Fund Prices Research Articles

Arbitrage, Liquidity and Exit: The Repo and Federal Funds Markets Before, During, and Emerging from the Financial Crisis

This paper examines the link between the federal funds and repo markets, before, during, and emerging from the financial crisis that began in August 2007. In particular, the paper investigates the initial transmission of monetary policy to closely related money markets, pricing of risk, and liquidity effects, and then shows how these could interact if the Federal Reserve removes the substantial amount of liquidity currently in the federal funds market. The results suggest that pass-through from the federal funds rate to the repo deteriorated somewhat during the zero lower bound period, likely due to limits to arbitrage and idiosyncratic market factors. In addition, during the early part of the crisis, the pricing of federal funds, which are unsecured loans, indicated a marked jump in perceived credit risk. Moreover, the liquidity effect for the federal funds rate, or the change in the federal funds rate associated with an exogenous change in reserve balances, weakened greatly with the increase in supply of these balances over the crisis, implying a non-linear demand for federal funds. Using these analyses, the paper then shows simulations of the dynamic effects and balance sheet mechanics of liquidity draining on the federal funds and repo rates--a tool that might be used in an exit strategy to tighten monetary policy.

Are mutual fund fees excessive?

There is a long running debate over whether competition in the mutual fund industry limits the ability of investment advisors to charge fees that are disproportionate to the services they provide. We posit that disproportionately high fees are prevalent in funds with multiple share classes and those with weak governance structures. Using a comprehensive sample of index mutual funds for the from 1998 to 2007, we find that internal governance mechanisms matter primarily for funds with relatively small share classes where investors often face increased search costs and/or restricted access to competitive mutual funds. Additionally, we find that funds managed by publicly held sponsors are associated with disproportionately higher fee spreads (about 28 basis points). The results are robust to the inclusion of board characteristics, share class structure, and investment objectives. Overall, our findings suggest that competition and agency considerations are important determinants in the pricing of mutual funds.

Are Mutual Fund Fees Excessive?

There is a long running debate over whether competition in the mutual fund industry limits the ability of investment advisors to charge fees that are disproportionate to the services they provide. We posit that disproportionately high fees are prevalent in funds with multiple share classes and those with weak governance structures. Using a comprehensive sample of index mutual funds for the from 1998 to 2007, we find that internal governance mechanisms matter primarily for funds with relatively small share classes where investors often face increased search costs and/or restricted access to competitive mutual funds. Additionally, we find that funds managed by publicly held sponsors are associated with disproportionately higher fee spreads (about 28 basis points). The results are robust to the inclusion of board characteristics, share class structure, and investment objectives. Overall, our findings suggest that competition and agency considerations are important determinants in the pricing of mutual funds.

The Agency Effect of Repurchases on Closed‐End Funds

AbstractShare prices rise after companies announce repurchases, but there are differing views as to why this happens. Repurchases are announced by closed‐end funds when their discounts are widening (market‐to‐book is falling). The immediate post‐announcement effect is a small jump in a fund's share price, but the main effect occurs over the next four years during which time there is significant outperformance both of the fund's price and of its investment portfolio. Liquidity of the shares does not change. Repurchases, if executed, reduce the size of a fund and therefore the manager's fees. Our findings are consistent with directors using the threat of repurchases to discipline managers whose investment performance has been poor, leading to a closer alignment of pay and performance.

A Quantum-PSO-based SVM Algorithm for Fund Price Prediction

A Quantum-PSO-based SVM Algorithm for Fund Price Prediction

Earnings Opacity and Closed-End Country Fund Discounts

Closed-end country funds are interesting in that they have two sets of prices for the same underlying assets – the net asset value (NAV) of the fund holdings as measured using the underlying firms’ stock prices in their home markets and the fund price at which the fund trades on a U.S. stock exchange. Utilizing the theoretical framework of information asymmetry in two separate markets for an identical asset, we find that the difference between the fund’s NAV and its trading price (i.e., the fund discount) is positively associated with the earnings opacity of the underlying companies. Such a positive association is consistent with the notion that U.S. investors face higher information acquisition and processing costs when compared with local investors and therefore earnings opacity exacerbates the information disadvantage of U.S. investors, leading to a larger fund discount. We further show that the positive relation varies predictably with U.S. investors’ information acquisition and processing costs and with the extent to which host stock markets are segmented from the U.S. market. Specifically, we find that the positive relation between earnings opacity and fund discounts is weaker for those funds with more U.S. cross-listings in fund holdings, with underlying companies following financial reporting standards similar to U.S. standards, and with less segmented local markets.

Outperformance in Exchange Traded Fund Pricing Deviations: Generalised Control of Data Snooping Bias

An investigation into Exchange Traded Fund (ETF) outperformance during the period 2008-2012 is undertaken utilising a data set of 288 US traded securities. ETFs are tested for Net Asset Value (NAV) premium, underlying index and market benchmark outperformance, with Sharpe, Treynor and Sortino ratios employed as risk adjusted performance measures. A key contribution is the application of an innovative generalised stepdown procedure in controlling for data snooping bias. It is found that a large proportion of optimized replication and debt asset class ETFs display risk adjusted premiums with energy and precious metals focused funds outperforming the S&P500 market benchmark.

Arbitrage, Liquidity and Exit: The Repo and Federal Funds Markets before, during, and Emerging from the Financial Crisis

This paper examines the link between the federal funds and repo markets, before, during, and emerging from the financial crisis that began in August 2007. In particular, the paper investigates the initial transmission of monetary policy to closely related money markets, pricing of risk, and liquidity effects, and then shows how these could interact if the Federal Reserve removes the substantial amount of liquidity currently in the federal funds market. The results suggest that pass-through from the federal funds rate to the repo deteriorated somewhat during the zero lower bound period, likely due to limits to arbitrage and idiosyncratic market factors. In addition, during the early part of the crisis, the pricing of federal funds, which are unsecured loans, indicated a marked jump in perceived credit risk. Moreover, the liquidity effect for the federal funds rate, or the change in the federal funds rate associated with an exogenous change in reserve balances, weakened greatly with the increase in supply of these balances over the crisis, implying a non-linear demand for federal funds. Using these analyses, the paper then shows simulations of the dynamic effects and balance sheet mechanics of liquidity draining on the federal funds and repo rates -- a tool that might be used in an exit strategy to tighten monetary policy.

PRM10 to Get the Right Price – A Decision Support Method to Optimize Managerial Decisions on Public Funding Price to Apply for

In challenging economic times public funding decision makers are getting tougher, so the managers have to be smarter to choose the right price and optimally justify it. The objective is to present our method which rationally supports managerial decisions on pricing in public funding. The decision support method consists of the following steps: 1) identify all arguments relevant to different price levels – e.g. based on prices of similar drugs that were accepted by public payer or related to prices of the drug in other countries; 2) calculate maximum price that may be justified with each piece of an argument; 3) sort arguments in price ascending order; 4) rank arguments in a pairwise manner against their impact on probability of public funding acceptance using 5-point Likert scale; 5) plot all arguments on a graph with price level on X axis and cumulative impact on probability of acceptance on Y axis; and 6) calculate first derivative to identify local maxima. The seventh step is the manager's decision on choosing the right price from the subset of local maxima. Local maxima represent the price levels for which a relatively large increase in price associates with a relatively small decrease in acceptance for public funding. The decision support analysis results in a subset of price levels that the manager is recommended to choose the right price from. The final choice may depend on acceptance/avoidance of risk or necessity to achieve a specific turnover. All arguments that justify the chosen and higher prices may be used to justify this price to public funding decision makers. To ensure a pricing success to their companies and their own career development Market Access managers should use the presented decision support method to make possibly best informed choices concerning official prices of their drugs.

Juridical and Financial Considerations on the Public Recapitalisation and Rescue of Financial Institutions During Periods of Financial Crises (Part II)*

As well as a consideration of why the lender of last resort facility should be used for emergency situations and systemically relevant institutions in particular, an interesting point which will be considered in this paper is the comparison between the European Central Bank (ECB) Recommendation and its application by the Commission in the Re capitalisation Communication, specifically with its Annex, where the Commission explains how it determines the price of equity or own funds (ordinary or common shares) – balancing the “real value” with the “market value” within a crisis context. This paper will also consider how to transform the Crisis into an opportunity in order to minimise tax burdens to taxpayers – as well as making financial markets more efficient. Furthermore, whether the Commission and Member States have applied the methodology (the determination of the price of equity – as stated in the Annex to the Re capitalisation Communication) in determining the price of equity with respect to the capital of banks acquired by Member States, will be addressed. Such consideration could provide a vital key to determining the real value of State Aid and the best possible price for which capital could be sold.Given the scale of government intervention and State rescues which occurred during the recent crisis – as well as the prominence accorded to measures aimed at preventing and limiting distortions of competition, calls have been made for competition authorities to take on more formidable roles in designing and implementing exit strategies. In order to foster competition as much as possible, it is proposed that ”governments should provide financial institutions with incentives to prevent them from depending on government support once the economy begins to recover.”

Arbitrage, Liquidity and Exit: The Repo and Federal Funds Markets Before, During, and After the Financial Crisis

This paper examines the link between the federal funds and repo markets, before, during, and after the financial crisis that began in August 2007. In particular, the paper investigates three issues: transmission of monetary policy, pricing of risk, and liquidity effects, and then shows the effect of these on draining liquidity. First, the results suggest that pass-through from the federal funds rate to the repo deteriorated somewhat during the zero lower bound period, likely due to limits to arbitrage and idiosyncratic market factors. Second, during the crisis, the pricing of federal funds, which are unsecured loans, indicated a marked jump in perceived credit risk. Third, the liquidity effect for the federal funds rate, or the change in the federal funds rate associated with an exogenous change in reserve balances, weakened greatly with the increase in supply of these balances over the crisis, implying a non-linear demand for federal funds. Using these analyses, the paper then shows simulations of the dynamic effects and balance sheet mechanics of liquidity draining on the federal funds and repo rates.

Relationship between macroeconomic variables and net asset values (NAV) of equity funds: Cointegration evidence and vector error correction model of the Hong Kong Mandatory Provident Funds (MPFs)

This paper is the first to examine the cointegration and causality among the net asset values (NAV) of Hong Kong equity funds under the Hong Kong Mandatory Provident Fund (MPF) scheme, the local stock market index – Hang Seng Index (HSI), and selected Hong Kong macroeconomic variables including the inflation rate proxied by CPI, money supply (M2), and short-term interest rate proxied by overnight Hong Kong Interbank Offer Rate (HIBOR), during the period 2001–2009. Bivariate cointegration analysis indicates that the fund NAV respond to HSI and CPI, but not respond to M2 and HIBOR; while multivariate cointegration analysis adds further evidence that the fund NAV are cointegrated with a set of these macroeconomic variables. The fund NAV is found to be Granger caused by HSI, CPI, and M2; however, HIBOR does not have any Granger causal relations with the fund NAV. A multivariate error correction model (ECM) of each fund's NAV on all macroeconomic variables is finally constructed, which adds further evidence that fund price is not causal related with HIBOR. This suggests that any movements in selected macroeconomic variables can be used to predict the movement of NAV and the MPF scheme participants may ignore the effects of changes in interest rates on the changes in NAV when they consider reallocating the distribution between equity funds and other types of funds.

Stock price dynamics: nonlinear trend, volume, volatility, resistance and money supply

We present a methodology to study a data set of 119 260 daily closed-end fund prices using mixed-effects regressions with the objective of understanding price dynamics. There is strong statistical support that relative price change depends significantly on (i) the recent trend in a nonlinear manner, (ii) recent changes in valuation, (iii) recent changes in money supply (M2), (iv) longer-term trend, (v) recent volume changes and (vi) proximity to a recent high price. The dependence on the volatility is more subtle, as short-term volatility has a positive influence, while the longer term is negative. The cubic nonlinearity in the weighted price trend shows that a percentage daily gain of up to 2.78% tends to yield higher prices, but larger gains lead to lower prices. Thus, the nonlinearity of price trend establishes an empirical and quantitative basis for both underreaction and overreaction within one large data set, facilitating an understanding of these competing motivations in markets. Increasing money supply is found to have a significant positive effect on stock price, while proximity to recent high prices has a negative effect. The data set consists of daily prices during the period 26 October 1998 to 30 January 2008.

Performance evaluation of mutual fund investments: The impact of non-normality and time-varying volatility

Extending previous work on mutual fund pricing, this article introduces the idea of modeling the conditional distribution of mutual fund returns using a fat tailed density and a time-varying conditional variance. This approach takes into account the stylized facts of mutual fund return series, that is heteroscedasticity and deviations from normality. We evaluate mutual fund performance using multifactor asset pricing models, with the relevant risk factors being identified through standard model selection techniques. We explore potential impacts of our approach by analyzing individual mutual funds and show that it can be economically important.

Arbitrage, Idiosyncratic Risk and the Rationality of Discounts on Closed-End Funds

We examine the roles of rational and behavioural factors in explaining long-run premiums/discounts on closed-end funds, using evidence on equity funds from the US and UK. Although the processes by which fund prices converge towards long-run premiums or discounts are similar in the two countries, there is a remarkable difference in what influences the cross-section of premiums: in the US two behavioural factors (idiosyncratic risks and dividend payouts) have a positive influence, whereas in the UK two rational factors (management fees and liquidity) have a negative influence. While these cross-sectional factors are highly significant, they cannot explain why premiums are not positive in the US (-3% average) and so highly negative in the UK (-12% average). The main contribution of our paper is to show that a fund trades at a discount because there is an arbitrage cap on its premium resulting from new issues. This censors the distribution of the premium and causes its mean to be negative. The more idiosyncratic is a fund’s risk, the more difficult it is to make a copycat issue and the smaller is the cap’s downward influence on the premium. Because of the cap, the existence of a discount is a rational phenomenon for all types of closed-end fund, albeit modified for equity funds by behavioural factors in the US and by rational factors in the UK.

Current debates on the cost-benefit analysis of transport proyects in Great Britain

Britain was one of the first countries to adopt cost-benefit analysis for use in transport projects, and now has a state of the art approach, which nests the cost-benefit analysis in a multi-criterion framework linked to the objectives of transport policy. But despite this a number of heated debates about the a p p roach used continue. This paper outlines the current approach used and the debates going on. Regarding valuation of benefits, despite decades of relevant research, the value of time savings remains controversial, particularly in the context of small time savings and of savings in working time, where the current approach is based on theoretical considerations rather than empirical evidence on willingness to pay. The other big uncertainty in measuring benefits is in relation to wider economic benefits. For many years the official position on these was that they were unlikely to be significant, but recent research has led to proposals to incorporate them into the standard analysis. The current British approach to decision criteria relies on the calculation of benefit cost ratios, in which the benefits are the net impact on all other than the government budget and the costs are the cost to the public budget. However, there is a strong case for introducing an explicit shadow price of pub lic funds into the appraisal. A further weakness in current British transport project appraisal is the lack of detailed attention to the distribution of costs and benefits. Overall, appraisal is seen too much as a purely technical analysis to obtain a single indicator of value for money rather than a consideration of the robustness of the project to alternative future scenarios. JEL Classification: G31, H40, H54.

The price linkages between the equity fund price levels and the stock markets: Evidences from cointegration approach and causality analysis of Hong Kong Mandatory Provident Fund (MPF)

This paper is the first study to examine the short and long term price level linkages between the equity funds under the Hong Kong Mandatory Provident Fund (MPF) scheme and the benchmark indices proxied by different indices designed by the Hong Kong Investment Fund Association (HKIFA) over the period 2001–2008. Cointegration test is used to identify the long run relationship between the price levels and the stock market index, short run relationship between them is analyzed by the Granger causality test. We find that there is 56.43% of the equity funds have their price levels cointegrated with stock market index. In the short run, the Granger causality test indicates that some funds' price levels have both long and short run comovements with the stock market indices; on the other hand, some equity funds are found to have short run comovements with the stock market index but no long run comovements with the index, this indicates that some equity fund managers have ever tried to design their portfolios trying to win the market. Cointegration analysis is also done to investigate the long run relationship between the price levels of non-Hong Kong equity fund price levels and the local stock market index, Hang Seng Index, to evaluate the existence of benefit from global diversification by investing in the foreign equity funds. The results indicate that the scheme participants may have global diversification benefit by investing in US and Japanese equity funds.

The Price Linkages between the Equity Fund Price Levels and the Stock Markets: Evidences from Cointegration Approach and Causality Analysis of Hong Kong Mandatory Provident Fund (MPF)

This paper is the first study to examine the short and long term price level linkages between the equity funds under the Hong Kong Mandatory Provident Fund (MPF) scheme and the benchmark indices proxied by different indices designed by the Hong Kong Investment Fund Association (HKIFA) over the period 2001 – 2008. Cointegration test is used to identify the long run relationship between the price levels and the stock market index, short run relationship between them is analyzed by the Granger causality test. We find that there is 56.43% of the equity funds have their price levels cointegrated with stock market index. In the short run, the Granger causality test indicates that some funds’ price levels have both long and short run comovements with the stock market indices; on the other hand, some equity funds are found to have short run comovements with the stock market index but no long run comovements with the index, this indicates that some equity fund managers have ever tried to design their portfolios trying to win the market. Cointegration analysis is also done to investigate the long run relationship between the price levels of non-Hong Kong equity fund price levels and the local stock market index, Hang Seng Index, to evaluate the existence of benefit from global diversification by investing in the foreign equity funds. The results indicate that the scheme participants may have global diversification benefit by investing in US and Japanese equity funds.

Low discount rates and insignificant environmental values

Difference between the discount rate on consumption and the rate of return on investment is often taken to prevent the former's being used as a social discount rate. Yet techniques have long been known for incorporating both these rates in a shadow price of investment funds. Assumptions about the proportion of investment revenues saved and reinvested are crucial in determining whether a low discount rate favours or discriminates against long-term environmental values. Even a moderate saving rate may make the shadow price of funds indefinitely large. The conceptually correct discount rate then becomes the growth rate of investment funds, and the relative value of environmental effects becomes zero. Stochastic variation in rate of return makes this result more likely. Such an outcome may be avoided by setting reinvestment to zero, or assuming convergence of rates of return and discount, but no firm justification exists for these stratagems. However, various reasonable assumptions about environmental costs – especially, that they embody an investment element, or require adequate compensation to be paid – may make such costs indefinite also, and therefore capable of standing against indefinite values of investible funds.

Inefficiencies in the Pricing of Exchange-Traded Funds

The prices of exchange-traded funds can deviate significantly from their net asset values, on average fluctuating within a band of about 200 basis points, in spite of the arbitrage mechanism that allows authorized participants to create and redeem shares for the underlying portfolios. The deviations are larger in funds holding international or illiquid securities where net asset values are most difficult to determine in real time. To control for stale pricing of the underlying assets, I introduce a novel approach using the cross-section of prices on a group of similar ETFs. Nevertheless, the average pricing band remains economically significant at about 100 basis points, with even larger mispricings in some asset classes. Active trading strategies exploiting such inefficiencies produce substantial abnormal returns before transaction costs, providing further proof of short-term mean-reversion in ETF prices.