Managers, investors, and crises: mutual fund strategies in emerging markets

We examine the trading strategies of mutual funds in emerging markets. We develop a method for disentangling the behavior of fund managers from that of underlying investors. For both managers and investors, we strongly reject the null hypothesis of no momentum trading: mutual funds systematically sell losers and buy winners. Selling current losers and buying current winners is stronger during crises, and equally strong for managers and investors. Selling past losers and buying past winners is stronger for managers. Managers and investors also practice contagion trading—they sell (buy) assets from one country when asset prices fall (rise) in another.     

Derivatives do affect mutual fund returns: Evidence from the financial crisis of 1998

Using a unique data set of detailed balance sheet information on mutual funds, we find that most mutual funds using derivatives do so to a very limited extent that has little discernable impact on returns. However, there exist two types of funds that make more extensive use of derivatives, global funds and specialized domestic equity funds. The risk and return characteristics of these two groups of funds are significantly different from funds employing derivatives sparingly or not at all. Fund managers time their use of derivatives in response to past returns. Evidence during the financial crisis of August 1998 supports the hypothesis that the effects of derivative use are most pronounced during the periods of extreme movement. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:629–658, 2011     

Salience theory and mutual fund flows: Empirical evidence from China

Using a sample of Chinese mutual funds during 2004–2020, we provide empirical evidence on the salience theory, which argues that individuals' decision weights on risky asset choices are distorted in favor of salient payoffs. Specifically, we document robust and casual impacts of funds' salience theory values on their future flows. The impacts are not explained by investors' attention-driven purchases, funds' lottery-like features, or the characteristics of funds' underlying stocks. Further tests show that the impacts are larger for funds with more shares held by individual investors and are more pronounced when investor sentiment is higher.     

Firm boundaries,incentives, and fund performance: Evidence from a private pension fund system

The private pension fund system in Turkey presents a unique institutional structure where bank holding companies can own both private pension companies and asset management firms. More often than not, pension companies delegate their operational mandates to the asset management arm of the same bank. This practice exposes the retail investor to a double agency problem and raises questions about conflicts of interest and fiduciary duty. Our analysis reveals that the funds set up and managed under the same bank holding company perform worse on a risk-adjusted basis than the funds with an arm's length relationship between the pension company and the asset manager. We show that this relative underperformance is not simply a bank effect; bank-affiliated pension companies and asset managers do just as well, if not better than their peers, when they are not operating under the same roof. Unfortunately, this inefficient institutional structure is not eliminated by market discipline because these funds attract more flows from retail investors, and the underperformance is not discernible in raw returns.     

Flight-to-liquidity: Evidence from China's stock market

In an order-driven and strictly regulated stock market, illiquidity risks' effects on asset pricing should be highlighted, particularly in such extreme market conditions as those in China. This paper utilizes panel data from China's stock market in an attempt to answer whether the illiquidity risk in various dimensions—including price impacts, the transaction speed, trading volume, transaction costs, and asymmetric information—can explain stock returns. We find that almost all dimensions of stock illiquidity are positively associated with excess stock returns. More importantly, smaller, less-liquid stocks suffer more liquidity costs, providing a strong evidence for “flight-to-liquidity.” Additionally, the transaction costs and asymmetric information, denoted by bid-ask spreads, robustly account for these illiquidity effects on stock pricing and differ from the findings in the U.S. market. We also find that the “flight-to-liquidity” can partially explain the idiosyncratic volatility puzzle, investors' gambling, and herding psychologies. This study provides substantial policy implications in regulation and portfolio management for emerging markets.     

Bond markets co-movement dynamics and macroeconomic factors: Evidence from emerging and frontier markets

This paper examines the co-movement dynamics of ten emerging and four frontier government bond markets with the US market and the impact of macroeconomic factors and global bond market uncertainty on the time-varying co-movement. We find that macroeconomic factors play important role in explaining time variations in the bond return co-movement. Specifically, domestic macroeconomic factors have higher relative importance than global factors, with domestic monetary policy and domestic inflationary environment identified as the most influential factors. The global bond market uncertainty, based on an implied volatility measure, has explanatory power in driving co-movement dynamics in emerging and frontier bond markets.     

Portfolio concentration and closed-end fund discounts: Evidence from the China market

This paper provides an analysis of the determinants of the closed-end fund discount in Mainland China. We focus on the diversification level of closed-end funds as the investor clienteles for closed-end funds in Mainland China are different from other markets. Our empirical evidence shows that discount is strongly and negatively related to stock concentration as measured by the number of stocks in the fund or Herfindahl index. We also find the discount decreases with the dividend payout and turnover, suggesting that investors are willing to pay a higher price (lower discount) for a fund that pays more dividends and has higher turnover.     

The real effects of local mutual funds: Evidence from corporate innovation

This paper investigates whether the proximity between mutual funds and firms could explain corporate innovation. I find that local mutual funds tend to increase firms' R&D expenditures and productivity. Firms with greater local ownership produce more patents and patents with bigger impact. The positive relations are more pronounced for firms with low information quality and poor corporate governance. Further, local funds with more innovative firms outperform the ones with less innovative firms. Finally, firms with higher local ownership are less likely to fire CEOs who engage in innovation, which incentivizes CEOs for risky investments.     

The inner workings of the board: Evidence from emerging markets

We survey non-executive directors in emerging markets to obtain detailed information about the inner workings of corporate boards across a variety of institutional settings. We document substantial variation in the structure and conduct of boards as well as in directors' perceptions of the local legal environment. Our analysis indicates that directors who feel adequately empowered by local legislation are less likely to vote against board proposals. They also form boards that play a stronger role in the company's strategic decision-making. The evidence suggests that a supportive legal environment allows directors to focus more on their advisory role rather than on their monitoring role.     

Crisis,internal governance mechanisms and pension fund performance: Evidence from Poland

This study provides new insight on the impact of supervisory board structure as an internal governance mechanism on privately defined contribution pension fund performance in Poland. Using a hand-collected data set, we find evidence that the chairman, as a motivated insider, plays an important role in determining fund performance. The results also show, although with weaker evidence, that outsiders may positively impact fund performance. During the 2007–2008 crisis, however, the insider professional knowledge outweighed the benefits of having motivated outsiders on the supervisory board. Consequently, the results show that both the composition of the supervisory board and the motivation and knowledge of its members are important in explaining pension fund performance. We also find that other governance factors have no impact on fund performance. The results are a relevant contribution to the current regulatory debate on reforms of the pension fund industry in Poland, arguing that modifying the supervisory board structure and electing outsiders with professional knowledge may significantly improve its performance.     

The performance of socially responsible equity mutual funds: Evidence from Sweden

This paper presents a comprehensive analysis of socially responsible (SR) funds in Sweden by assessing fund managers' abilities and performances across different market states. These issues are analyzed at the aggregate and individual fund levels. The paper also presents several new statistical tests that allow more precise inferences about differences in performance and the variability in fund returns arising from different benchmarks. In general, SR and conventional funds perform similarly to the market. At the aggregate level, SR funds investing in Sweden and Europe perform similarly to conventional funds, while those investing globally tend to underperform. This underperformance seems to be linked with poor selectivity abilities of global SR fund managers. For individual funds, the performance of both types of funds is more similar. Most funds perform similarly in crisis periods compared to non‐crisis periods. Overall, our results are consistent with a mature market for SR investing and support the view that the similar performance of SR and conventional funds is associated with the mainstreaming of SR investment in Sweden. These findings encourage SR investing both by socially conscious investors, who wish to align their social values with their investment decisions, as well as by conventional investors, who will not be penalized by investing in these funds. We also call attention to the difficulties investors face when trying to identify funds with high social standards, considering that there is scarce information on the extent to which each fund (SR or conventional) holds stocks that comply with ethical and social criteria.     

Interdependence of international equity variances: Evidence from East Asian markets

This paper investigates the interdependence of volatility in six East Asian markets. We first model the returns in a VAR-BEKK framework to obtain the conditional variances, and then apply the vector-autoregressive model (VAR) to the six-market variances. The results of VAR estimation show that the interdependence of equity market conditional variances is high. The Japanese market, while being the most exogenous and the least susceptible to volatility stimuli from other markets, is the most influential in transmitting volatility to the other East Asian markets.     

Corporate governance and investment-cash flow sensitivity: Evidence from emerging markets

Controlling for country-level governance, we investigate how firms' corporate governance influences financing constraints. Using firm-level corporate governance rankings across 14 emerging markets, we find that better corporate governance lowers the dependence of emerging market firms on internally generated cash flows, and reduces financing constraints that would otherwise distort efficient allocation of investment and destroy firm value. Additionally and more importantly, firm-level corporate governance matters more significantly in countries with weaker country-level governance. This suggests substitutability between firm-specific and country-level governance in determining a firm's investment sensitivity to internal cash flows.     

Economic policy uncertainty and fund flow performance sensitivity: Evidence from New Zealand

Utilizing a large sample of actively managed equity funds and a recently developed EPU index for New Zealand, we show that fund flow performance sensitivity decreases with policy uncertainty. The role of policy uncertainty as a determinant of fund flow performance sensitivity is found to be stronger, particularly for funds with global focus, large sized funds, high momentum funds and those with high idiosyncratic volatility and low downside risk. The findings support the argument that high policy uncertainty dampens investors' ability to process information that allows them to distinguish fund manager skill from luck. The results remain strong after accounting for various macroeconomic factors.     

Spanish mutual fund fees and less sophisticated investors: examination and ethical implications

Some mutual funds not only apply the usual asset management and custodial fees, but also front loads and redemption fees as a kind of 'toll charge' payable on entering and/or leaving the fund. The aim of this work is to examine the implications of the different loads and fees applied to mutual fund investors in the Spanish market. The results show that there is a relationship between the various charges and fees. The fact that load fund companies charge higher management and custody fees proves the potential of the fund companies to impose higher fees on a segment of the clientele. The investors in load funds, which tend to be large in number of shareholders and belonging to banks and savings banks, are small investors who show a low cost sensitivity. A lower level of financial sophistication may be the reason for the apparent lower price awareness. The problem is that the investors in load funds are not financially compensated for the extra cost represented by the front-load and redemption fees. The only beneficiary seems to be the financial institution itself. On this view, the survival of load funds seems to depend on the lack of financial sophistication of their clientele, combined with market inefficiencies. It is worth asking about the ethics of a situation of market segmentation that allows managing institutions to benefit from the segment of the least sophisticated investors.     

Experience-based corporate corruption and stock market volatility: Evidence from emerging markets

This paper reassesses how “experience-based” corporate corruption affects stock market volatility in 14 emerging markets. We match the World Bank enterprise-level data on bribes with a unique cross-country macroeconomics dataset obtained from the World Bank development indicators. It is found that wider coverage of “realized” corporate corruption in the emerging markets investigated reduces the stock market volatility, attributed to decrease in uncertainty about government policy with regard to the business environment, as implied by the general equilibrium model of Pastor and Veronesi (2012). Overall, our results suggest that stock price volatility decreases as the uncertainty about government policy becomes more predictable, which is consistent with the testable hypotheses of Pastor and Veronesi (2012).     

Hedging performance analysis of energy markets: Evidence from copula quantile regression

This study investigates hedging performance with respect to different market structures for energy-related commodities, including West Texas Intermediate crude oil, Brent crude oil, Chinese crude oil, and Heating oil. Copula quantile regression functions and the generalized autoregressive conditionally heteroscedasticity model are combined to analyze the nonlinear impact of dependence and the heterogeneous impact of market structure changes on hedging performance. Results show that hedging performance presents nonlinearity and market structure changes have surprisingly strong heterogeneous effects on the quantile hedge ratio, where bearish and bullish have lower hedge ratios than normal markets, which is captured better by Clayton copula quantile regression. Additionally, the trend of hedging effectiveness over different market structures also shows an inverted U shape. After changing data frequency or the types of futures contracts, the conclusions remain the same. Our empirical findings imply that hedgers are supposed to adjust the hedging number of futures according to market structure changes to hedge price risk effectively.     

Corporate governance and firm performance in emerging markets: Evidence from Turkey

This is a study of the relationship between context, internal corporate governance and firm performance, looking at the case of Turkey, an exemplar of family capitalism. We found more concentrated ownership, often in the hands of families, led to firms performing better; concentrated ownership means that controlling families bear more of the risks of poor performance. Less predictably, given that the institutional environment is so well attuned to family ownership, we found that mechanisms that accord room for a greater range of voices and interests within and beyond families – larger boards and foreign ownership stakes – seem to also make for positive performance effects. We also noted that increase in cross ownership did not influence market performance, but was negatively associated with accounting performance. Conversely, we found that a higher proportion of family members on boards had no discernable effect on performance. Our findings provide further insights on the relationship between the type of institutions encountered in many emerging markets, internal corporate governance configurations and firm performance.     

Determinants of price flexibility in oligopolistic markets: Evidence from austrian manufacturing

In this paper, we examine the impact of market structure (concentration) on three different characteristics of industrial pricing behavior: 1) the sensitivity of prices to cost and demand changes, 2) the speed of price adjustment, and 3) the asymmetry of price behavior. We find the relationship between concentration and the sensitivity of prices to cost changes to be the most robust one. Cost changes are less fully transmitted into prices in highly concentrated industries. Overall, differences in the pricing behavior across industries can be “explained” fairly well with industry differences in concentration, capital intensity, inventoriability, and the length of the production period.