Abnormal Risk-adjusted Returns Research Articles

The performance and market timing ability of Chinese mutual funds


 
 
 We examine the performance and market timing ability of actively managed Chinese stock mutual funds and investigate how fund characteristics and fund flows relate to performance and market timing ability. Based on daily return data and several four-factor models, only about 7.5% of these funds have statistically significant risk-adjusted abnormal returns and even fewer demonstrate market timing ability. After controlling for fund size, management fees, average amount, and volatility of fund flows, older funds show higher Sharpe ratios. Our evidence also reveals the volatility of fund flows has an inverted-U shape relationship with fund performance.
 
 

Spillover effects of crash and jump events: evidence from Chinese market

PurposeThis paper aims to investigate the spillover effects of jump and crash events among Chinese nonfinancial firms.Design/methodology/approachThis sample consists of more than 1.5 million weekly observations of over 3,000 Chinese listed firms over the period 1991–2015. The authors utilize univariate tests to compare the post-event performance of matched peer and non-peer control firms and cross-sectional regressions of their abnormal returns/cumulative abnormal returns (ARs/CARs) and returns on assets (ROAs).FindingsThe authors find that extreme risk-adjusted abnormal stock returns (stock price crashes and jumps) generate statistically significant ARs/CARs in the same directions in industry, size, leverage, and geographical location matched peer firms in Chinese stock market. Further tests reveal that peer firms' response to the crash event is pronounced more in the group of firms about which the information asymmetry is high between investors and firms.Research limitations/implicationsPortfolio investors can adjust their portfolios accordingly by selling stocks of the matching rival firms during a crash period. Policymakers may develop policies so as to protect the interests of small investors in the events of crashes in the markets. They can reduce the information asymmetry between the firms and the investors by making information about the firms more transparent, so as to reduce the contagion in case of crash event.Practical implicationsThis study has important implications for portfolio investment managers and policymakers.Originality/valueTo the best of authors' knowledge, this is the first study that combines the jump and crash events and attempts to assess their spillover effects on other firms in Chinese stock market.

Portfolio Management Services in India: Returns and Incentives

On the back of booming equity markets and falling interest rates, Indian high net worth investors have flocked to Portfolio Management Services (PMS) funds in India with substantial assets under management of INR 18,07,939 crores. However, there is scant academic literature on the performance of PMS funds in India which charge high fees compared to passive index funds. The purpose of this study is twofold. First, describe the performance of PMS funds in India as compared to their respective benchmark. Secondly, review the incentives fees structure of PMS funds and recommend regulatory changes needed to address the shortcomings. The principal results indicate that majority of PMS funds have failed to outperform the benchmark in the short-term and medium-term periods. In the long-term period, however, largely PMS funds have beaten the benchmark returns. The implications of this study are two-fold in the Indian market context. First, high net worth individuals in India must invest via PMS funds only if their investment time horizon is at least ten years. For the short to medium-term, it will be better to invest in index funds due to their meager expense ratio and returns, which are like the benchmark indices. Second, Indian policymakers must increase the minimum hurdle rate based on which the variable performance fee is charged to ensure portfolio managers are rewarded if they generate abnormal risk-adjusted returns. This study contributes to academic literature by focusing on the performance and incentives of PMS funds market in India, which is largely unexplored till now.

Does Manager Race Impact Performance? An Examination of the US Mutual Fund Industry

Using hand-collected fund manager race data, we study the current status of minority managers in the mutual fund industry. We investigate manager characteristics and performance differences between the minority (Asian, Black, Hispanic Latino) and White managers. Our results show that minorities are underrepresented in the fund management industry, especially Black and Hispanic managers. On average, 86.8% of single-manager funds are managed by White managers, while 8.3%, 2.7%, and 2.3% are Asian, Black, and Hispanic managers, respectively. Minority managers manage more international equity funds, while White managers manage more growth-focused funds. We show evidence that minority managers are younger and more educated, with shorter tenure and a lower percentage holding a CFA designation. The funds managed by White managers are larger in size, have a higher turnover ratio, and have greater exposure to market risk. Minority managed funds have higher monthly fund flows and take on greater idiosyncratic risk. We find no significant difference in fund returns or risk-adjusted abnormal returns (alpha) using different asset pricing models. These results are robust to various analytical methods, including Welch's t test, panel regression, and propensity score matching approach. The findings of this study can improve our understanding of mutual fund performance in general. More importantly, this study provides timely and imperative information to understand and address the lack of diversity in the mutual fund industry.

Impact of COVID-19 on Different Sectors of the Economy Using Event Study Method: An Indian Perspective

ABSTRACT This research examines the impact of the lockdown announcement imposed by the Indian government on the different leading sectors of the economy such as pharmaceuticals, FMCG, Financial services, banking, energy, etc. Event study method has been used to analyze the data. Lockdown announcement day has been considered as the event for our study. We have taken a 40-day event window, i.e., 20 days before and 20 days after the date of the announcement. Secondary data is used in the study and the same is collected from the NSE website. Using MS Excel, we have applied three methods for analysis—mean-adjusted, market-adjusted, and risk-adjusted abnormal return. Auto, Bank, Financial Services, FMCG, IT, Media, Metal, Pharma, Private bank, PSU Bank, Realty, Oil & Gas, and Energy are sectors of NSE that were taken for the study. Our results indicated that most of the sectors performed positively and gained abnormal returns during 21 days after the announcement. It showed that these sectors recovered their position after going down the market index. This shows that investors were confident that the impact was due to the abnormal condition of the market and not due to the fault or fundamental problems of these sectors. Based on the results, investors may decide to hold their position in the stock that has recovered during the period. Also, investors can diversify their portfolio in those sectors to which abnormal return was positive besides the COVID-19 impact. This is the first study to analyze the effects of the announcement of lockdown due to COVID-19 on the stock market performance of different sectors using the event study method in the context Indian stock market.

Buyouts: A Primer

This paper provides an introduction to buyouts and the academic literature about them. Buyouts are initiated by “buyout funds”, which are limited partnerships raised from mostly institutional investors. The funds earn returns for their investors by improving the operations of the firms they acquire and exiting them for a profit. Buyout funds have grown substantially and currently raise more than $400 billion annually in capital commitments. We first discuss the institutional environment that developed to foster such buyouts and to provide incentives for general partners and firm managers to earn returns for the fund’s investors. We then describe various strategies that funds use to increase the values of their portfolio companies. The paper provides up to date statistics on all aspects of the buyout industry. Finally, we present a summary of the academic literature on buyouts. This literature has paid particular attention to the extent to which buyouts earn risk-adjusted abnormal returns for their investors, as well as the sources of those returns.

Neural network embeddings on corporate annual filings for portfolio selection

In recent years, there has been an increased interest from both academics and practitioners in automatically analyzing the textual part of companies’ financial reports to extract meaning rich in information for future outcomes. In particular, tracking textual changes among companies’ reports can have a large and significant impact on stock prices. This impact happens with a lag implying that investors only gradually realize the implications of the news hinted by document changes. However, the length of these documents as well as their complexity in terms of structure and language have been increasing dramatically making this process more and more difficult to perform. In this paper, we analyzed how to face this complexity by learning arbitrary dimensional vector representations for US corporate filings (10-Ks) from 1998 to 2018, exploiting and comparing different neural network embedding techniques which take into account words’ semantics through vectors proximity. We also compared their ability to capture changes associated with future risk-adjusted abnormal returns with other more commonly used approaches in literature. Finally, we propose a novel investment strategy named Semantic Similarity Portfolio (SSP) that exploits these neural network embeddings. We show that firms that do not change their 10-Ks in a semantically important way from the previous year tend to have large and statistically significant future risk-adjusted abnormal returns. We, also document an amplifying effect when we incorporate a momentum-related criterion, where the companies selected must also have had positive previous year returns. Specifically, a portfolio that buys “non-changers” based on this strategy earns up to 10% in yearly risk-adjusted abnormal returns (alpha).

Do good fundamentals generate alpha?

Objective: To verify abnormal risk-adjusted returns in Brazilian stock portfolios formed according to the F-Score that indicates the presence of good fundamentals.
 Method: The sample has 146 companies per year on average, includes the period of adoption of the International Financial Reporting Standards (IFRS) from July 2008 to June 2018 and uses equally weighted portfolios formed at the end of June of each year with information from the previous year.
 Results: The high F-Score portfolio showed greater average returns, lower beta, and a positive and significant alpha that disappeared in the sub-period initiating after the full adoption of IFRS. Significant coefficients for the small capitalization risk premium and egalitarian weighting suggest that large companies do not dominate its performance. High and low F-Score portfolios cannot be characterized as value stocks. The low F-Score portfolio displayed a negative and significant coefficient for the moment factor, suggesting persistence of negative returns.
 Contributions: Portfolios with high F-Score may have less chance of catastrophic returns. The technique can be employed by less sophisticated investors to build defensive portfolios of companies with good fundamentals.

Practical Applications of Holdings Concentration and Hedge Fund Investment Strategies

Practical Applications In Holdings Concentration and Hedge Fund Investment Strategies, published in the Spring 2020 issue of The Journal of Alternative Investments, Xiaohui Yang (Fairleigh Dickinson University) and Hossein Kazemi (University of Massachusetts Amherst) investigate whether hedge fund managers are skilled stock pickers and can earn abnormal risk-adjusted returns. By focusing on the proportion of a stock that a hedge fund holds relative to the stock’s proportion in its benchmark, the authors note that the concentrated stocks outperform the least-concentrated stocks under most conditions. The analysis provides insights on market efficiency because certain stock prices do not immediately reflect publicly available holdings information. The study considers the relative performance of small-cap and large-cap stocks with high holding concentrations in crisis and non-crisis conditions. By simulating strategies based on holding concentrations, the authors examine risk-adjusted returns as well as downside risks. They conclude that investors can potentially use publicly available hedge fund information to create a profitable investment strategy. TOPICS:Real assets/alternative investments/private equity, portfolio construction, performance measurement

Portfolio Managers on the Colombian Open-End Mutual Fund Industry: Performance, downside risk and persistence

This study explores whether Colombian mutual funds deliver abnormal risk-adjusted returns and delves on their persistence. Through traditional and downside risk measures based on Modern Portfolio Theory and Lower Partial Moments, this article evaluates the performance of 146 mutual funds categorized by investment type and fund manager. This assessment suggests that mutual funds underperform the market and deliver real returns. Similarly, bond funds underperform equity funds, and investment trusts underperform brokerage firms as managers. Furthermore, bond funds and funds managed by investment trusts exhibit short-term performance persistence. These results suggest that investors may pursue passive investment strategies, and that they must analyze past performance to invest in the short-term.

Relationship between sustainable and responsible investing and returns: a global evidence

PurposeThe purpose of this study is to examine whether sustainable and responsible investing (SRI) outperforms the benchmark index investing across different time frames globally.Design/methodology/approachBased on the systematic weighted environmental, social and governance (ESG) ratings compiled by Thomson Reuters Asset4, the authors assess the stock market performance and risk of highly compliant firms portfolio in seven different countries; grouped as developed and developing nations over different time frames by adopting the Jensen’s alpha model (CAPM) and the Fama and French three-factor model.FindingsThe study finds that SRI portfolios significantly underperform their benchmark index, in case of, the developing nations, however, enjoy a significantly lower risk. This is contrary to the findings in case of developed nations, where the US SRI portfolio has significantly outperformed the benchmark index and the UK and Australia SRI portfolios have performed in line with the benchmark index. Finally, the study discusses results and implications for regulators, practitioners and investors’ who believe in the SRI investing.Research limitations/implicationsThis study provides empirical support for the practitioners, policymakers and investors emphasizing that in the case of developed nations SRI investments generate a significant excess return or at the best perform in line with the broader market index. However, in the case of developing nations, very few firms are consistently rated on ESG parameters. This provides lesser options for investors in developing nations to apply the “impact first” philosophy of investment. The investor’s community and regulators need to make a serious effort in promoting firms to take up sustainability effort seriously.Originality/valueThe unique contribution of this study is that it considers a wider definition of the term “sustainability” and examines the performance of SRI investment in developed vs developing countries. This is one of the few studies at the global level, which highlights whether sustainable investing generates abnormal risk-adjusted returns for the investors.

Can artificial intelligence enhance the Bitcoin bonanza

This paper aims to investigate how Machine Learning (ML) techniques perform in the prediction of cryptocurrency prices. We answer if Support Vector Machines (SVM) and Artificial Neural Networks (ANN) based strategies can generate abnormal risk-adjusted returns when applied to Bitcoin, the largest decentralized digital currency in terms of market capitalization. Findings indicate that traders are able to earn conservative returns on the risk adjusted basis, even accounting for transaction costs, when using SVM. Furthermore, the study suggests that ANN can explore short run informational inefficiencies to generate abnormal profits, being able to beat even buy-and-hold during strong bull trends.

Option-implied Tail Risk and Stock Returns Around Earnings Announcements

We show that option-implied jump tail risk estimated prior to earnings announcements strongly predicts post-earnings risk-adjusted abnormal stock returns. The predictive power of implied jump tail risk is particularly strong on extreme abnormal stock returns whose absolute values exceed 10%. The finding is robust to various event windows and after controlling for model-free implied moments of variance, skewness and kurtosis. We argue that the tail risk implied from options preceding earnings news releases reflects a sudden flood of information of informed traders and investors, and this results in the tail risk usefully predicting abnormal stock returns. Finally, we show that upside and downside tail risk contain distinctive predictive information, with upside (downside) tail risk strongly predicting positive (negative) abnormal stock returns.

An Empirical Evidence of Over Reaction Hypothesis on Karachi Stock Exchange (KSE)

Purpose: There is extensive international evidence that contrarian strategy yields positive abnormal returns for long-term periods. However, this topic has received scarce attention in Pakistan. This research study in line with De Bondt and Thaler (1985) examines the winner-loser anomaly on Karachi Stock Exchange (KSE) using cumulative abnormal returns (CAR). Design/Methodology: To substantiate the purpose, this study has calculated cumulative abnormal returns (CAR) of each company listed on KSE for a period of 2000-2015 and constructed both the corresponding Equally Weighted and Value Weighted portfolios returns. To check the risk adjusted performance of these portfolios, a system-based estimation via the Generalized method of moments (GMM) with Newey-West standard errors corrected for heteroscedasticity and serial correlation is employed. Findings: This study reports significant evidence of Contrarian Investment strategies in KSE over the entire sample period. Results show that both Equally Weighted and Value Weighted portfolios formed on CAR generates abnormal returns of 9.89% and 3.64% per annum in the long run on KSE. Further a system of equations based on Generalized Methods of Moments (GMM) showed that Capital Asset Pricing Model (CAPM) is misspecified in case of KSE as it fails to explain the cross-sectional variation in portfolios returns based on contrarian investment strategies but 3-factor and 5-factor (Fama and French, 1996;2016) have explained their risk-adjusted abnormal return. Research Limitation/Implications: The study can be improvised by including other fundamentals and macroeconomic variables and determining their impact on contrarian investment strategies in different sectors and markets of Pakistan. Practical Implications: Policymakers and Investors need to take in to account contrarian investment strategies for evaluating asset returns. Contrarian Investment strategies are profitable in the long run on KSE and investors when taking their portfolio selection decisions can long the portfolios with lowest CAR value shares and short the higher CAR values portfolios. Originality/Value: The study aims to make the first attempt in investigating the risk adjusted performance of portfolios based on contrarian strategies by using not only CAPM but also 3-factor and 5-factor Fama and French (1996;2016) on Karachi Stock exchange.

Does investing in sound corporate governance pay? A South African study

Despite increased recognition of the importance of sound corporate governance practices in emerging markets, previous researchers reported inconclusive evidence on the association between corporate governance and financial performance. Authors that predominantly focused on board-related variables might, however, have failed to reflect the complex nature of corporate governance. The financial performance measures employed in the majority of previous studies also ignored the potential risk-reducing benefits that sound corporate governance could hold for emerging market firms. The purpose of this article was thus to investigate the relationship between a comprehensive measure of corporate governance and the risk-adjusted performance of selected South African companies. A unique corporate governance database was compiled by conducting content analysis on the considered companies’ annual reports over the period 2002 to 2010. Aspects related to nine corporate governance categories were taken into account. In addition to the accounting and market-based performance measures that were employed in previous studies, South African companies’ risk-adjusted performance was also taken into account. The capital asset pricing model and the Fama-French three-factor model were employed to estimate risk-adjusted abnormal returns for four corporate governance-sorted portfolios. Both estimations revealed that the portfolio comprising of companies with the highest corporate governance scores managed to significantly outperform the market.

A calendar effect: Weekend overreaction (and subsequent reversal) in spot FX rates

This paper investigates a calendar effect, namely the weekend overreaction, in spot foreign exchange markets of 8 major and 9 emerging currencies. We find that after a large price difference between Friday close and subsequent Monday open, most markets are likely to reverse in multiple horizons during the following week, which is consistent with the overreaction hypothesis. We develop a reversal trading strategy to exploit this effect which we show are robust to transaction costs and interest rates. In the out-of-sample test, the strategy is able to generate abnormal risk-adjusted returns, which suggests that these currency markets might be weak-form inefficient.

Rich Pickings? Risk, Return, and Skill in the Portfolios of the Wealthy

This paper empirically investigates the portfolios of wealthy households and their implications for the dynamics of inequality. Using an administrative panel of all Swedish residents, we document that returns on financial wealth are on average 4% higher per year for households in the top 1% compared to the median household. These high average returns are primarily compensations for high levels of systematic risk. Abnormal risk-adjusted returns, linked for instance to informational advantages or exceptional investment skill, contribute only marginally to the high returns of the wealthy. Implications for inequality dynamics and public policy are discussed.

Trial by Media: An Empirical Investigation of Corporate Reputation and Stock Returns in Australia

This article examines whether investors are able to generate abnormal risk-adjusted returns in the Australian market based on media-specific firm reputational factors under market uncertainty between 2004 and 2012. The findings suggest that after controlling for crisis-centric time periods and market risk factors, contrarian trading strategies produce abnormal returns for poor corporate reputation firms but not for their good corporate reputation counterparts. Corporate reputation may be a driver of performance for poorly performing Australian firms and could be considered a stimulus for trading activity due to its explanatory capabilities.

Can we forecast the implied volatility surface dynamics of equity options? Predictability and economic value tests

We examine whether the dynamics of the implied volatility surface of individual equity options contains exploitable predictability patterns. Predictability in implied volatilities is expected due to the learning behavior of agents in option markets. In particular, we explore the possibility that the dynamics of the implied volatility surface of individual stocks may be associated with movements in the volatility surface of S&P 500 index options. We present evidence of strong predictable features in the cross-section of equity options and of dynamic linkages between the volatility surfaces of equity and S&P 500 index options. Moreover, time-variation in stock option volatility surfaces is best predicted by incorporating information from the dynamics in the surface of S&P 500 options. We analyze the economic value of such dynamic patterns using strategies that trade straddle and delta-hedged portfolios, and find that before transaction costs such strategies produce abnormal risk-adjusted returns.

Momentum in Irish stocks: evidence from the credit crisis

This article examines return momentum in Irish shares over a 24-year period, including the recent credit crisis. The optimal momentum strategy generates significant risk-adjusted abnormal returns that are robust to the return generating model and seasonal effects. The extent of underreaction is more symmetrical than previous research has indicated, with both past winners and losers contributing to momentum returns. Momentum is found to be significantly higher in the pre-credit crisis period. The source of the positive returns in the momentum strategy changes from the winner portfolio to the loser portfolio as we move into the credit crisis, with this latter period showing positive but insignificant moment returns.