric beta puzzle” phenomenon.FindingsThis study confirms the presence of the “asymmetric beta puzzle” in the data of monthly REIT ETFs as documented by Goldstein and Nelling (1999) and Chatrathet al.(2000) for REITs; however, this phenomenon was not found when using daily data, but quite the opposite – REIT ETF betas are higher in advancing markets than they are in declining markets – was found.Originality/valueGoldstein and Nelling (1999) and Chatrathet al.(2000) identify the phenomenon of “the asymmetric REIT-beta puzzle” in monthly REIT’s returns. This study revisits the phenomenon identified in the aforementioned authors’ studies by using daily data and a relatively new real estate financial instrument – REIT ETFs. Therefore, this paper fills a void in the literature and would benefit both institutional and retail investors in their portfolio designs.

Public news arrival and the idiosyncratic volatility puzzle

Abstract This paper analyzes the effects of news and its sentiment on the idiosyncratic volatility ( IVOL ) — expected return relation. We postulate that the perceived negative IVOL -expected return relation could be the artifact of the confounding effect of public news arrivals. Using the stock return data from the Center for Research in Security Prices (CRSP) database and the news database from the RavenPack News Analytics over the period from 2000 to 2011, we show that the strength of the positive relation is reduced systematically by 50% after accounting for the arrivals of good and bad news releases, which are defined by their sentiment scores. This finding is robust to numerous model specifications, and the inclusion of firm-level characteristics, liquidity risk and information risk. When we restrict the firm-specific news to value-relevant news, the positive relation disappears. We conclude that that the public arrivals of firm-specific news play a significant role in explaining the IVOL puzzle.

Archival Research Considerations for CRSP Data

This study examines three important issues that archival accounting researchers frequently encounter with data from the Center for Research in Security Prices (CRSP). Although the issues appear to be innocuous, few if any studies overtly discuss the remedies or ramifications of the issues. More importantly, omitting the discussion of the issues may leave the editor, reviewer, discussant, etc. speculating about the integrity of a research study’s methodology. Addressing the issues directly builds trust with an editorial staff, and enhances the researcher’s credibility.