Raw Returns Research Articles

The performance of socially responsible mutual funds: a volatility‐match approach

PurposeThe purpose of this paper is to examine the performance of a sample of socially responsible mutual funds (SRMFs) and a matched sample of conventional funds during the 1997‐2005 time period.Design/methodology/approachRisk‐adjusted performance is examined using several methodologies, including a measure that compares the performance of a fund with that of an efficient and volatility‐match benchmark portfolio.FindingsOn the basis of the raw returns, socially responsible funds performed better than some market indexes but this evidence of outperformance disappears once risk is incorporated into the analysis. Consistent with previous studies, no evidence was found of out performance by socially responsible funds. Also, the difference between the performance of SRMFs and conventional mutual funds is not statistically significant. This result is robust to the use of two additional measures of risk‐adjusted performance.Originality/valueTo measure risk‐adjusted performance, a measure first introduced by Graham and Harvey was employed. Similar to the Jensen's alpha of a single factor model, the Graham and Harvey measure evaluates fund performance relative to a volatility‐match benchmark but does not depend on a linear model specification and thus is free from the potential biases presented by linear models.

Robust performance measures for high yield bond funds

Abstract We examine performance measures for high yield bond mutual funds, which are a considerable percentage of taxable bond investments, but have not been widely studied. High yield funds exhibit persistence in their monthly returns, so we calculate Sharpe ratios using methods that incorporate the serial correlation of returns. We find that high yield fund rankings using raw returns and conventionally calculated Sharpe ratios are different from those using trailing standard deviations and robust standard errors. High yield fund rankings based on robust Sharpe ratios also differ from those computed using multi-index Jensen's alphas and information ratios. When measured by risk-adjusted returns, high yield bond fund managers do not add much value.

Signal level Simulator for netted text radar waveforms evaluation

When evaluating the performances of radar waveforms, it is crucial to understand how the signal is affected by multiple interactions with the environment and the system hardware. Analysis of complex radar systems, such as multistatic and netted designs (see Figure 1) is often intractable without the application of a dedicated radar simulation system. Recent research into radar simulation has focused primarily on synthetic aperture radar (SAR) systems [1] and is not entirely applicable to traditional radar systems concerned with the location and tracking of remote targets. A complete simulator has been designed for the accurate simulation of raw returns in complex, multistatic, and netted radars, and is applicable to pulsed and continuous wave (CW) systems, and both active and passive radar systems. The Flexible Simulator for Multistatic Radars (FERS) can be used to simulate radar systems with arbitrary waveforms and arbitrary numbers of receivers, transmitters, and scatterers. Herein, algorithms for the simulation of raw radar return signals are presented, based on interpolation and modification of the transmitted signal and modeling of the radar hardware and environment. The algorithms are expected to be especially valuable for the simulation of emerging radar technologies, such as Passive Coherent Location (PCL) [2], netted radar and phased array radar. Preliminary results, presented herein, suggest that these algorithms can simulate physical systems with excellent accuracy.

Skew-Normal Mixture and Markov-Switching GARCH Processes

This paper introduces skew-normal (SN) mixture and Markov-switching (MS) GARCH processes for capturing the skewness in the distribution of stock returns. The model class is motivated by the fact that the common way of incorporating asymmetries into Gaussian MS GARCH models, i.e., regime-dependent means, leads to autocorrelated raw returns, which may not be desirable. The appearance of the SN distribution can be explained by a pre-asymptotic behavior of daily stock returns, and can still be viewed as "generic." The dynamic properties of the process are derived, and its in- and out-of-sample performance is compared with that of several competing models in an application to three major European stock markets over a period covering the recent financial turmoil. It turns out that parsimoniously parameterized SN mixture GARCH processes perform best overall. In particular, they outperform both a skewed t GARCH specification as well as normal mixture GARCH models with skewness generated via nonzero component means.

IPO Offer Prices and Firm Performance

This paper explores the determinants of IPO prices and studies the relationship between price choice of firms going public and post-issue stock performance and firm characteristics. I find that IPO prices positively relate to median industry prices, underwriter reputation, and book-to-market ratio of the firm going public. I further show that raw and risk-adjusted stock returns of IPOs monotonically increase with the ratio of offer price to average industry price. The difference in returns between IPOs with the highest and lowest relative offer prices averages 9% during one year following the issuance, and exceeds 60% over five years. The group of IPOs with high relative prices does not exhibit any underperformance relative to matches at any horizon. I also document a positive relation between underpricing and relative offer prices. I further show that firms with high relative prices generate better earnings after going public. These firms have larger market betas around the IPO, and spend considerably more on investment during five years following the offering.

A resolution of the distress risk and leverage puzzles in the cross section of stock returns

We revisit findings that returns are negatively related to financial distress intensity and leverage. These are puzzles under frictionless capital markets assumptions but are consistent with optimizing firms that differ in their exposure to financial distress costs. Firms with high costs choose low leverage to avoid distress, but they retain exposure to the systematic risk of bearing such costs in low states. Empirical results are consistent with this explanation. The return premiums to low leverage and low distress are significant in raw returns, and even stronger in risk-adjusted returns. When in distress, low-leverage firms suffer more than high-leverage firms as measured by a deterioration in accounting operating performance and heightened exposure to systematic risk. The connection between return premiums and distress costs is apparent in subperiod evidence. Both are small or insignificant prior to 1980 and larger and significant thereafter.

Can the Cross-Sectional Variation in Expected Stock Returns Explain Momentum?

AbstractIt has been hypothesized that momentum might be rationally explained as a consequence of the cross-sectional variation of unconditional expected returns. Stocks with relatively high unconditional expected returns will on average outperform in both the portfolio formation period and in the subsequent holding period. We evaluate this explanation by first removing unconditional expected returns for each stock from raw returns and then testing for momentum in the resulting series. We measure the unconditional expected return on each stock as its mean return in the whole sample period. We find momentum effects vanish in demeaned returns.

Skewness from High-Frequency Data Predicts the Cross-Section of Stock Returns

Theoretical and empirical studies document a negative relation between stock returns and individual skewness. In these studies, individual skewness has been defined with predictive models, industry groups and even with options' skewness. However, measures of skewness computed only from stock returns, such as historical skewness, do not confirm this negative relation. We propose a model-free measure of individual skewness directly obtained from high-frequency intraday prices, which we call realized skewness. We test whether realized skewness predicts future stock returns by sorting stocks every week according to realized skewness, forming five portfolios and analyzing subsequent weekly returns. We find a negative relation between realized skewness and stock returns in the cross section. A trading strategy that buys stocks in the lowest realized skewness quintile and sells stocks in the highest realized skewness quintile generates an average raw return of 38 basis points per week with a t-statistic of 9.15. This result is robust to different market periods, portfolio weightings, firm characteristics proxies and is not explained by the Fama-French-Carhart factors.

Speculative trading and stock returns: A stochastic dominance analysis of the Chinese A-share market

The pricing of A-shares in China has long puzzled financial economists. This paper applies recent tests of stochastic dominance (SD) to examine whether differences in the return distributions of A- and B-shares in China are consistent with market efficiency. As SD is nonparametric, market efficiency can be examined without the joint test problem arising from misspecifications in the asset pricing benchmark. Our results show A-shares have second-order dominated B-shares from 1996 to 2005. This dominance was most significant during the market segmentation period, but has continued, albeit to a lesser extent even after the B-share market was opened to local investors in 2001. Our results are robust to using residual returns from an international asset pricing model instead of raw returns. We conclude that the superior performance of A-shares cannot be attributed to risk. The results are more likely due to a return bias caused by intense speculation among retail individuals under limited arbitrage.

Analisis Kinerja Reksa Dana Saham Dengan Metode Raw Return, Sharpe, Treynor, Jensen dan Sortino

Mutual Fund (Reksa Dana) can be used as one of the investment alternatives besides personal saving, time deposit, shares and bond. Mutual fund is an investment that has a form as a collective contract investment and managed by the profesionals. From various mutual funds in Indonesia, the investor should choose the mutual fund that they want to invest in. The problem is the type of indicators that the investor can use to choose the mutual funds. The writer did research with 16 equity-based mutual funds in Indonesia with the period from December 31, 2002 to December 31, 2007. Firstly, the writer measures all mutual funds according to their performance, which is based on raw return, Sharpe, Treynor, Jensen and Sortino. Mutual funds with above average performance are considered as superior mutual funds. Afterwards, whether there is any consistency in the performance is checked by using probabilistic method and Chi Squared test. Then, ranking will be made started with the best to the worst mutual funds. The candidates for the best mutual funds are the mutual funds that achieve the superior level at least three times during the six years of the research period. The best mutual fund is the mutual fund which obtains the highest rank according to the five methods above. Probabilistic method indicates a high consistency level with an average of 71.50%. This result is supported by the chi squared test, where the hyphotesis that stated that there is a consistency between mutual fund performances can be proven. The final result is the rank of equity-based mutual funds in Indonesia. The following is the rank of the mutual funds with superior performance: Fortis Pesona, Schroder Prestasi Plus, Dana Reksa Mawar, Fortis Ekuitas, Trim Kapital, Panin Dana Maksima, Si Dana Saham, Rencana Cerdas dan Bahana Dana Prima.

The Costs of Owning Employer Stocks: Lessons from Taiwan

AbstractUsing data on all employees at listed companies in Taiwan, we find that the bias toward employer stocks is generic to individual investor decision making, but not limited to retirement plans. Seventy-one percent of the sample employees invest in employer stocks and employer stocks make up on average 47% of employee equity portfolios. The underdiversification resulting from the bias toward employer stocks is very costly. Holding current portfolio risk constant, employees forego 4.89% per annum in raw returns by investing in employer stocks, which represents 39.74% of their average 1998 salary income. Our findings have important implications for social security reform and retirement account management.

The Performance Persistence of Equity Long/Short Hedge Funds

This paper examines the persistence of raw and risk-adjusted returns for equity long/short hedge funds using the portfolio approach of Hendricks, Patel, and Zeckhauser (1993). Only limited evidence of persistence is found for raw returns. Funds with the highest raw returns last year continue to outperform over the subsequent year, although not significantly, while there is no persistence in returns beyond one year. In contrast, we find performance persistence based on risk-adjusted return measures such as the Sharpe Ratio and in particular an alpha from a multifactor model. Funds with the highest risk-adjusted performance continue to significantly outperform in the following year. The persistence does not last longer than one year except for the worst performers. Funds with significant risk-adjusted returns show less exposure to the market, have high raw returns, and low volatility. These results are robust to adjustments for stale prices and subperiod analysis.

Determinants of flows into retail international equity funds

Diversification benefits appear to be a major reason why investors choose international equity funds. Funds less correlated with the US market tend to receive higher flows from investors. In addition, investors prefer funds that invest in a diversified portfolio of securities from different regions in the world to funds that focus only on a specific region. Risk-adjusted return is shown to exert greater effect on flows into international equity funds than raw return. International equity funds from fund families offering a greater number of investment objectives also receive higher flows. On the other hand, international equity fund investors do not appear to be sensitive to expenses or exchange rates.

Understanding the Returns to Delayed Childbearing for Working Women

Since women began entering the workforce in large numbers in the latter half of the twen? tieth century, they have faced important and difficult trade-offs between family and work. One such trade-off involves the timing of fer? tility. Biological constraints such as declining fecundity by age encourage early childbearing. However, researchers have found evidence of a wage premium to delay. Amalia Miller (2007) uses miscarriages as a source of variation in the timing of first birth, and finds an additional year of delay is associated with a 3 percent increase in wage rates and a 10 percent increase in earnings. David Ellwood, Ty Wilde, and Lily Batchelder (2004) show that wage profiles for high-skilled women flatten out at the point of the first birth, resulting in' significantly greater lifetime earn? ing for delayers.1 Understanding the causes of this wage pre? mium is essential to understanding the choices working women face and the decisions they make. This paper examines how much of the delay premium can be explained by differ? ences in human capital among early and late child bearers. Using data from the National Longitudinal Survey of Youth (NLSY), I find a raw return of approximately 3 percent per year of delay for hourly wages in 2003. Using the full NLSY panel and a fixed-effects framework, I show that there is a wage penalty to motherhood that increases with time since the birth, and that these penalties are greatest for high-skilled women. However, this effect is attenuated for women who delay childbirth. Next, I show that there are significant differ? ences in women's observable characteristics by age at first birth. Women who delay are more skilled, more educated, more likely to be in pro? fessional or managerial careers, and have more experience?even conditional on completed fer? tility. I return to estimating the return to delay, adjusting wages for differences in observable characteristics. I find that as much as 90 percent of the return to delay can be explained by differ? ences in observable characteristics. Education, experience, and age at first marriage have the most explanatory power. These results support a human capital theory for the delay premium.

Is Idiosyncratic Risk a Source of Momentum?

Recent studies reject the notion that momentum profits are compensation for risk by showing that momentum profits are mostly comprised of idiosyncratic components that cannot be risk (which, according to standard theory, must entail non-diversifiable systematic variation). Recent theoretical papers, however, show that idiosyncratic components of returns (in particular idiosyncratic risk) may affect risk premia. Using EGARCH-M, this paper estimates idiosyncratic risk and idiosyncratic risk premia at the individual security level and shows that idiosyncratic risk premia are responsible for between 70 and 90 percent of momentum profits. A closer examination shows that, although securities in the loser portfolio have higher levels of idiosyncratic risk than those in the winner portfolio (confirming other studies), the idiosyncratic risk premia in the loser portfolio are significantly less than those in the winner portfolio. Further supporting a link between idiosyncratic risk premia and momentum profits, we show that momentum portfolios formed by sorting on past idiosyncratic risk premia (rather than raw returns) generate significantly positive profits.

Mispricing Following Public News: Overreaction for Losers, Underreaction for Winners

We document an important relation between two well-established anomalies: momentum and short-term reversal. Only stocks with negative momentum experience short-term reversal. Using Chan's (2003) news database, we show that the market appears to overreact to public news following bad past performance and underreact following strong past performance. The results are robust to using alternative methodologies. Stocks with current good news and negative momentum earn on average -9.3% annual raw returns during the subsequent month, while stocks with current good news and positive momentum earn 32.2%. The large, negative raw returns point to cognitive biases, rather than risk-based explanations, as the source of abnormal returns.

Can CEO Dismissals Be Proactive?

We find significant variation in the prior stock returns of firms that dismiss their CEOs between 1996 and 2008. 49% of firms that dismiss their CEOs do so in the absence of negative industry-adjusted stock returns prior to dismissal (37% dismiss in the absence of negative raw returns). We find evidence for two reasons why boards may dismiss CEOs early, i.e., in the absence of significant poor prior stock performance. First, we find that early dismissals are more likely to be associated with corporate scandals, suggesting that CEOs that are found to engage in unethical or illegal activities are dismissed although their actions may not have a significant adverse impact on firm value. Second, we find support for the argument that early dismissals are proactive actions by boards to dismiss low ability CEOs. We find that firms with more equity-based compensation for directors and higher independent director ownership are more likely to dismiss their CEOs early. Boards with strong incentives are more likely to be proactive and act on their private information about the CEO than boards with poor incentives. Early dismissal firms experience a short-lived decline in operating performance around the date of CEO dismissal, and their operating performance recovers immediately after the CEO is replaced. On the other hand, the operating performance of late dismissal firms declines significantly prior to dismissal and improves substantially after dismissal. We also find that CEOs that are dismissed early are not more likely to find new CEO positions than CEOs that are dismissed late, supporting the idea that early dismissal CEOs may not have different ability than late dismissal CEOs.

Investing in Talents: Manager Characteristics and Hedge Fund Performances

Using a large sample of hedge fund manager characteristics, we provide one of the first comprehensive studies on the impact of manager characteristics, such as education and career concern, on hedge fund performances. We document differential ability among hedge fund managers in generating risk-adjusted returns and flow-chasing-return behaviors among hedge fund investors. In particular, we find that managers from higher-SAT undergraduate institutes tend to have higher raw and risk-adjusted returns, more inflows, and take less risks. Our results provide supporting evidence to some of the assumptions and implications of the rational theory of active portfolio management of Berk and Green (2004). However, in contrast to the results for mutual funds, we find a rather symmetric relation between hedge fund flows and past performance, and that hedge fund flows do not have a significant negative impact on future performance.

After a Restatement: Long-Run Market and Investor Response

We examine returns and institutional trading in a long window surrounding earnings restatements. We show that abnormal returns following restatement announcements, a strongly negative event with negative pre-announcement and announcement-period returns, are significantly positive. We find significant positive returns in the one through six month period following the announcement, using raw returns, 3- and 4-factor calendar-time abnormal returns, firm-specific 4-factor adjusted returns and characteristic-adjusted returns. Results suggest that these positive returns are not due to a change in traditional risk factors or cost of capital. Given the potential variation in investors’ willingness to tolerate information risk and uncertainty associated with restatements we also examine institutional ownership changes before and after the restatement announcement. We find that dedicated institutions sell restatement firm shares steadily in the quarters surrounding the announcement, while transient and quasi-indexing institutions sell strongly before the restatement announcement and then buy significantly in the months around and after the announcement. The event-time trading of dedicated institutions has weakly positive predictive ability for future returns, meaning that the firms for which dedicated institutions maintain or buy the most shares around the restatement announcement experience the most positive returns post-announcement, while the event-time trading of transient and quasiindexing institutions has weakly negative predictive ability. The differences in the returns predicted by the three groups’ trading are statistically significant. Together, the results suggest that transient and quasi-indexing institutions are less willing to tolerate the increase in information risk immediately surrounding a restatement, and help drive a strong negative price reaction to the initial announcement, along with a later recovery in stock price.

Market Underreaction to Bad News: The Case of Bankruptcy Filings

Although there is an extensive literature on the market's anticipation of, and short-term reaction to, the bankruptcy event, the longer-term reaction to Chapter 11 filing has not been properly examined to date. We investigate the subsequent performance of the 351 non-financial, non-utility firms entering into bankruptcy protection between 1979 and 2005, and which continue trading on a major exchange. Consistent with previous research, we find negative abnormal and raw returns both before, and at the Chapter 11 date. However, more importantly, we find a strong, negative and statistically significant post-bankruptcy abnormal return of at least -28% over the 12-month period after the event date. Such market underreaction is consistent with research in other domains suggesting that the market has difficulty in dealing appropriately with extreme bad news events. We also find that the post-Chapter 11 drift is distinct from other reported market anomalies. Potential explanations for our anomalous results are presented.