Performance aspects of Greek bond mutual funds

This paper examines the performance characteristics of Greek bond funds and the impact of fund flows on portfolio returns. The evidence shows that on average bond funds do not offer risk-adjusted profits exceeding the returns of the benchmark index, which is in consistence with the US and international evidence. Returns before fees are slightly superior to the returns of the benchmark index, but when fees are considered they lag considerably. The security selection and market timing skills of fund managers are also tested using both an unconditional and a conditional model to test for the impact of public information variables. We also find that fund flows impact negatively on market timing.     

Measuring Fund Strategy and Performance in Changing Economic Conditions

The use of predetermined variables to represent public information and time-variation has produced new insights about asset pricing models, but the literature on mutual fund performance has not exploited these insights. This paper advocates conditional performance evaluation in which the relevant expectations are conditioned on public information variables. We modify several classical performance measures to this end and find that the predetermined variables are both statistically and economically significant. Conditioning on public information controls for biases in traditional market timing models and makes the average performance of the mutual funds in our sample look better.     

Conditional performance evaluation for German equity mutual funds

We investigate the conditional performance of a sample of German equity mutual funds over the period from 1994 to 2003 using both the beta-pricing approach and the stochastic discount factor (SDF) framework. On average, mutual funds cannot generate excess returns relative to their benchmark that are large enough to cover their total expenses. Compared to unconditional alphas, fund performance sharply deteriorates when we measure conditional alphas. Given that stock returns are to some extent predictable based on publicly available information, conditional performance evaluation raises the benchmark for active fund managers because it gives them no credit for exploiting readily available information. Underperformance is more pronounced in the SDF framework than in beta-pricing models. The fund performance measures derived from alternative model specifications differ depending on the number of primitive assets taken to calibrate the SDF as well as the number of instrument variables used to scale assets and/or factors.     

Emerging Market Bond Funds: A Comprehensive Analysis

We analyze U.S.‐based emerging market bond funds over a ten‐year (1996–2005) complete cycle of ups and downs in the dominant emerging bond markets. Emerging market bond funds outperform comparable domestic and global bond funds. The results are robust across both conditional and unconditional models. The funds also provide international diversification benefits to U.S. and international bond and equity portfolios. The funds exhibit persistence in performance and seasonality. Active funds, large funds and funds with high minimum purchases perform better on a total return basis but not on a risk‐adjusted basis.     

Time varying betas and the unconditional distribution of asset returns

This paper draws attention to the fact that under standard assumptions the time varying betas model cannot capture the dynamics in beta. Conversely, evidence of time variation in beta using this model is equivalent to non-normality in the unconditional distribution of asset returns. Using the multivariate normal as a model for the joint distribution of returns on market indices and predetermined information variables, it is shown how to capture skewness and kurtosis in the unconditional distributions of asset returns. Under the assumptions of the model, asset returns are unconditionally distributed as an extended quadratic form (EQF) in normal variables. Expressions are given for the moment generating function and for the computation of the distribution and density functions. The market-timing model is derived formally using this model. The properties of bias when the standard linear betas model is used to estimate alpha when the correct model is the EQF are also investigated. It is shown that a different time varying betas model can arise as a consequence of portfolio selection. It is also shown that the predetermined information variables have the potential to account for the time series properties of returns, including heterogeneity of variance. An empirical study applies the model to returns on 46 UK bond funds. An analysis of the residuals shows that the model described in this paper is able to capture the dynamics of alpha and beta and properly account for other features of the time series of returns for 28 of these funds, of which 15 exhibit time variation in beta. The study reports the effect of the EQF model on the computation of VaR and CVaR and bias in the estimation of alpha.     

Performance persistence of closed-end funds

Studies of performance persistence of closed-end funds (CEFs) use two measures of persistence; autocorrelation and rank correlation of performance. The autocorrelation measure offers limited information because it cannot separate persistence relative to the market and to the industry. The rank correlation measure is generally applied to two periods, disregarding multi-period persistence. We investigate performance persistence of CEFs in terms of both market price return and net asset value return using contingency tables and multiple regression models. Jensen’s alpha and the Sharpe ratio are used as measures of risk-adjusted performance. We test three hypotheses: (i) CEFs performing better than the industry median will do so persistently, (ii) CEFs outperform the market persistently; and (iii) performance persistence can be partly explained by dividend yield. The findings are fivefold. First, the number of persistent years varies with the models used to calculate risk-adjusted performance. Second, with 4-index unconditional beta fixed variance model, CEFs persistently beat their industry for six out of 10 years in terms of both market price return and net asset value return. Third, with a 4-index unconditional beta fixed variance model, we find performance persistence relative to market for 6 and 7 years, out of the 10 years considered, in terms of market price return and net asset value return, respectively. Fourth, the disaggregate sample tests show that performance of municipal bond funds is more persistent than equity funds and taxable bond funds. Fifth, dividend patterns can partially explain persistence with liquidity as control.     

Analyzing hedging strategies for fixed income portfolios: A Bayesian approach for model selection

During the recent European sovereign debt crisis, returns on EMU government bond portfolios experienced substantial volatility clustering, leptokurtosis and skewed returns as well as correlation spikes. Asset managers invested in European government bonds had to derive new hedging strategies to deal with changing return properties and higher levels of uncertainty. In this environment, conditional time series approaches such as GARCH models might be better suited to achieve a superior hedging performance relative to unconditional hedging approaches such as OLS. The aim of this study is to test innovative hedging strategies for EMU bond portfolios for non-crisis and crisis periods. We analyze single and composite hedges with the German Bund and the Italian BTP futures contracts and evaluate the hedging effectiveness in an out-of-sample setting. The empirical analysis includes OLS, constant conditional correlation (CCC), and dynamic conditional correlation (DCC) multivariate GARCH models. We also introduce a Bayesian composite hedging strategy, attempting to combine the strengths of OLS and GARCH models, thereby endogenizing the dilemma of selecting the best estimation model. Our empirical results demonstrate that the Bayesian composite hedging strategy achieves the highest hedging effectiveness and compares particularly favorable to OLS during the recent sovereign debt crisis. However, capturing these benefits requires low transactions cost and efficiently functioning futures markets.     

Testing conditional asset pricing models: An emerging market perspective

The CAPM as the benchmark asset pricing model generally performs poorly in both developed and emerging markets. We investigate whether allowing the model parameters to vary improves the performance of the CAPM and the Fama–French model. Conditional asset pricing models scaled by conditioning variables such as Trading Volume and Dividend Yield generally result in small pricing errors. However, a graphical analysis reveals that the predictions of conditional models are generally upward biased. We demonstrate that the bias in prediction may be the consequence of ignoring frequent large variation in asset returns caused by volatile institutional, political and macroeconomic conditions. This is characterised by excess kurtosis. An unconditional Fama–French model augmented with a cubic market factor performs the best among some competing models when local risk factors are employed. Moreover, the conditional models with global risk factors scaled by global conditioning variables perform better than the unconditional models with global risk factors.     

Attribution of investment performance: an analysis of Australian pooled superannuation funds*

This paper evaluates the market timing and security selection capabilities of Australian pooled superannuation funds over the eight‐year period from January 1991 to December 1998. Evaluation of both components of investment performance is surprisingly scarce in the Australian literature despite active investment managers engaging in both market timing and security selection. The paper also evaluates performance for the three largest asset classes within diversified superannuation funds and their contribution to overall portfolio return. The importance of an accurately specified market portfolio proxy in the measurement of investment performance is demonstrated. This paper employs performance benchmarks that account for the multi‐sector investment decisions of active investment managers in a manner that is consistent with their unique investment strategy. Consistent with U.S. literature, the empirical results indicate that Australian pooled superannuation funds do not exhibit significantly positive security selection or market timing skill.     

Attribution of investment performance: an analysis of Australian pooled superannuation funds*

This paper evaluates the market timing and security selection capabilities of Australian pooled superannuation funds over the eight‐year period from January 1991 to December 1998. Evaluation of both components of investment performance is surprisingly scarce in the Australian literature despite active investment managers engaging in both market timing and security selection. The paper also evaluates performance for the three largest asset classes within diversified superannuation funds and their contribution to overall portfolio return. The importance of an accurately specified market portfolio proxy in the measurement of investment performance is demonstrated. This paper employs performance benchmarks that account for the multi‐sector investment decisions of active investment managers in a manner that is consistent with their unique investment strategy. Consistent with U.S. literature, the empirical results indicate that Australian pooled superannuation funds do not exhibit significantly positive security selection or market timing skill.     

Portfolio performance measurement using APM-free kernel models

A general asset-pricing framework is used to derive a conditional asset-pricing kernel that accounts efficiently for time variation in expected returns and risk, and is suitable to perform (un)conditional evaluations of passive and dynamic investment strategies. The positive abnormal unconditional performance of Canadian equity mutual funds over the period 1989–1999 becomes negative with conditioning, and is robust to the removal of ex post index mimickers. The reversal in the size-based performance results with limited information conditioning is alleviated somewhat with an expansion of the conditioning set. The performance statistics are weakly sensitive to changes in the level of relative risk aversion of the uninformed investor. Unconditional positive performances based on averages of individual fund performances lose their significance when cross-correlations are accounted for using the block-bootstrap method. Estimates of survivorship bias due to the elimination of funds with shorter lives, which range from 36 to 58 basis points per year, are stable across performance models but differ across groupings by fund objective.     

The timing ability and global performance of Tunisian mutual fund managers: A multivariate GARCH approach

It is well-established in the financial literature that the global performance of mutual fund managers is the result of two skills: selectivity and market timing. This paper examines whether the multivariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) approach improves our perception of the global performance of fund managers compared with the unconditional approach and the conditional approach based on instruments. We find strong evidence that the multivariate GARCH method makes mutual fund performance looks better relative to the existent approaches, but this improvement in the global performance does not mean necessarily that mutual funds outperform traditional benchmarks. Indeed, mixed mutual funds yield neutral performance relative to benchmarks, whereas bond mutual funds generate significant positive global coefficients. The strong performance of bond fund managers comes from their ability to pick profitable bonds, not from their ability to time the market. Also, the empirical tests highlight that the best (worst) bond funds in the past remain at the top (bottom) of the ranking in the following years. These findings suggest that the Tunisian bond market presents strong opportunities for sophisticated investors.     

An examination of alternative CAPM-based models in UK stock returns

We evaluate the performance of unconditional and conditional versions of seven stochastic discount factor models in UK stock returns between January 1975 and December 2001. We find that the conditional four-moment capital asset pricing model (CAPM) has the best performance among the models we consider in terms of the lowest [Hansen, L.P., Jagannathan, R., 1997. Assessing specification errors in stochastic discount factor models. Journal of Finance 52, 591–607] distance measure and explaining the time-series predictability of industry portfolio excess returns. Conditional models also do a better job than unconditional models. However we find that the superior performance of the conditional four-moment CAPM, and conditional models in general, arises in part due to overfitting the data.     

Why not use SDF rather than beta models in performance measurement?

This paper analyzes performance measurement based on stochastic discount factors, compared to beta models traditionally used in computing funds’ (Jensen) alphas. From a theoretical point of view, standard alphas suffer from several limitations. Our paper addresses this issue from an empirical point of view using a sample of Swiss mutual funds from 2000 to 2011. Our results suggest that the key for a “fair” comparison between stochastic discount function (SDF) and beta models is the specification of the set of primitive assets used to calibrate the SDF function. Once this is established, the size of (absolute) performance differences considerably decreases between the two model families. However, there are sizeable performance deviations in the cross-section of funds if conditioning information is incorporated in the tests, up to some 20 basis points per month, or about 2.3 % per year. In almost all cases, the SDF-alphas are lower than the standard (Jensen) alphas. In absolute terms, the average SDF-based underperformance of the funds is way larger than the average total expense ratio (TER) of the funds, both in a conditional and unconditional setting.     

Testing Conditional Asset Pricing Models Using a Markov Chain Monte Carlo Approach

We use Markov Chain Monte Carlo (MCMC) methods for the parameter estimation and the testing of conditional asset pricing models. In contrast to traditional approaches, it is truly conditional because the assumption that time variation in betas is driven by a set of conditioning variables is not necessary. Moreover, the approach has exact finite sample properties and accounts for errors‐in‐variables. Using S&P 500 panel data, we analyse the empirical performance of the CAPM and the Fama and French (1993) three‐factor model. We find that time‐variation of betas in the CAPM and the time variation of the coefficients for the size factor (SMB) and the distress factor (HML) in the three‐factor model improve the empirical performance. Therefore, our findings are consistent with time variation of firm‐specific exposure to market risk, systematic credit risk and systematic size effects. However, a Bayesian model comparison trading off goodness of fit and model complexity indicates that the conditional CAPM performs best, followed by the conditional three‐factor model, the unconditional CAPM, and the unconditional three‐factor model.     

Varying the VaR for unconditional and conditional environments

Accurate forecasting of risk is the key to successful risk management techniques. Using the largest stock index futures from 12 European bourses, this paper presents VaR measures based on their unconditional and conditional distributions for single and multi-period settings. These measures underpinned by extreme value theory are statistically robust explicitly allowing for fat-tailed densities. Conditional tail estimates accounting for volatility clustering are obtained by adjusting the unconditional extreme value procedure with GARCH filtered returns. The conditional modelling results in iid returns allowing for the use of a simple and efficient multi-period extreme value scaling law. The paper examines the properties of these distinct conditional and unconditional trading models. The paper finds that the biases inherent in unconditional single and multi-period estimates assuming normality extend to the conditional setting.     

Should investors invest in hedge fund-like mutual funds? Evidence from the 2007 financial crisis

This study empirically examines the value added for investors during the 2007–2009 financial crisis from hedge fund-like equity mutual funds, including 130/30, market neutral, and long/short equity funds. We find that based on the information ratio, all market neutral funds, top 90% of long/short funds, and top 25% of 130/30 funds outperform a long-only passive index fund over the crisis period. However, we find little evidence of abnormal performance by the average and median funds in our sample, based on either unconditional or conditional four-factor alphas. The reason for the overall under-performance in the crisis period is that while short positions taken by these funds do generate alpha, the gain from their short positions is not sufficiently large to offset the loss from their long positions. Finally, the abnormal performance of short positions is found to be attributable to managers’ characteristic-adjusted and industry-adjusted stock selection skills. One implication of this study is that even though market neutral and long/short funds on average may not generate alpha, investors can benefit from holding these funds, especially the former, that can provide a hedge against down markets due to their low betas and that can be useful for asset allocation.     

Diversification,Integration and Emerging Market Closed-End Funds

We study a new class of unconditional and conditional mean-variance spanning tests that exploits the duality between Hansen-Jagannathan bounds (1991) and mean-standard deviation frontiers. The tests are shown to be equivalent to standard spanning tests in population, but we document substantial differences in the small sample performance of alternative tests. Our empirical application examines the diversification benefits from emerging equity markets using an extensive new data set on U.S. and U.K.-traded closed-end funds. We find significant diversification benefits for the U.K. country funds, but not for the U.S. funds. The difference appears to relate to differences in portfolio holdings rather than to the behavior of premiums in the United States versus the United Kingdom.     

Determinants of Sovereign Eurobonds Yield Spread

We examine the determinants of sovereign Eurobond spread at issuance covering 1991–2000. The results of the regression models showed that yield spread increases with maturity, issue size and gross fees and decreases with credit rating and the number of managers. Higher‐grade issuers also pay a relatively higher spread to borrow long‐term funds and for smaller issues. The findings are consistent with the notion of a term structure 'liquidity premium.' Low‐grade issuers pay a higher spread than better‐rated countries. However, low‐grade countries pay high spread for larger funds. Credit rating is found to provide additional information in explaining the spread on sovereign Eurobonds beyond that provided by macroeconomic variables.     

Determining returns to bidding firms’ shareholders using different benchmark methods: an Australian study

This article revisits the determinants of cumulative abnormal returns (CAR) for bidder firm shareholders around takeover bid announcements and in particular, if bidder CAR estimates differ significantly between conditional and unconditional models. The results indicate that CAR estimation is significantly different between the two models. The conditional model is theoretically superior to the traditional unconditional model due to the former controlling for unobservable factors surrounding the bid announcement. This study shows that it is important to account for unobservable factors in growth (organic versus takeover) strategies to infer the true effect of the bidder's characteristics on CAR.