Monthly Returns Research Articles

Statistical analyses of the performance of Macedonian investment and pension funds

The foundation of the post-modern portfolio theory is creating a portfolio based on a desired target return. This specifically applies to the performance of investment and pension funds that provide a rate of return meeting payment requirements from investment funds. A desired target return is the goal of an investment or pension fund. It is the primary benchmark used to measure performances, dynamic monitoring and evaluation of the risk–return ratio on investment funds. The analysis in this paper is based on monthly returns of Macedonian investment and pension funds (June 2011 - June 2014). Such analysis utilizes the basic, but highly informative statistical characteristic moments like skewness, kurtosis, Jarque–Bera, and Chebyishev’s Inequality. The objective of this study is to perform a trough analysis, utilizing the above mentioned and other types of statistical techniques (Sharpe, Sortino, omega, upside potential, Calmar, Sterling) to draw relevant conclusions regarding the risks and characteristic moments in Macedonian investment and pension funds. Pension funds are the second largest segment of the financial system, and has great potential for further growth due to constant inflows from pension insurance. The importance of investment funds for the financial system in the Republic of Macedonia is still small, although openend investment funds have been the fastest growing segment of the financial system. Statistical analysis has shown that pension funds have delivered a significantly positive volatility-adjusted risk premium in the analyzed period more so than investment funds.

Common dynamic factors in driving commodity prices: Implications of a generalized dynamic factor model

Identification of the price drivers of commodity prices is difficult because economic indicators reflect commodity prices with lead or lag, and some commodities have spillover effects to other commodities. A generalized dynamic factor model is capable of accounting for these characteristics and can be applied to panel data of monthly returns of a vast variety of commodities. The empirical results indicate that four common dynamic factors exist that account for much of the variation in the commodity returns. The identification of the common dynamic factors is conducted by interchangeably creeping an economic indicator into the commodity return panel data and examining the ratio of variance explained by the common factors. The four common factors correspond to the U.S. inflation rate, the world industrial production, the world stock index, and the price of crude oil.

Managerial Talent and Hedge Fund Performance

We propose a new measure of managerial skill based on the maximum monthly returns of hedge funds over a fixed time interval and test if this new measure (pMAX) is an indicator of greater managerial talent leading to superior fund performance. We find significant cross-sectional variations and persistence in pMAX. Our main finding indicates that hedge funds in the highest pMAX quintile generate 8.4% more annual returns compared to funds in the lowest pMAX quintile. After controlling for a large set of fund characteristics, risk factors, and past performance measures, the positive relation between pMAX and future returns remains highly significant. We also show that the directional and semi-directional hedge fund managers can predict and exploit changes in the market and economic conditions by increasing (decreasing) fund exposures to risk factors when market risk and/or economic uncertainty is high (low). However, mutual funds do not have market- or macro-timing ability. Thus, we find no evidence of a significant link between managerial talent of mutual fund managers and their future returns. Overall, the results indicate that the predictive power of pMAX over future returns for hedge funds is driven by superior timing ability and better managerial skills of hedge funds.

Does it pay to diversify?

Individual investors seek diversification in their portfolios using a number of approaches. One approach that is commonly used is to diversify globally. This article evaluates the performance and diversification benefits of international ETFs for U.S. investors during and after the recent financial crisis. Our results show that U.S. ETFs outperform all categories of international ETFs for the period of our study (January 2008 – June 2013); they have higher average monthly returns, lower risk (standard deviation of returns), higher risk-adjusted performance (Sharpe, Sortino, and Treynor ratios) and the highest cumulative returns over the entire period. When we form equally weighted portfolios of each ETF category and compute their risk-adjusted performance, we again find that U.S. ETF portfolios had the best performance for the entire period. We also find that U.S. ETFs have the lowest tracking error during the entire period. Most of these ETFs passively track the benchmark and do not manage for positive ɑ. Previous research has questioned the diversification benefits of international investing during times of financial distress. We find that international ETFs are highly dependent on major U.S. indices during the period of our analysis, and therefore, offered limited diversification benefits for U.S. investors.

Upside potential of hedge funds as a predictor of future performance

ABSTRACT This paper investigates the relationship between upside potential and future hedge fund returns. We measure upside potential based on the maximum monthly returns of hedge funds (MAX) over a fixed time interval, and show that MAX successfully predicts cross-sectional differences in future fund returns. Hedge funds with strong upside potential generate 0.70% per month higher average returns than funds with weak upside potential. After controlling for alternative risk and performance measures, funds’ market-timing ability, and a large set of fund characteristics, the positive link between MAX and future returns remains highly significant. We conclude that MAX, as a simple proxy for realized noln-normalities in hedge funds, offers incremental information on future hedge fund returns above and beyond provided by standard risk, performance, and market-timing measures.

Does China Really Have a Serious Real Estate Bubble?

This research uses 2002-2013 Chinese data to analyze the Chinese real estate market. We look at the returns on direct real estate, securitized real estate, and the general stock market. We compare the financial health of the real estate industry to the financial health of other industries. We do not document an overheating real estate industry, even though the real estate industry does have a higher debt to asset ratio compared with other industries. The monthly return is above 1% for all three types of investments (direct real estate, securitized real estate, and the general stock market). The Chinese economy does grow at a shocking pace. This is not limited to one industry. If there is overheating, we believe it relates to the Chinese economy as a whole.

The Cross Section of Expected Stock Returns

This paper studies the cross-sectional properties of return forecasts derived from Fama-MacBeth regressions. These forecasts mimic how an investor could, in real time, combine many firm characteristics to obtain a composite estimate of a stock’s expected return. Empirically, the forecasts vary substantially across stocks and have strong predictive power for actual returns. For example, using ten-year rolling estimates of Fama- MacBeth slopes and a cross-sectional model with 15 firm characteristics (all based on low-frequency data), the expected-return estimates have a cross-sectional standard deviation of 0.87% monthly and a predictive slope for future monthly returns of 0.74, with a standard error of 0.07.

Market Timing With Moving Averages

AbstractI present evidence that a moving average (MA) trading strategy has a greater average return and skewness as well as a lower variance compared to buying and holding the underlying asset using monthly returns of value‐weighted US decile portfolios sorted by market size, book‐to‐market, and momentum, and seven international markets as well as 18,000 individual US stocks. The MA strategy generates risk‐adjusted returns of 3–7% per year after transaction costs. The performance of the MA strategy is driven largely by the volatility of stock returns and resembles the payoffs of an at‐the‐money protective put on the underlying buy‐and‐hold return. Conditional factor models with macroeconomic variables, especially the default premium, can explain some of the abnormal returns. Standard market timing tests reveal ample evidence regarding the timing ability of the MA strategy.

The Value of Active Investing

We examine whether the value of active investment management can exceed its cost, and find that it can, by a substantial margin. We consider the 0.67% average cost estimate in French (2008), comparing it versus the expected value of a known active investment strategy. For a “passive” benchmark, we develop a 225 year index of monthly U.S. equity market returns, from July 1789 through June 2014. This timeframe encompasses the entire history of every U.S. exchange and includes all known periods of secondary market stock trading in the United States. We then estimate the long-run monthly returns of an active investment strategy based on an actual 11-year investment strategy. We present a new performance model extending the Treynor and Mazuy (1966) model and implement it to estimate monthly returns to the active strategy over the same 225 year period. We believe this experiment offers a good example of how the value of well-constructed active investment strategies can be worth substantially more than their cost.

Multinational Firms' Geographic Segmentation and Exchange-Rate Dynamics

This paper investigates the role of currency risk as a source of mispricing in equity markets. Using sales geographic concentration, we find a strong correlation between firms' abnormal returns and changes in a measure of their sales-weighted currency returns contemporaneously and one month ahead. A simple trading strategy exploring this finding yields a four-factor model abnormal monthly return of 104 basis points (12.48% annualized return), significant at the 5% level and robust to the use of different subsamples. The result is robust to the Fama and French (2014) profitability and investment risk factors and the Lustig, Roussanov, and Verdelhan (2011) currency risk factors. Using Fama-MacBeth (1973) regressions, we do not find that controlling for a firm's own stock reversal and momentum, as well as industry reversal and momentum, the informativeness of the sales segmentation disclosure, and other regional controls, change the magnitude and significance of the results.

War Profiteering Comparing Military-Industry Stock Portfolio Returns versus Market Returns During the Iraq and Afghan Wars

The Department of Defense (DoD) relies on a privatized defense industry for tools of war. Following the Cold War, the majority of this Defense Industry consolidated into 5 large corporations: Boeing, United Technologies Corporation, Honeywell, Raytheon, and Lockheed Martin. In this study, an equally weighted portfolio of the 5 aforementioned companies stocks is constructed, and then analyzed during Operation Iraqi Freedom (OIF) and Operation Enduring Freedom (OEF). The equally weighted portfolio is then compared to the market to see whether or not a defense-industry portfolio can outperform the market during wartime. Both the portfolio and the market index are assessed by average monthly return and the Sharpes Slope. These metrics are compared between the portfolio and the market through a Difference in Means Statistical Test.

Test Specifications, Correct Modeling, and Sensitivity of Long-Run Abnormal Returns in Hedge Fund Target Firms

Following the literature on test-specifications, correct-modeling, and detectability of long-run stock performance in event study framework, this study tests the performance of monthly stock returns of 589 firms targeted by 112 hedge funds over the period of January 2000 to December 2013. For an estimation window of (-12, 36) months, it addresses two fundamental questions; first, whether active targets (13D) outperform the passive targets (13G) in recent financial crisis; and second, whether long-horizon abnormal returns still pronounce when corrected for biases and test-specifications. To investigate these concerns, a number of methodologies including cumulative abnormal returns, buy-and-hold abnormal returns, and calendar -- time portfolio approach using various matching criteria are applied. Our initial findings suggest that 13D firms perform relatively better than 13G firms, however, underperform the PE targets. Moreover, when matching criteria are well-defined, then estimates appear generally significant with the improved power of the tests.

Improving the quality of environmental management: impact on shareholder value

Purpose– The purpose of this paper is to build upon the conceptual model developed by Feldmanet al.(1997) that demonstrated a link between improved environmental performance and increased market value for publicly traded corporations. ISO 14000 standards, not yet established at the time of their study, provide the framework for a strategic approach to environmental management with an emphasis on continuous quality improvement. Consequently, ISO 14000 certification is used as the basis for creating an investment portfolio of publicly traded companies. While previous research has examined short-term stock market reactions to ISO 14000 certification, this study evaluates the longer term impact on shareholder value by comparing the ISO portfolio’s performance against other funds. It adds to the existing literature on the “pay to be green” question.Design/methodology/approach– The successful attainment of ISO 14000 certification is used as the basis for developing a portfolio that is followed over time in order to examine its value to shareholders. The portfolio consists of companies certified between 1996 and 2006, each added to the portfolio the month after its announced ISO 14000 certification date. The study covers the period from October 1996 through April 2011. Average monthly returns and standard deviations for a buy-and-hold strategy over various rolling periods (three, five, seven and ten year) are used to compare the ISO 14000 portfolio against the S&P 500 Index. In addition, the growth of an initial investment of $100,000 is tracked to compare the ISO 14000 portfolio against the S&P 500 Index and three other funds that are socially responsible and/or green (Domini Social Equity Fund (DSEFX), Winslow Green Growth Investment, and iShares KLD 400 Social Index).Findings– The ISO 14000 portfolio outperformed the S&P 500 Index as well as selected socially responsible and/or green funds in the growth of an initial investment over time. It also consistently provided higher average monthly returns (along with higher standard deviations) than the S&P 500 Index when using a buy-and-hold investment strategy over all rolling periods considered. Moreover, monthly returns for the ISO 14000 portfolio were found to be significantly higher, at the 0.05 level, than for those of the S&P 500 Index and the DSEFX.Research limitations/implications– Companies that attained ISO 14000 certification after 2006 were not included in the portfolio due to the inability to obtain a complete listing after that time. Furthermore, causality cannot be established by analyzing fund performance. Nonetheless, ISO 14000 certification as the basis for creating an investment portfolio appears to be a strategy that pays off in the long term.Originality/value– This paper fills a gap in the literature by examining longer term market reactions to ISO 14000 certification. The methodology employed has not been used in this context, although it has been used to examine the impact of ISO 9000 certification on stock prices. The findings support the argument that improved environmental performance is valued by the market and may provide long-term value for shareholders.

When Fast Trading Looks Like Priced Noise

This paper introduces a new tool — the wavelet-variance estimator — that measures the fraction of trading activity at each investment horizon. We find substantial cross-sectional variation in horizons, even for stocks with the same volume, size, and liquidity. Moreover, the fraction of trading at the one-minute horizon is priced in monthly returns. The quintile of stocks with the highest fraction of trading at the one-minute horizon has abnormal returns that are 0.49% per month higher than the lowest quintile’s. Abnormal returns persist after controlling for liquidity, asymmetric information, and risk factors. Trading activity at one horizon can spillover and affect returns at another.

Risk and Return on Investment in Auto and Banking Sectors of Indian Economy

The objective of the paper is to find out the historical risk and return on investment in Auto and Banking sectors of Indian Economy and help the investor to take investment decisions in these sectors. Two measures of risk are used. Standard Deviation of the monthly returns which is the measure of total risk and Beta which is the measure of systematic risk. Monthly Returns are measured with the help of Arithmetic Mean and Geometric Mean over the period of five years. Sectoral indices CNXAUTO, CNXBANK and CNXNIFTY are used to measure the risk and return on investment in these sectors. The study found that risk is higher in Banking Sector and returns are higher in Auto Sector, which is contrary to theory of higher the risk higher should be the returns on Investment. This study guides the investor to take investment decisions in Auto and Banking sector of the Indian Economy. Monthly data from January 2009 to December 2015 of CNXAUTO, CNXBANK and CNXNIFTY from National Stock Exchange's website is used in this study.

Do macroeconomic factors matter for stock returns? Evidence from the European automotive industry

This paper applies the multi-index model to explore the sensitivity of the stock return of European automotive companies to some macroeconomic variables. The analysis involves the monthly returns of nine European companies operating in the automotive industry from January 2003 to April 2012 using 15 macroeconomic variables and the market index represented by S&P 350. The study finds that the S&P 350 positively affects stock returns, supporting the single index model. Furthermore, exchange rate, exports and platinum positively affect stock return, while aluminium and unemployment rate negatively affect stock return. The results suggest that a multi-index model using selected macroeconomics variables provides additional power in explaining the variability of the European stock returns in the automobile industry over a single index model using the market index alone.

New evidence on determinants of price momentum in the Japanese stock market

We investigate the cross section momentum effect in the Japanese stock market over the period January 1997 to December 2013, sub-periods before August 2008 and during the crisis September 2008–2009. From previous studies, it follows that the Japanese market is the exception to the findings on developed capital markets (momentum effect does not occur or is weak). Our study highlights the limitation of standard notions; we document the conditional nature of momentum and identify the characteristics of companies and their stocks and market states, allowing investors to earn positive momentum profit in the Japanese market (the statistically significant positive monthly return of zero cost portfolios is not less than 1%). It is shown that investors should take into account the seasonal pattern (for the Japanese stocks this revealed two months when we do not recommend taking investment activity) to increase portfolio profits. We explain the results from the specifics of the Japanese financial and governance systems, the ownership structure of listed Japanese firms and socio-cultural factors.

Predictable Corporate Distributions and Stock Returns

Corporate managers frequently announce corporate distributions, including stock splits, stock dividends, special dividends, and increases in regular dividends, on the anniversary of a like announcement at the same firm. The market appears to not fully appreciate the implications of current distributions for future distributions and stock returns, as a simple strategy that involves purchasing firms with high predicted probabilities of distribution announcements earns significant abnormal monthly returns. These results are distinct from previously documented return regularities related to regular earnings and dividend announcements and return seasonality.

Are MENA and Pacific Basin Stock Equity Markets Predictable?

This research uses variance ratio analysis to test whether Middle Eastern, North African (MENA) and Pacific Basin emerging equity markets follow a martingale behavior during the period1980-2004. The conventional Lo and MacKinlay variance ratio test, the multiple variance ratio test of Chow and Denning, rank- and sign-based test of Wright, and wild bootstrap of Kim are used for the monthly return series. The problem of thin trading was addressed using Miller, Muthuswamy, and Whaley’s adjusting procedure. Results have shown traces of a martingale behavior at high holding horizons. However, overall conclusions indicate that the null martingale hypothesis is strongly rejected for the whole sample and considered sub-periods at a 5% significance level. The pattern of the variance ratio estimates signify that the selected stock markets exhibit persistent mean-reverting and predictable behavior in their monthly adjusted returns series. The results expose the ineffectiveness of economic liberalization and privatization measures implemented in the early 1990s to improve their market efficiency. The Asian crisis did not affect the outcomes of the variance ratio analysis. Moreover, it sounds as if the perceptible development in terms of size and liquidity was not sufficient to exhibit a martingale behavior in these markets.

Multidimensional Analysis of Monthly Stock Market Returns

Abstract This study examines the monthly returns in Turkish and American stock market indices to investigate whether these markets experience abnormal returns during some months of the calendar year. The data used in this research includes 212 observations between January 1996 and August 2014. I apply statistical summary analysis, decomposition technique, dummy variable estimation, and binary logistic regression to check for the monthly market anomalies. The multidimensional methods used in this article suggest weak evidence against the efficient market hypothesis on monthly returns. While some months tend to show abnormal returns, there is no absolute unanimity in the applied approaches. Nevertheless, there is a strikingly negative May effect on the Turkish stocks following a positive return in April. Stocks tend to be bullish in December in both markets, yet we do not observe anya significant January effect is not observed.