Unexplained Returns Research Articles

Arbitrage Strategy Based on DHS Pricing Model

The Daniel-Hirshleifer-Sun (DHS) is a three-factor model based on the investors psychology. It supplements the market factors of the CAPM model with two behavioral factors that capture commonalities in mispricing resulting from psychological biases. The DHS method focuses on two psychological biases affecting asset prices: overconfidence and limited attention. According to Daniel, Hirshleifer, and Sun, overconfidence in the investor tends to induce commonality in long-horizon mispricing.In contrast, the inattention of the investor tends to induce commonality in short-horizon mispricing. In this strategy, assets are priced according to the DHS model, and the unexplained return generated from this model is traded. According to the back-test, the explanation power of the DHS model is limited in Chinses market. As a result, the arbitrage strategy based on this model cannot generate a decent return in the long run. However, this strategy generates a significant positive return in turbulent market conditions. During these periods, investors tend to panic, and their psychology is especially unstable, so the two behavioral factors can explain the return efficiently.

Estimation with mixed data frequencies: A bias-correction approach

We propose a solution to the measurement error problem that plagues the estimation of the relation between the expected return of the stock market and its conditional variance due to the latency of these conditional moments. We use intra-period returns to construct a nonparametric proxy for the latent conditional variance in the first step which is subsequently used as an input in the second step to estimate the parameters characterizing the risk–return tradeoff via a GMM approach. We propose a bias-correction to the standard GMM estimator derived under a double asymptotic framework, wherein the number of intra-period returns, N, as well as the number of low frequency time periods, T, are simultaneously large. Simulation exercises show that the bias-correction is particularly relevant for small values of N which is the case in empirical scenarios involving long time periods. The methodology lends itself to additional applications, such as the empirical evaluation of factor models, wherein the factor betas may be estimated using intra-period returns and the unexplained returns or alphas subsequently recovered at lower frequencies.

A misspecification test for the higher order co-moments of the factor model

ABSTRACTThe traditional estimation of higher order co-moments of non-normal random variables by the sample analog of the expectation faces a curse of dimensionality, as the number of parameters increases steeply when the dimension increases. Imposing a factor structure on the process solves this problem; however, it leads to the challenging task of selecting an appropriate factor model. This paper contributes by proposing a test that exploits the following feature: when the factor model is correctly specified, the higher order co-moments of the unexplained return variation are sparse. It recommends a general to specific approach for selecting the factor model by choosing the most parsimonious specification for which the sparsity assumption is satisfied. This approach uses a Wald or Gumbel test statistic for testing the joint statistical significance of the co-moments that are zero when the factor model is correctly specified. The asymptotic distribution of the test is derived. An extensive simulation study confirms the good finite sample properties of the approach. This paper illustrates the practical usefulness of factor selection on daily returns of random subsets of S&P 100 constituents.

Past price changes, trading volume and prediction of portfolio returns

Purpose – The purpose of this paper is to evaluate the profitability of investment strategies based on past price changes and trading volumes. Design/methodology/approach – Data are employed from January 1998 to December 2011 for select emerging markets. Portfolios are formed on the basis of past information on prices and/or volumes. Unrestricted and risk adjusted returns for sample portfolios are analyzed. The risk models employed in study are Capital Asset Pricing Model (CAPM), Fama-French (F-F) Model and Fama-French augmented models. Findings – Price momentum patterns are observed for Brazil, India, South Africa and South Korea, while there are reversals in Indonesia and China. Low-volume stocks outperform high-volume stocks for all sample countries except China. Further, volume and price based bivariate strategies do a better job than univariate strategies in case of India, South Africa and South Korea. The past price and volume patterns in stock returns are not fully explained by CAPM as well as the F-F Model. Price and volume momentum factors do play a role in explaining some of these return patterns. Finally, the unexplained returns seem to be an outcome of investor under or overreaction to past information. The sources of price and volume momentum seem to be partly risk based and partly behavioral. Originality/value – The study analyzes combined role of price and volume in portfolio formation with post holding analysis. The work is useful for global portfolio managers, policy makers, market regulators and the academic community. The study contributes to asset pricing and behavioral finance literature for emerging markets.

Cell therapy for chemically induced ovarian failure in mice.

Cell therapy has been linked to an unexplained return of ovarian function and fertility in some cancer survivors. Studies modeling this in mice have shown that cells transplantation generates donor-derived oocytes in chemotherapy-treated recipients. This study was conducted to further clarify the impact of cell transplantation from different sources on female reproductive function after chemotherapy using a preclinical mouse model. Methods. Female mice were administered 7.5 mg/kg cisplatin followed by cell transplantation (one week later) using GFP+ female cell donors. For cell tracking, adipose derived stem cell GFP+ (ADSC), female germline stem cell GFP+/MVH+ (FGSC), or ovary cell suspension GFP+ mice were transplanted into cisplatin-treated wild-type recipients. After 7 or 14 days animals were killed and histological analysis, IHQ for GFP cells, and ELISA for estradiol were performed. Results. Histological examinations showed that ADSC, ovary cell suspension, and FGSC transplant increase the number of follicles with apparent normal structure in the cells recipient group euthanized on day 7. Cell tracking showed GFP+ samples 7 days after transplant. Conclusion. These data suggest that intraovarian injection of ADSCs and FGSC into mice with chemotherapy-induced ovarian failure diminished the damage caused by cisplatin.

Decomposing Immigrants’ Economic Integration in Earnings Disparity: Racial Variations in Unexpected Returns

Le discours sur l’intégration économique des immigrés prend souvent pour acquis que le capital humain de ces derniers détermine le succès de leur intégration, tel que comparé aux revenus de la population d’origine. Dans cet article, nous décomposons les salaires des uns et des autres au Canada pour voir à quel point on peut attribuer la disparité de gains au capital humain en question ou à d’autres facteurs. Selon nos résultats, les immigrés avaient à leur arrivée une formation et une expérience de haut niveau, souvent supérieures à celles des Canadiens de naissance, mais ils ont été sous-rétribués à cause de l’absence d’autres bénéfices non expliqués. Ceci suggère que la politique de sélection des immigrants a des limites, et qu’il faudrait reconsidérer d’autres stratégies pour infléchir la manière dont le marché du travail les traite, surtout ceux d’origine minoritaire, afin de combler cette inégalité de revenu.

The Long-Term Performance of a Social Investment Universe

This article presents a multi-decade, holdings-based attribution analysis of a U.S. social investment index. This analysis finds that differences between the index’s returns and those of the S&amp;P 500 Index are fully explained by conventional investment factors. This is true for the full time period under study as well as for two subperiods (January 1992–November 1999 and December 1999–June 2010) that coincide with periods of nominal outperformance and underperformance by the index. The authors find that unexplained returns are not statistically different from zero in either the full time period or in either of the two subperiods. This is beneficial for investors motivated by social values because it suggests that the risk exposures created by social screens can be managed through careful portfolio construction. It is less encouraging for investors seeking a performance advantage through the use of social or environmental factors—the analysis suggests that, for this universe at least, market valuations already correctly incorporate this information. <b>TOPICS:</b>ESG investing, mutual funds/passive investing/indexing, equity portfolio management

Uncertain Life Expectancy, Optimal Portfolio Choice and the Cross-Section of Asset Returns

I solve a portfolio optimization problem with stochastic death rates. An agent demands more of an asset that pays off high (low) in states of the world when he expects to live longer (shorter) than an asset with the opposite payoff. Consequently, in equilibrium, an asset with a positive correlation between its returns and changes in the life expectancy pays a lower expected return than an asset with a negative correlation. Empirical evidence supports the model. Out-of-sample evidence suggests that a trading strategy, which exploits the theoretical relationship, pays 3.25% annual unexplained returns according to the CAPM.

Conditional risk–return relationship in a time-varying beta model

We investigate the asymmetric risk–return relationship in a time-varying beta CAPM. A state space model is established and estimated by the Adaptive Least Squares with Kalman foundations proposed by McCulloch. Using S&P 500 daily data from 1987:11–2003:12, we find a positive risk–return relationship in the up market (positive market excess returns) and a negative relationship in the down market (negative market excess returns). This supports the argument of Pettengill et al., who use a constant beta model. However, our model outperforms theirs by eliminating the unexplained returns and improving the accuracy of the estimated risk price.

Bone Marrow Transplantation Generates Immature Oocytes and Rescues Long-Term Fertility in a Preclinical Mouse Model of Chemotherapy-Induced Premature Ovarian Failure

Although early menopause frequently occurs in female cancer patients after chemotherapy (CTx), bone marrow (BM) transplantation (BMT) has been linked to an unexplained return of ovarian function and fertility in some survivors. Studies modeling this in mice have shown that BMT generates donor-derived oocytes in CTx-treated recipients. However, a subsequent report claimed that ovulated eggs are not derived from BM and that BM-derived oocytes reported previously are misidentified immune cells. This study was conducted to further clarify the impact of BMT on female reproductive function after CTx using a preclinical mouse model. Female mice were administered CTx followed by BMT using coat color-mismatched female donors. After housing with males, the number of pregnancies and offspring genotype were recorded. For cell tracking, BM from germline-specific green fluorescent protein-transgenic mice was transplanted into CTx-treated wild-type recipients. Immune cells were sorted from blood and analyzed for germline markers. BMT rescued long-term fertility in CTx-treated females, but all offspring were derived from the recipient germline. Cell tracking showed that donor-derived oocytes were generated in ovaries of recipients after BMT, and two lines of evidence dispelled the claim that these oocytes are misidentified immune cells. These data from a preclinical mouse model validate a testable clinical strategy for preserving or resurrecting ovarian function and fertility in female cancer patients after CTx, thus aligning with recommendations of the 2005 National Cancer Institute Breast Cancer Progress Review Group and President's Cancer Panel to prioritize research efforts aimed at improving the quality of life in cancer survivors.

MACROECONOMIC VARIABLES AND SEASONAL MEAN REVERSION IN STOCK RETURNS

AbstractIn this paper I investigate whether seasonal mean reversion in stock portfolio returns is related to common macroeconomic risk factors. I decompose excess returns into explained and unexplained returns using a multifactor pricing model. The explained excess returns exhibit January mean reversion; the unexplained excess returns do not. The mean reversion can be attributed to the components of return related to unexpected inflation, bond default premium, and market risk. The results do not depend on the time‐series properties of the portfolio betas. Bond default premia and excess market returns are mean reverting in January.

A possible beneficial effect of selenium administration in antiarrhythmic therapy.

The following review of the literature on the importance of Selenium (Se) in myocardial homeostasis and of the pharmacology of this trace metal, represents an attempt to search, without prejudice to other possible explanations, for a rationale of a beneficial effect of Se substitution as an adjuvant to antiarrhythmic therapy. For several years, in the early 1980s, I had to deal with the problem of a serious ventricular arrhythmia (non-sustained and sustained ventricular tachycardia) which was remarkably resistant to a battery of the most potent antiarrhythmic agents. Eventually, dramatic improvement, lasting for a period of 8 years, was achieved with Flecainide, which, however, left unsolved the episodic occurrence of disabling ventricular bigemini. Over the most recent period of 1 year and 8 months, there was a sudden and unexplained return to unbroken normal sinus rhythm. Among the multiplicity of possible reasons for this fortunate development, the concurrent introduction of Se substitution appeared as the most obvious, though very tentative explanation. Substitution of this trace metal preceded the extinction of ventricular bigemini by 1 week and actually represented the sole modification of otherwise reasonably standardized conditions of antiarrhythmic therapy, life style and diet.