Stock return expectations in the credit market

In this paper we compute long-term stock return expectations (across the business cycle) for individual firms using information backed out from the credit derivatives market. Our methodology builds on previous theoretical results in the literature on stock return expectations and, empirically, we demonstrate a close relationship between credit-implied stock return expectations and future realized stock returns. We also find stock portfolios selected based on credit-implied stock return forecasts to beat equally- and value-weighted portfolios of the same stocks out-of-sample. Contrary to many other studies, our expectations/predictions are made at the individual stock level rather than at the portfolio level, and no parameter estimations using historical stock price- or credit spread observations are needed.     

Positive return premia in Japan

This paper examines Jensen's [J. Finance, 1968, 23, 389–416] alphas and the time-varying return premia unexplained by standard risk factors in Japan and presents several new findings. First, in contrast to the US experience, positive alphas remain after Fama and French's three factors are applied to excess stock returns in Japan. Second, positive alphas remain in Japan, even if the Fama–French three factors combined with momentum and reversal factors are applied to excess stock returns. Third, the positive return premia unexplained by these five factors bear little relation to the dynamics of the Japanese macroeconomy. Fourth, the time series evolution of the positive return premia indicates autonomous dynamics with at least three regimes. Fifth, we can predict or time the acquisition of the positive return premia for small-size portfolios in Japan by observing the direction and effect of the return premia of large-size portfolios and high-book equity to market equity (BE/ME) portfolios. Finally, application of the self-exciting threshold autoregressive (SETAR) model shows that the size effects are stronger than the BE/ME effects in Japan, given that the return premia from small-size portfolios in the SETAR model are bounded by positive thresholds, while the return premia from high-BE/ME portfolios are bounded by negative thresholds.     

Multi-asset portfolio optimization and out-of-sample performance: an evaluation of Black–Litterman,mean-variance,and naïve diversification approaches

The Black–Litterman model aims to enhance asset allocation decisions by overcoming the problems of mean-variance portfolio optimization. We propose a sample-based version of the Black–Litterman model and implement it on a multi-asset portfolio consisting of global stocks, bonds, and commodity indices, covering the period from January 1993 to December 2011. We test its out-of-sample performance relative to other asset allocation models and find that Black–Litterman optimized portfolios significantly outperform naïve-diversified portfolios (1/N rule and strategic weights), and consistently perform better than mean-variance, Bayes–Stein, and minimum-variance strategies in terms of out-of-sample Sharpe ratios, even after controlling for different levels of risk aversion, investment constraints, and transaction costs. The BL model generates portfolios with lower risk, less extreme asset allocations, and higher diversification across asset classes. Sensitivity analyses indicate that these advantages are due to more stable mixed return estimates that incorporate the reliability of return predictions, smaller estimation errors, and lower turnover.     

Takeover Prediction and Portfolio Performance: A Note

This paper empirically tests whether it is possible to generate abnormal returns from investing in a portfolio of predicted successful takeover targets. Portfolios are formed on the basis of predictions from models similar to those estimated by Palepu (1986). However, unlike Palepu (1986), the portfolios in this paper are formed using a decision rule that results in smaller portfolios with higher average takeover probabilities. This provides a stronger test of whether share prices reflect future takeover probabilities. The results show that while the models have significant explanatory power, the portfolios fail to beat the return on the market over a 12-month holding-period.     

A Dynamic Model of Characteristic‐Based Return Predictability

We present a dynamic model that links characteristic‐based return predictability to systematic factors that determine the evolution of firm fundamentals. In the model, an economy‐wide disruption process reallocates profits from existing businesses to new projects and thus generates a source of systematic risk for portfolios of firms sorted on value, profitability, and asset growth. If investors are overconfident about their ability to evaluate the disruption climate, these characteristic‐sorted portfolios exhibit persistent mispricing. The model generates predictions about the conditional predictability of characteristic‐sorted portfolio returns and illustrates how return persistence increases the likelihood of observing characteristic‐based anomalies.     

Instantaneous portfolio theory

Instantaneous risk is described by the arrival rate of jumps in log price relatives. As a consequence there is then no concept of a mean return compensating risk exposures, as zero is the only instantaneous risk-free return. From this perspective, all portfolios are subject to risk and there are only bad and better ways of holding risk. For the purpose of analysing portfolios, the univariate variance gamma model is extended to higher dimensions with an arrival rate function with full high-dimensional support and independent levels of marginal skewness and excess kurtosis. Investment objectives are given by concave lower price functionals formulated as measure distorted variations. Specific measure distortions are calibrated to data on S&P 500 index options and the time series of the index. The time series estimation is conducted by digital moment matching applied to uncentred data and it is shown that data centring is a noisy activity to be generally avoided. The evaluation of the instantaneous investment objective requires the computation of measure distorted integrals. This is done using Monte Carlo applied to gamma distributed ellipitical radii with a low shape parameter. The resulting risk reward frontiers are between finite variation as the reward and measure distorted variations as risk. In the absence of an instantaneous risk-free return, portfolios on the efficient frontier are characterized by differences in asset variations being given by differences in asset covariations with the risk charge differential of the efficient portfolio. Portfolio variations seen as the equivalent of excess returns, may optimally be negative. Lower price maximizing portfolios are presented in two, six and twenty five dimensions.     

Can tail risk explain size,book‐to‐market,momentum, and idiosyncratic volatility anomalies?

We examine the impact of tail risk on the return dynamics of size, book‐to‐market ratio, momentum and idiosyncratic volatility sorted portfolios. Our time‐series analyses document significant portfolio return exposures to aggregate tail risk. In particular, portfolios that contain small, value, high idiosyncratic volatility and low momentum stocks exhibit negative and statistically significant tail risk betas. Our cross‐sectional analyses at the individual stock level suggest that tail risk helps in explaining the four pricing anomalies, particularly size and idiosyncratic volatility anomalies.     

Portfolio optimization under a generalized hyperbolic skewed t distribution and exponential utility

In this paper, we show that if asset returns follow a generalized hyperbolic skewed t distribution, the investor has an exponential utility function and a riskless asset is available, the optimal portfolio weights can be found either in closed form or using a successive approximation scheme. We also derive lower bounds for the certainty equivalent return generated by the optimal portfolios. Finally, we present a study of the performance of mean–variance analysis and Taylor’s series expected utility expansion (up to the fourth moment) to compute optimal portfolios in this framework.     

Term Premium Determinants, Return Enhancement and Interest Rate Predictability

This paper investigates whether simple term premium estimation techniques provide potential for return enhancement and interest rate predictability. Using short-term US government securities, during 1959—93, it is demonstrated that utilization of such knowledge allows investors to enhance returns on fixed income portfolios, provided that other than money market alternatives can be considered as potential repositories of funds. In addition, such knowledge yielded short-term interest rate predictions that were weakly superior to other methodologies, including the naive no-change forecast, except during the volatile early 1980s.     

MACROECONOMIC FACTORS, THE APT AND THE UK STOCKMARKET

This paper examines the macroeconomic sources of risk priced in the UK stockmarket between 1983 and 1990 using monthly data on 840 stocks to form both beta-sorted and market value sorted portfolios using the methodology proposed by Chen, Roll and Ross (1986) and Chan, Chen and Hsieh (1985) for the US. We find that several intuitively plausible macroeconomic variables were priced over this period using the beta sorted portfolios and that once these variables are included there is little role for the return on the market. However, when the market value sorted portfolios were used only inflation and a measure of equity market 'expense' relative to gilts was priced; furthermore with the market value sorted portfolios a role for the market return was found.     

Book Assets,Real Estate,and Returns on Common Stock

Since real estate is common to most firms, this study examines whether there is a real estate factor in common stock returns that is not completely captured by existing asset pricing models. The three-factor model of Fama and French (1993), hereafter FF, is extended to incorporate a unique real estate factor. Using his extended-FF model, we examine the returns on 53 industry portfolios of common stocks over the 1972 through 1995 time period. The results indicate that a significant 19 percent of the industries are systematically related to the real estate factor. Most interestingly, we show that the loading of the real estate factor in common stock return is related to the loading of the book-to-market equity factor in these returns. We also construct decile portfolios of common stocks based on historical sensitivities of common stock returns to the real estate factor. The coefficients on the real estate factor vary systematically across the decile portfolios. The results of our analysis suggest that portfolio managers should manage their exposure to real estate.     

Heteroskedasticity in Stock Returns

We use predictions of aggregate stock return variances from daily data to estimate time-varying monthly variances for size-ranked portfolios. We propose and estimate a single factor model of heteroskedasticity for portfolio returns. This model implies time-varying betas. Implications of heteroskedasticity and time-varying betas for tests of the capital asset pricing model (CAPM) are then documented. Accounting for heteroskedasticity increases the evidence that risk-adjusted returns are related to firm size. We also estimate a constant correlation model. Portfolio volatilities predicted by this model are similar to those predicted by more complex multivariate generalized-autoregressive-conditional-heteroskedasticity (GARCH) procedures.     

Wavelet timescales and conditional relationship between higher-order systematic co-moments and portfolio returns

This paper investigates the association between portfolio returns and higher-order systematic co-moments at different timescales obtained through wavelet multi-scaling, a technique that decomposes a given return series into timescales enabling investigation at different return intervals. In Australian industry portfolios, the relative risk positions indicated by systematic co-moments at some timescales are different from those revealed in daily returns. A strong positive (negative) linear association between beta and portfolio return and co-kurtosis and portfolio return in the up (down) market is observed in daily returns and at different timescales. The beta risk is priced in the up and down markets. Co-kurtosis is not priced when the beta is in the pricing model. Co-skewness appears to be priced at a relatively high timescale and this is observed only after the up and down separation of market returns.     

Volatility timing: How best to forecast portfolio exposures

This paper investigates how best to forecast optimal portfolio weights in the context of a volatility timing strategy. It measures the economic value of a number of methods for forming optimal portfolios on the basis of realized volatility. These include the traditional econometric approach of forming portfolios from forecasts of the covariance matrix. Both naïve forecasts using simple historical averages, and those generated from econometric models are considered. A novel method, where a time series of optimal portfolio weights are constructed from observed realized volatility and direct forecast is also proposed. A number of naïve forecasts and the approach of directly forecasting portfolio weights show a great deal of merit. Resulting portfolios are of similar economic benefit to a number of competing approaches and are more stable across time. These findings have obvious implications for the manner in which volatility timing is undertaken in a portfolio allocation context.     

The Volatility and Price Sensitivities of Managerial Stock Option Portfolios and Corporate Hedging

We use estimates of the Black–Scholes sensitivity of managers' stock option portfolios to stock return volatility and the sensitivity of managers' stock and stock option portfolios to stock price to test the relationship between managers' risk preferences and hedging activities. We find that as the sensitivity of managers' stock and stock option portfolios to stock price increases, firms tend to hedge more. However, as the sensitivity of managers' stock option portfolios to stock return volatility increases, firms tend to hedge less.     

Return and Volatility Spillovers Between Large and Small Stocks in the UK

Abstract:  This paper investigates return and volatility spillover effects between the FTSE 100, FTSE 250 and FTSE Small Cap equity indices using the multivariate GARCH framework. We find that return and volatility transmission mechanisms between large and small stocks in the UK are asymmetric. In particular, there are significant spillover effects in both returns and volatility from the portfolios of larger stocks to the portfolios of smaller stocks. For volatility, there is also evidence of limited feedback from the portfolios of smaller stocks to the portfolios of larger stocks, although sub-period analysis suggests that this is to some extent period-specific. Simulation evidence shows that non-synchronous trading potentially explains some, but not all, of the spillover effects in returns, and that it explains none of the spillover effects in volatility. These results are consistent with a market in which information is first incorporated into the prices of large stocks before being impounded into the prices of small stocks.     

Differences in Perstistence in Aggregated and Disaggregated UK Stock Returns: A Reconciliation

Studies of the persistence in the returns series of UK stocks, using inter alia variance ratios, have documented clear differences between the relatively low levels of persistence in individual security returns and the relatively high levels of persistence in the returns of portfolios composed of these same securities. In this paper, I reconcile this contrast by showing that portfolio return variance ratios should not be expected to reflect (own) persistence levels in the component security returns, but instead should reflect a 'cross-persistence' between the securities. I calculate synthetic portfolio variance ratios from measures of security return 'cross-persistence' and find that they replicate closely the observed portfolio return variance ratios, which provides empirical support for the theoretical results.     

Owner-Occupied Housing and the Composition of the Household Portfolio: The Case of France

This paper investigates the impact of housing demand on the composition of the optimal portfolios of homeowners in France, following the methodology developed by Flavin and Yamashita (NBER Working Paper 6389, 2002). We use historical data on housing prices and financial assets returns to estimate the mean return and covariance matrix of a set of assets including housing. We then calculate mean-variance efficient frontiers associated to various levels of the housing-to-net wealth ratio, corresponding to the average ratios observed for different age groups in the 1998 French Wealth Survey sample. Our numerical results fit the average portfolios in different age brackets quite well. Also, returns of housing and its covariance with the other assets indicate there is room in France for housing price derivatives.     

明星基金溢价效应:“高技术”还是“好运气”?

本文研究我国股票型、偏股型开放式基金的评级与未来业绩的关系。根据晨星公司的基金评级数据,每月构造1星级至5星级的基金投资组合,并采用Carhart四因子模型对组合收益进行风险调整,研究发现5星级基金每年能获得2%的超额收益率,5星级与1星级基金的套利组合年超额收益为6%。此外,采用自助法对超额收益率的进一步检验,本文发现,明星基金溢价与基金经理的选股能力无关,与基金经理的好运气有关。     

Profitability of momentum strategies in Latin America

This article examines performance of momentum portfolios in Latin America. Conventional momentum produces zero risk-adjusted returns. Residual and model-based momentum strategies are also unable to deliver positive and significant risk-adjusted performance. A third or absolute strength momentum strategy based on historical returns obtains positive and significant alphas only when controlling for market, size, and value factors. Nonetheless, when we control for country effects or expand the set of risk factors, abnormal returns to absolute strength momentum are also insignificant. In all, after accounting for risk, stock investors in the region were not able to profit from return continuation.