Higher Excess Returns Research Articles

Optimal capital structure of government-subsidized private participation in infrastructure projects

A government-subsidized private participation in infrastructure (PPI) project is a solution to attract private investors to invest in financially non-viable infrastructure projects with high social benefits. A government-subsidized PPI project comprises three financing sources: government subsidy, equity, and debt. For government-subsidized PPI projects, the government subsidy level must be determined before the optimal debt ratio can be determined. A government subsidy level that is too low may lead to the project being non-bankable for financial institutes and a level that is too high may result in high excess returns for project investors. This paper develops cooperative game models, which are multiple–variable game models, to determine optimal solutions for four major decision variables – the government subsidy, tariff, debt ratio, and interest rate for project negotiation for PPI projects. This three–party game model is developed to identify terms and conditions that optimize the total benefits of financially non-viable PPI projects, which can lead to successful PPI project negotiations. The Kaohsiung cable car project in Taiwan is used for demonstration purposes. The results of the analysis show that optimal solutions for the three financing sources - government subsidy, equity, and debt - can be determined by the models.

基于知识图谱的智能投资决策 (Intelligent Investment Decision Based on Knowledge Graph)

Chinese Abstract: 如何能将海量非结构化数据为投资所用，从海量的新闻中挖掘有用的信 息，对于投资决策至关重要。本文研究金融知识图谱的自动构建，把多源数据， 包括结构化数据、半结构化数据以及非结构化数据，整合在一起，将金融市场错 综复杂的关系以知识图谱的方式刻画。在此基础上，进一步研究基于知识图谱的 关联实体挖掘，解决财经新闻与股票实体的对应影响关系识别问题。本文最后设 计实验，模拟真实投资策略进行回测，取得了较高的超额收益，验证了本文算法 的有效性。 English Abstract: How to use massive amounts of unstructured data for investment, and to mine useful information from massive news is critical to investment decisions. This paper studies the automatic construction of financial knowledge graph, and integrates multi-source data, including structured data, semi-structured data and unstructured data, to characterize the intricate relationship of financial markets in the form of knowledge graph. On this basis, the related entity mining based on knowledge graph is further studied to solve the problem of identifying the corresponding influence relationship between financial news and stock entities. At the end of the paper, the experiment is designed to simulate the real investment strategy for backtesting, and the higher excess returns are obtained, which verifies the effectiveness of the proposed algorithm.

Market transparency and international real estate investment

PurposeThe purpose of this paper is to provide new empirical evidence on the important role of market transparency in international real estate investment.Design/methodology/approachThe authors apply the augmented panel regression method (or the correlated random effects approach) by using national panel data from 44 countries from 2004 to 2016.FindingsCountries with better accessibility to market information and higher enforceability of regulations have less information asymmetry and attract more inward real estate investment. In contrast, the accounting quality of corporate governance is negatively correlated with investment, indicating the possibility that foreign investors enjoy high excess returns by investing in real estate in countries with poor accounting quality.Practical implicationsCountries lacking market transparency can increase inward investments by providing richer market information to foreign investors and by boosting enforceability of regulation to mitigate the uncertainty of returns on investment. Investors and public sectors in countries facing a saturated real estate market may expand investment by investigating less-explored markets and by seeking bilateral negotiations to secure higher predictability of return on investment in targeted countries.Originality/valueThe authors utilize updated multiple transparency indices instead of a conventional aggregate index to examine how the investment is attributed to different aspects of market transparency and employ the augmented panel regression method for investigation of the intra- and international determinants of the investment.

Investor attention using the Google search volume index – impact on stock returns

PurposeThe purpose of this paper is to investigate whether the investor attention using the Google search volume index (GSVI) can be used to forecast stock returns. The authors also find the answer to whether the “price pressure hypothesis” would hold true for the Indian stock market.Design/methodology/approachThe authors employ a more recent fully balanced panel data for the period from July 2012 to Jun 2017 (260 weeks) of observations for companies of NIFTY 50 of the National Stock Exchange in the Indian stock market. The authors are motivated by Tetlock (2007) and Bijl et al. (2016) to employ regression approach of econometric estimation.FindingsThe authors find that high Google search volumes lead to positive returns. More precisely, the high Google search volumes predict positive and significant returns in the subsequent fourth and fifth weeks. The GSVI performs as an useful predictor of the direction as well as the magnitude of the excess returns. The higher quantiles of the GSVI have corresponding higher excess returns. The authors notice that the domestic investor searches are correlated with higher excess returns than the worldwide investor searches. The findings imply that the signals from the search volume data could be of help in the construction of profitable trading strategies.Originality/valueTo the best of the authors knowledge, no paper has examined the relationship between Google search intensity and stock-trading behavior in the Indian stock market. The authors use a more recent data for the period from 2012 to 2017 to investigate whether search query data on company names can be used to predict weekly stock returns for individual firms. This study complements the prior studies by investigating the relationship between search intensity and stock-trading behavior in the Indian stock market.

Does one model fit all in global equity markets? Some insight into market factor based strategies in enhancing alpha

AbstractThe sources of risk in a marketplace are systematic, cross‐sectional, and time varying in nature. Though the capital asset pricing model (CAPM) provides an excellent risk–return framework and the market beta may reflect the risk associated with risky assets, there are opportunities for investors to take advantage of dimensional and time‐varying return anomalies in order to improve their investment returns. In this paper, we restrict our analysis to return variations linked to market factor anomalies or factor or dimensional beta using the Fama–French three‐factor; Carhart four‐factor; Fama‐French five‐factor; and Asness, Frazzini, and Pederson (AFP)'s five‐ and six‐factor models. We find significant variations in explaining sources of risk across 22 developed and 21 emerging markets with data over a long period from 1991 to 2016. Each market is unique in terms of factor risk characteristics, and market risk as explained by the CAPM is not the true risk measure. Hence, contrary to the risk–return efficiency framework, we find that lower market risk results in higher excess return in 19 out of the 22 developed markets, which is a major anomaly. However, although in majority of the markets, the AFP models result in reducing market risk (15 countries) and enhancing alpha (11 countries), it is also very interesting to note that the CAPM is second only in generating excess returns in the developed markets. We are conscious of the fact, however, that each market is unique in its composition and trend even over a long time horizon, and hence, a generalized approach in asset allocation cannot be adopted across all the markets.

Momentum and reversal strategies in Chinese commodity futures markets

This paper tests a wide range of momentum and reversal strategies at different trading frequencies for the complete Chinese commodity futures market dataset. Accurate estimates of transaction costs for each commodity and the minute level futures prices are utilized to obtain the most realistic out-of-sample backtesting results. Distinctively from the existing literature, our dataset does not suffer from liquidity problems since the intra-day data is constructed from the most actively traded contracts for each and every of the 31 commodities included in our sample. Overall, there are three main findings of this study. First, momentum and reversal trading strategies can generate robust and consistent returns over time; however, the intra-day strategies used cannot generate sufficiently enough high excess returns to cover the excessive costs due to the higher frequency of trading. Secondly, at lower trading frequencies and longer holding periods momentum and reversal strategies can generate excess returns, but with higher maximum drawdown risk. Finally, the double-sort strategies statistically improve the performance of the trading strategies.

The state of monetary policy and industrial asset allocation: the Ghanaian perspective

Purpose The purpose of this paper is to investigate whether asset allocation across various industries listed on the Ghana Stock Exchange (GSE) varies across different monetary policy states. Design/methodology/approach This paper adopts the Markov Chain technique to split monetary policy into three different states. The authors further adopt the Markowitz portfolio optimization technique to find the minimum variance and optimum portfolio for the industries listed on the GSE. Findings The finding reveals a dynamic asset allocation, which varies the industry’s weight mix across the various monetary policy states enhance excess returns compared to the static asset allocation. Specifically, the authors find risk-return trade-off among industries listed on the GSE. Financial and Food and Beverage industries portfolios record high returns relative to the Government of Ghana 91-day Treasury bill. The Food and Beverage portfolio is the only portfolio that records relatively high excess returns across all the monetary policy states. The authors also find that, during expansionary state (high monetary policy rates) of the monetary policy, investors are to allocate about 69 and 30 percent of their investment into food and beverages and financials, respectively. Corner solution is found in the transient state where 100 percent of wealth is allocated to financial to obtain the optimum portfolio. The optimum portfolio in the contraction state assigns 52 percent to financials and 42 percent to manufacturing. In summary, the result supports the dependence of investors’ asset allocation decisions on monetary policy. Practical implications Therefore, the authors propose an investment strategy which is dynamic and takes into consideration the monetary policy states rather than static asset allocation which maintains the same industry weight mix over the investment period. Social implications In sum, the authors interpret the result as support for the dependence of investors’ asset allocation decisions on monetary policy. In Ghana, an increase in the monetary policy appears to support industries listed on the equity market. The result also gives knowledge about investors’ asset allocation decisions on the GSE, which is practical balanced source of information for investors’ risk and return choices. For a prudent monetary policy framework, the monetary policy committee should monitor industries listed on the GSE. The result from the analysis has also an implication for investors, portfolio managers and fund managers to consider the state of the monetary policy in Ghana when making investment decisions. Originality/value The study differs from earlier research on asset allocation by breaking new grounds on two levels. First of all, based on the notion that different industries have different exposures to monetary policy states, the authors extend the portfolios by grouping the equities listed on the GSE into their industrial sectors. Second, the authors examine how investors’ optimal portfolio allocation may change depending on the state of monetary policy.

Systematic Currency Volatility Risk Premia

I show that volatility risk of the dollar factor --- an equally weighted basket of developed U.S. dollar exchange rates --- carries a significant risk premium and that it is priced in the cross-section of currency volatility excess returns. The dollar factor volatility risk premium is negative on average with an upward sloping and concave term structure. Consistent with this pattern, I find that dollar factor volatility risk is most significantly priced in the cross-section of volatility excess returns at shorter maturities. A trading strategy that sells (buys) volatility insurance on currencies with high (low) exposure to dollar factor volatility risk delivers high mean excess returns and Sharpe ratios. At shorter maturities, the profitability of this strategy cannot be explained by exposure to traditional currency factors, equity factors, or currency volatility carry factors.

Should the Interest Rate Level Influence Asset Allocation?

How does the interest rate environment inform the allocation between risky and safe assets? The authors focus on the level rather than change in rates because rates are highly persistent; changes are infrequent and unpredictable while low versus high rate regimes are durable. U.S. history from 1926 through 2016 shows that equities have lower risk and higher excess returns when rates are low. Despite all the concern about low yield, a low rates environment is actually a good thing for more-aggressive investors.

Value Premium and Portfolio Return Regime: Evidence from European Equities

This paper examines the profitability of four European higher return stock portfolios and their linkages between the value premium factor return, high-minus-low (HML), developed by Fama and French. Our fundamental analyses and quantitative examinations using Markov switching models derive the following findings. First, in the four higher return stock portfolios in Europe, the smallest and the highest momentum portfolio shows the highest return. Second, the second smallest and the highest book-to-market (BM) portfolio, the second smallest and the highest operating profitability portfolio, and the second smallest and the second lowest investment portfolio for Europe also demonstrate higher excess returns than the overall stock market in Europe. Furthermore, we also clarify that for all the four European stock portfolios, there clearly exist two regimes: one is positively associated with the value premium factor return, HML, and the other is negatively associated with HML. We further reveal that recently, for all the four portfolios, the high value premium factor loading regimes shift to the other regimes that are uncorrelated with HML. This indicates that, in the recent periods, hedging and risk-diversification effects can be recognized in investing value stocks and the four higher return stock portfolios in Europe.

Momentum and Reversal Strategies in Chinese Commodity Futures Markets

This paper tests a wide range of momentum and reversal strategies at different trading frequencies for the complete Chinese commodity futures market dataset. Accurate estimates of transaction costs for each commodity and the minute level futures prices are utilized to obtain the most realistic out-of-sample backtesting results. Distinctively from the existing literature, our dataset does not suffer from liquidity problems since the intra-day data is constructed from the most actively traded contracts for each and every of the 31 commodities included in our sample. Overall, there are three main findings of this study. First, momentum and reversal trading strategies can generate robust and consistent returns over time; however, the intra-day strategies can not generate sufficiently high excess returns to cover the excessive costs due to the higher frequency of trading. Second, at lower trading frequencies and longer holding periods momentum and reversal strategies can generate excess returns, but with higher maximum drawdown risk. Finally, the double-sort strategies statistically improve the performance of the trading strategies.

U.S. Presidents and Stock Market Performance: The Good, the Bad and the Useless

We present an econometric framework that estimate conjoined ‘fixed effect’ components to analyze the presidential puzzle, by separating party policy impact on the stock market from each president ability. Our methodology enable us to examine what drives the higher excess return under Democratic presidencies, whether it is Democratic policy or Democratic presidents’ abilities or both. Our results indicate that both parties policies have overall negative impact on the stock market, while Democratic policy is slightly more negative; Democratic presidents have greater ability than Republican counterparts. Furthermore, president ability impacts the stock market more than party policy, and both parties have fewer impact on large deciles. We then classify president based on their abilities and find that presidents LBJ/Clinton, Nixon and Carter/Eisenhower are the “Good”, the “Bad” and the “Useless” presidents, respectively. We believe these findings add new insight to the current debate of what party has a better policy, and suggest a small government would be an optimal political economy system. Collectively, our results show that we ought to separate between president’s party affiliation (policy) and the president’s ability when we study how politics influences financial markets.

International correlation risk

We show that the cross-sectional dispersion of conditional foreign exchange (FX) correlation is countercyclical and that currencies that perform badly (well) during periods of high dispersion yield high (low) average excess returns. We also find a negative cross-sectional association between average FX correlations and average option-implied FX correlation risk premiums. Our findings show that while investors in spot currency markets require a positive risk premium for exposure to high dispersion states, FX option prices are consistent with investors being compensated for the risk of low dispersion states. To address our empirical findings, we propose a no-arbitrage model that features unspanned FX correlation risk.

Investor sentiment, asset returns and firm characteristics: Evidence from the Korean Stock Market

ABSTRACTThis study investigates the effects of investor sentiment on asset returns with respect to firm characteristics. By analysing a unique stock trading dataset of the Korean Stock Market that contains rich information on investor types and sentiment, we confirm that high investor sentiment induces higher stock market returns. The positive association between investor sentiment and stock returns is highly significant after controlling for trading behaviours, other risk factors and firm characteristics. Interestingly, investor sentiment has stronger effects on small firm, low-priced, high book-to-market ratio, high excess return, and highly volatile stocks, and stocks heavily traded by individual investors. The diverse degree and intensity of the sentiment effect across stocks with different firm characteristics is possibly attributable to individual investor’s trading.

Do Financial Advisors Live Up to Their Reputation: The Case of Major Assets Restructurings of Chinese Listed Companies

We investigate whether top-tier advisors provide superior services by examining the relationship between reputation (measured by whether it is a top-10 advisor ranked on deal value) of financial advisors on the bidder side and stock market-based/accounting-based performance of bidders. Using Chinese listed companies with major assets reorganizations (MARs, M&As with large-scale target), we find top-tier advisors are associated with higher excess returns (CARs), implying that reputation generates a verification effect on investors. But we find no significant relationship between the advisor reputation and bidders’ accounting-based performance post-MARs. The findings indicate that although advisor reputation can attract M&A business and sends positive signal to the market, it does not lead to stronger financial performance in the long run. That is, the so-called top-tier financial advisors fail to live up to their reputation. We also find that payment premium is an intervening variable between advisor reputation and the long-term accounting-based performance of bidders, suggesting that top-tier advisors fail in their duties to help clients achieve greater share of synergy gains.

Institutional investors and the credibility of open market repurchases in illiquid markets: evidence from Taiwan

ABSTRACTThis paper examines the issue of information advantages via observing the trading behaviour of foreign and domestic institutional investors during the entire execution periods of open market repurchases in Taiwan. A credibility index (foresighted) is constructed to measure the false signal of OMR firms. We find that foreign institutional investors possess an information advantage over domestic institutional investors. They buy companies with higher credibility, whereas domestic institutional investors cannot distinguish between true and false signals, signifying that foreign institutional investors are sophisticated and possess specialised investment experiences. In addition, we find that foreign institutional investors hold high-credibility firms because those firms are linked with higher excess returns than firms with lower credibility.

Investor Sentiment, Stock Returns, and Firm Characteristics: Evidence from a Leading Emerging Market

This study examines how investor sentiment affects asset returns in the Korean stock market, a representative leading emerging market, in different ways depending on firm characteristics. By analyzing the unique stock trading dataset containing rich information on investor types and sentiment, we construct the firm-level investor sentiment index and investor-type trading behavior index. We confirm that high investor sentiment induces higher stock market returns. The positive association between investor sentiment and stock returns is highly significant after controlling trading behavior and other risk and firm characteristics. Investor sentiment is shown to have stronger effects for small-firm, low-priced, high book-to-market ratio, high excess return, and highly volatile stocks, and stocks heavily traded by individual investors. The diverse degree and intensity of the sentiment effect across firm and stock characteristics are attributable to individual investors’ trading.

Empirical Asset Pricing with Multi-Period Disasters and Partial Government Defaults

According to the rare disaster hypothesis, the high excess returns that characterize U.S. postwar data resulted because investors ex ante demanded a compensation for possibly disastrous but very unlikely risks that they ex post did not suffer from. Empirical assessments of the rare disaster hypothesis are scarce, and the frequently used assumption that disasters shrink to one-period events is under suspicion of being the driving force behind the hypothesis' success in calibrations. This study uses the simulated method of moments to estimate a consumption-based asset pricing model that accounts for multi-period disasters, partial government defaults, and recursive investor preferences. The estimates are economically plausible, precise, and qualitatively insensitive with respect to different model specifications. Furthermore, the model-implied market Sharpe ratio, mean market return, and equity premium are comparable to the empirical data. The results thus help to restore the nexus between the real economy and financial markets that is implied by the consumption-based asset pricing paradigm.

The Harm in Selecting Funds that Have Recently Outperformed

We empirically investigate the investment results of commonly used fund selection strategies that involve redeploying assets from underperforming to outperforming funds. Based on portfolios constructed using U.S. mutual fund data over typical three-year evaluation periods, we find that investors who chose funds with poor recent performance earned higher excess returns than those who chose funds with superior recent performance. Our findings pose a challenge for asset owners: If past performance is used at all in selecting funds, it is the best-performing funds that should be replaced. Realistically, however, a policy of replacing successful funds with poor performers is unlikely to gain widespread acceptance. Instead, the practical implication of our paper is that asset owners should focus on factors other than past performance. We offer alternate criteria for selecting funds.

Hedge Fund Performance Persistence and Mixed Trading Strategies

We examine US hedge funds’ performance persistence and mixed-trading strategies across both different economic and market conditions for 1990-2014. We use parametric and non-parametric models and we examine hedge fund persistence in various aspects. During “good” times there is smoothness in hedge fund (risk-adjusted) returns whereas during “bad” times this smoothness disappears. With respect to the market benchmark, with a few exceptions, there is no performance persistence. Concerning the persistence within each group of strategy, for “good” times we found persistence up to one year whereas for “bad” times we found up to six months. There is strong evidence that the persistence is driven mainly by the top performers, and recessions are harsher than down regimes for hedge fund persistence. Finally, we constructed mixed trading strategies and we introduce the zero investment portfolio “momentrarian” strategy that can bring conditional high excess returns to investors.