Financial Integration of Large- and Small-Cap Stocks in Emerging Markets

This study examines the financial integration of large- and small-cap stocks in twenty-three emerging markets to determine their degree of market integration with the world market. The international asset pricing model cannot be rejected for most large-cap stock portfolios, but it is rejected for small-cap stock portfolios. The findings also demonstrate that super-large-cap stocks have the fewest pricing errors and their global financial integration has increased in recent years. In sum, the empirical results indicate that global market integration is primarily associated with the super-large-cap stocks of large emerging markets.     

Style drift: Evidence from small-cap mutual funds

This paper documents that small-cap mutual funds allocate on average 27% of their portfolio to mid- and large-cap stocks. We find that larger and older small-cap funds are more likely to hold mid- and large-cap stocks, consistent with funds straying from their objective over time. Funds that invest heavily in mid- and large-cap stocks expose their investors to unanticipated risks but investors do not experience higher abnormal returns or performance persistence overall. These funds did outperform their peers by 3% annually in the most recent period between January 2003 and March 2010.     

Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds

We present evidence that fund managers inflate quarter-end portfolio prices with last-minute purchases of stocks already held. The magnitude of price inflation ranges from 0.5 percent per year for large-cap funds to well over 2 percent for small-cap funds. We find that the cross section of inflation matches the cross section of incentives from the flow/performance relation, that a surge of trading in the quarter's last minutes coincides with a surge in equity prices, and that the inflation is greatest for the stocks held by funds with the most incentive to inflate, controlling for the stocks' size and performance.     

Stock return predictability and model uncertainty

We use Bayesian model averaging to analyze the sample evidence on return predictability in the presence of model uncertainty. The analysis reveals in-sample and out-of-sample predictability, and shows that the out-of-sample performance of the Bayesian approach is superior to that of model selection criteria. We find that term and market premia are robust predictors. Moreover, small-cap value stocks appear more predictable than large-cap growth stocks. We also investigate the implications of model uncertainty from investment management perspectives. We show that model uncertainty is more important than estimation risk, and investors who discard model uncertainty face large utility losses.     

Monetary policy and portfolio rebalancing: Evidence from European equity mutual funds

In this study, we provide empirical evidence on the portfolio rebalancing of European equity mutual funds following both conventional (CMP) and unconventional monetary policies (UMP). We use 1772 equity mutual funds’ portfolio holdings over the period 2002Q4–2016Q4. This level of granularity allows us to characterise the funds’ asset allocation in different portfolio dimensions: the size, style, currency, and domicile of the stocks, and managers’ preferred investment strategies. Using a panel fixed effect estimator, our results support the existence of portfolio rebalancing across equity categories following UMP. European equity mutual funds’ assets are, on average, reallocated towards mid-cap, and core stocks and developing economies, and shifted away from small-cap and value stocks and home as well as developed countries. Furthermore, mutual funds seem to concentrate on their preferred and historical investment strategies. These two results suggest that managers are more willing to invest in safer and familiar stocks following UMP announcements thereby decreasing the risk of asymmetry of information. We finally show that the funds size, returns volatility and expense ratio affect the strength of the rebalancing.     

Does institutional ownership matter for international stock return comovement?

We study the link between international stock return comovements and institutional investment. We test whether the rise of institutional ownership has increased cross-country correlations and decreased cross-industry correlations. Using stock-level institutional holdings across 45 countries during the 2001–2010 period, we find that industry and global factors are relatively more important the country factors in explaining stock return variation among stocks with higher institutional ownership. Industry diversification strategies are more beneficial than country diversification strategies for stocks with high institutional ownership. We show that cross-border portfolio investment is a powerful force of international capital market integration and convergence of asset prices.     

中国A股市场大交易量与收益率关系的研究

利用技术分析制定股票投资策略是投资者主要采用的方法之一,而对交易量与收益率两者之间关系的研究又是技术分析的基础。我们认为,大交易量能更好地预测未来股票的收益。本文通过对中国A股市场代表不同规模股票的指数实证研究发现,不同指数在大交易量形成后的检验期里反应是不同的。代表大盘股的指数存在明显的"大交易量溢价效应";而代表小盘股的指数几乎不存在这种效应。我们还进一步的发现,这种"大交易量溢价效应"只发生在指数上涨了10%-20%的情况下。最后,我们给出了相关的投资策略。     

Short-term residual reversal

Conventional short-term reversal strategies exhibit dynamic exposures to the Fama and French (1993) factors. We develop a novel reversal strategy based on residual stock returns that does not exhibit these exposures and consequently earns risk-adjusted returns that are twice as large as those of a conventional reversal strategy. Residual reversal strategies generate statistically and economically significant profits net of trading costs, even when we restrict our sample to large-cap stocks over the post-1990 period. Our results are inconsistent with the notion that reversal effects are the result of trading frictions or non-synchronous trading of stocks and pose a serious challenge to rational asset pricing models.     

On the Out-of-Sample Importance of Skewness and Asymmetric Dependence for Asset Allocation

Recent studies in the empirical finance literature have reportedevidence of two types of asymmetries in the joint distributionof stock returns. The first is skewness in the distributionof individual stock returns. The second is an asymmetry in thedependence between stocks: stock returns appear to be more highlycorrelated during market downturns than during market upturns.In this article we examine the economic and statistical significanceof these asymmetries for asset allocation decisions in an out-of-samplesetting. We consider the problem of a constant relative riskaversion (CRRA) investor allocating wealth between the risk-freeasset, a small-cap portfolio, and a large-cap portfolio. Weuse models that can capture time-varying moments up to the fourthorder, and we use copula theory to construct models of the time-varyingdependence structure that allow for different dependence duringbear markets than bull markets. The importance of these twoasymmetries for asset allocation is assessed by comparing theperformance of a portfolio based on a normal distribution modelwith a portfolio based on a more flexible distribution model.For investors with no short-sales constraints, we find thatknowledge of higher moments and asymmetric dependence leadsto gains that are economically significant and statisticallysignificant in some cases. For short sales-constrained investorsthe gains are limited.     

Closed-end funds and sentiment risk

Irradional noise traders earn high returns for bearing risk that they themselves create. Diversifying across closed-end funds does little to reduce this risk, because discounts are correlated across funds. But diversification between closed-end funds and large-cap stocks does reduce this risk, especially when markets are not subject to major shocks: a combination of closed-end funds and large-cap stocks has lower risk than either one alone. To the extent that fund shares and large-cap stocks are partially segmented markets, large-cap stocks thus provide some protection against the sentiment risk created by noise traders. This paper estimates the amount of large-cap stocks needed in tax-deferred portfolios, under various amounts of market-wide risk, and ways of measuring it.     

Small-cap equity mutual fund managers as liquidity providers

This paper examines the relation between the performance of small-cap equity mutual funds and the liquidity characteristics of their asset holdings. We study the trading behavior of fund managers and show that on average, they tend to buy less liquid stocks and sell more liquid stocks. We introduce the notion of net “liquidity creation” by fund managers and examine its role in explaining the cross section of small-cap equity mutual fund returns. Our empirical results show that on average, small-cap mutual fund managers are able to earn an additional 1.5% return per year as compensation for providing such liquidity services to the market.     

The world price of liquidity risk

This paper empirically tests the liquidity-adjusted capital asset pricing model of Acharya and Pedersen (2005) on a global level. Consistent with the model, I find evidence that liquidity risks are priced independently of market risk in international financial markets. That is, a security’s required rate of return depends on the covariance of its own liquidity with aggregate local market liquidity, as well as the covariance of its own liquidity with local and global market returns. I also show that the US market is an important driving force of global liquidity risk. Furthermore, I find that the pricing of liquidity risk varies across countries according to geographic, economic, and political environments. The findings show that the systematic dimension of liquidity provides implications for international portfolio diversification.     

Do large-cap exchange-traded funds perform better than their small-cap counterparts in extreme market conditions?

This study proposes a new threshold model that differentiates between the size and sign-dependent responses of large- and small-cap exchange-traded funds (ETFs) to changes in extreme market conditions. The asymmetric returns in extreme upsides, extreme downsides, and “in-between” markets are estimated using three sets of betas. Findings support the notion that small-cap ETFs in all seven countries fall more in extreme downturns than they rise in extreme upturns. By contrast, six out of nine large-cap ETFs climb up in upside more than they fall in downswing. Therefore, investors should be cautious when assigning excessive weights to small-cap ETFs in their portfolio.     

Multiple duration analyses of dynamic limit order placement strategies and aggressiveness in a low-latency market environment

This study examines dynamic order placement strategies in a low-latency environment together with limit orders' aggressiveness by a new approach which utilises survival analysis with a multiple-spell duration model. Two samples are considered, including the period immediately followed Australian Securities Exchange (ASX)’s migration to Integrated Trading System (ITS) and the period subsequent to the launch of ASX Trade. We find the evidence supporting both the ‘cost of immediacy hypothesis' and the ‘chasing hypothesis' as in Hasbrouck and Saar (2009). Furthermore, several distinctions in the results are found between the samples of ITS period and ASX Trade period as well as between the samples of small-cap stocks and large-cap stocks. The findings of this study are beneficial not only for high-frequency traders in forming dynamic order placement strategies in a low-latency stock market environment, but also for market regulators in helping their attempt to improve regulations for stock exchanges.     

Correlation and return dispersion dynamics in Chinese markets

This paper studies the relation between firm-level return dispersions and correlations among Chinese stocks during periods of unusually large upward and downward swings. We analyze individual stock returns across 18 sectors and test if return dispersions and stock correlations show asymmetric patterns for extreme up and down markets. Evidence from studies on U.S. stocks suggests that equity return correlations tend to be much greater on the downside than on the upside and that the degree of comovement gets even stronger during extreme market states. However, in the case of Chinese stock market, we find that higher downside correlations apply to only stocks within the Financial sector. With the exception of Financial stocks, we find that stock correlations are significantly higher during up markets, rather than down markets. Regarding firm-level return dispersions, our findings are consistent with rational asset pricing model predictions. We find that equity return dispersions are significantly higher during periods of large price changes.     

Three analyses of the firm size premium

The size premium for smaller companies is one of the best-known academic market anomalies. The relevant issue for investors is whether size premium for small-cap stocks is still positive, and, if so, whether its magnitude is substantial. In our analysis, we use annual compounded returns, monthly cross-sectional regressions, and linear spline regressions to investigate the relation between expected returns and firm size during 1980–1996. All three methodologies report no consistent relationship between size and realized returns. Hence, our results show that the widespread use of size in asset pricing is unwarranted.     

Is the Value Spread a Good Predictor of Stock Returns? UK Evidence

Abstract:  This paper explores the predictive ability of the value spread in the UK. I replicate the US analysis of Liu and Zhang (2007) using UK data. In addition, I extend their work by exploring the predictive ability of the book-to-market, market-to-book and value spread on other size and value investment strategies, namely: large-caps only; small-caps minus large-caps (SML); value stocks only; growth stocks only; value stocks minus growth stocks (VMG) and a market portfolio that includes all stocks. The results are consistent with Liu and Zhang (2007) on the value spread. The value spread shows no predictive power for portfolio returns. Therefore, I show that the predictive power of book-to-market and market-to-book spreads depend on the portfolio formation strategies and the relative proportion of small-cap, large-cap, value and growth stocks in the portfolio.     

Liquidity risk and stock returns around the world

The recent global financial crisis demonstrates that market liquidity is a prominent systematic risk globally. We find that local liquidity risk, in addition to the local market, value and size factors, demands a systematic premium across stocks in 11 developed markets. This local pricing premium is smaller in countries where the country-level corporate boards are more effective and where there are less insider trading activities. We also discover that global liquidity risk is a significant pricing factor across all developed country market portfolios after controlling for global market, value, and size factors. The contribution of this risk to the return on a country market portfolio is economically and statistically significant within and across regions.     

Idiosyncratic volatility and equity returns: UK evidence

The proposition that idiosyncratic volatility may matter in asset pricing is currently a topic of research and controversy. Using data from the UK market we examine the predictive ability of various measures of idiosyncratic risk and provide evidence which suggests that: (a) it is the idiosyncratic volatility of small capitalization stocks that matters for asset pricing and (b) that small stocks idiosyncratic volatility predicts the small capitalization premium component of market returns and is unrelated to either the market or the value premium. The predictive power of the aggregate idiosyncratic volatility of small stocks remains intact even after we control for the possible proxying effects of business cycle fluctuations and liquidity and is robust across time and different econometric specifications.