Stocks for the long run? Evidence from emerging markets

We estimate the myopic (single-period) and intertemporal hedging (long-run) demand for stocks in 20 growth-leading emerging market economies during the 1999–2012 period. We consider two types of investors: a domestic investor who invests in emerging-market assets only (with returns in local currency) and an international investor who invests in both US and emerging-market assets (with returns in US dollars). We establish economically relevant short-run and long-run demand for stocks in several emerging market economies, for both domestic and international investors. From a welfare perspective, however, the myopic demand for emerging-market stocks is much more important than the hedging demand. Further international diversification and foreign currency hedging by the international investor do not alter this conclusion. Hence, for both domestic and international investors emerging-market stocks are mainly assets for the short run.     

Does Investment Horizon Matter? Disentangling the Effect of Institutional Herding on Stock Prices

This study finds that, over short horizons, herding by short‐term institutions promotes price discovery. In contrast, herding by long‐term institutions drives stock prices away from fundamentals over the same periods. Furthermore, while the positive predictability of short‐term institutional herding for stock prices is more pronounced for small stocks and stocks with high growth opportunities, the negative association between long‐term institutional herding and stock prices is stronger for stocks whose valuations are highly uncertain and subjective. Finally, we show that the destabilizing effect of institutional herding persistence documented in the recent literature is entirely driven by persistent herding by long‐term institutions.     

Momentum or contrarian investment strategies: Evidence from Dutch institutional investors

This paper analyses investment strategies of three types of Dutch institutional investors - pension funds, life insurers and non-life insurers - over the period 1999-2005. We use balance sheet and cash flow data, including purchases and sales of equity, fixed income and real estate. We trace asset reallocations back to both active trading and revaluations and link investment decisions to firm-specific characteristics and macroeconomic variables. Overall, our results indicate that all three investor types tend to be contrarian traders, i.e. they buy past losers and sell past winners. Especially pension funds showed this behaviour in the most turbulent part of the sample - the crash of 2002 and early 2003 - implying that these institutions have a stabilising impact on financial markets when this is needed most. Life insurers tend to be contrarian traders when they have a high proportion of unit-linked policies, while non-life insurers are contrarian when they have a more risky business model.     

Detecting structural breaks and identifying risk factors in hedge fund returns: A Bayesian approach

Extending previous work on asset-based style factor models, this paper proposes a model that allows for the presence of structural breaks in hedge fund return series. We consider a Bayesian approach to detecting structural breaks occurring at unknown times and identifying relevant risk factors to explain the monthly return variation. Exact and efficient Bayesian inference for the unknown number and positions of the breaks is performed by using filtering recursions similar to those of the forward–backward algorithm. Existing methods of testing for structural breaks are also used for comparison. We investigate the presence of structural breaks in several hedge fund indices; our results are consistent with market events and episodes that caused substantial volatility in hedge fund returns during the last decade.     

Competition among mutual funds

We examine the impact of the entry of new mutual funds on incumbents using the overlap in their portfolio holdings as a measure of competitive intensity. This simple metric delivers powerful economic results. Incumbents that have a high overlap with entrants subsequently engage in price competition by reducing management fees. Distribution fees, however, rise so that investors do not benefit as much from price competition. Funds with high overlap also experience quantity competition through lower investor flows, have lower alphas, and higher attrition rates. These effects only appear after the late 1990s, at which point there appears to be an endogenous structural shift in the competitive environment. We conclude that the mutual fund market has evolved into one that displays the hallmark features of a competitive market.     

Payout yield,risk, and mispricing: A Bayesian analysis

We develop a simple parametric model in which hypotheses about predictability, mispricing, and the risk-return tradeoff can be evaluated simultaneously, while allowing for time variation in both risk and expected return. Most of the return predictability based on aggregate payout yield is unrelated to market risk. We consider a range of Bayesian prior beliefs about the risk-return tradeoff and the extent to which predictability is driven by mispricing. The impact of these beliefs on an investor's certainty-equivalent return when choosing between a market index and riskless T-bills is economically significant, in both ex ante and out-of-sample analyses.     

A Bayesian approach to detecting nonlinear risk exposures in hedge fund strategies

This paper proposes a model that allows for nonlinear risk exposures of hedge funds to various risk factors. We introduce a flexible threshold regression model and develop a Bayesian approach for model selection and estimation of the thresholds and their unknown number. In particular, we present a computationally flexible Markov chain Monte Carlo stochastic search algorithm which identifies relevant risk factors and/or threshold values. Our analysis of several hedge fund returns reveals that different strategies exhibit nonlinear relations to different risk factors, and that the proposed threshold regression model improves our ability to evaluate hedge fund performance.     

Ex post: The investment performance of collectible stamps

This paper uses stamp catalogue prices to investigate the returns on British collectible postage stamps over the period 1900–2008. We find an annualized return on stamps of 7.0% in nominal terms, or 2.9% in real terms. These returns are higher than those on bonds but below those on equities. The volatility of stamp prices approaches that of equities. Stamp returns are impacted by movements in the equity market, but the systematic risk of stamps remains low. Stamps partially hedge against unanticipated inflation. Estimates of average after-cost returns for individual investors show that stamps may rival equities in terms of realized performance.     

Foreign Investment in Emerging Markets: International Diversification or Familiarity Bias?

This study empirically tests whether foreign investors take advantage of international diversification when investing in emerging Asian markets. Using the 2007–2008 financial crisis as identification, we find that firms with higher foreign ownership had better stock returns during the financial crisis. Moreover, the diversification effect exists in five out of the eight emerging markets and is stronger in markets with a lower dynamic conditional correlation with the global market index. We also find that foreign investors prefer firms with a lower international sales ratio. In conclusion, the evidence consistently suggests that foreign investors take advantage of diversification effects.     

Hedge fund pricing and model uncertainty

This article uses Bayesian model averaging to study model uncertainty in hedge fund pricing. We show how to incorporate heteroscedasticity, thus, we develop a framework that jointly accounts for model uncertainty and heteroscedasticity. Relevant risk factors are identified and compared with those selected through standard model selection techniques. The analysis reveals that a model selection strategy that accounts for model uncertainty in hedge fund pricing regressions can be superior in estimation/inference. We explore potential impacts of our approach by analysing individual funds and show that they can be economically important.