SELECTIVITY,MARKET TIMING,AND RANDOM BETA BEHAVIOR OF MUTUAL FUNDS: A GENERALIZED MODEL

This paper presents a generalized varying parameter model to investigate the performance of mutual funds. The model allows beta nonstationarity to include both market timing and random beta behavior; therefore, it can be regarded as a general case of previous research. Forty-three funds with a wide range of objectives are examined. The generalized varying parameter results indicate that about 30 percent of the funds show selectivity, 19 percent have random betas, and 14 percent indicate significant, yet negative, market timing performance. Therefore, mutual funds, as a group, show no market timing ability. The apparent ability to select undervalued securities, however, seems to conflict with the efficient markets hypothesis.     

A MEASUREMENT OF THE ERRORS IN INTRA-PERIOD COMPOUNDING AND BOND VALUATION

The errors in intra-period compounding and bond pricing are widespread in textbooks, and they also periodically occur in published research. This article deals with the measurement of error and the magnitude of error when, given the market price of other than annual bonds, the yield to maturity is calculated using the incorrect formula. The authors demonstrate that the errors are (1) the result of confusion, not oversight, (2) large in magnitude when the effective yearly interest rate is high, and (3) not symmetrical; that is, the characteristics of the errors when determining yields, given bond prices, differ from the characteristics of the errors when determining bond prices, given interest rates.     

A MEASUREMENT OF THE ERRORS IN INTRA-PERIOD COMPOUNDING AND BOND VALUATION: A SHORT EXTENSION

Previously identified errors in yield calculations and bond valuation are shown to affect bond duration and interest elasticity calculations. These errors may be material and lead to poorly immunized bond portfolios.     

EVIDENCE OF SHIFTS IN PORTFOLIO ASSET COMPOSITION AS A MARKET TIMING TOOL

Previous research has investigated portfolio timing success by analyzing possible shifts in the beta of professionally managed portfolios. The methodology used by these studies usually involves calculating the betas of portfolios under varing market conditions using ex post holding period yields. Since a portfolio's beta can shift for reasons other than timing efforts, the results and interpretation of this type of analysis are limited. This paper takes a more direct approach to the analysis of timing by analyzing shifts in the asset composition of professionally managed portfolios. The asset composition is first analyzed to determine if portfolio managers are attempting to adjust risk exposure. Any shifts that are identified are compared to the market conditions that existed subsequent to the shift to determine if the shift was appropriate in terms of correct timing.     

THE USE OF MULTIPLE INSTRUMENTS FOR MEASUREMENT OF EARNINGS FORECAST ERRORS, FIRM SIZE EFFECT AND THE QUALITY OF ANALYSTS'FORECAST ERRORS

This paper develops an instrumental variables framework to form a better proxy for earnings forecast errors. The key aspect of the approach is to extract information from alternative proxies for the same underlying variable, namely a portion of realized earnings signals unexpected by the market. We use signs of various proxies for earnings forecast errors obtained from different time-series forecasting models as multiple instruments. The results show that the instrumental variables approach is effective for reducing measurement errors inherent in various proxies for earnings forecast errors. It produces not only a smaller magnitude but also a narrower dispersion of earnings forecast errors. The paper provides evidence that the instrumental variables approach performs better for small-firm samples than for large-firm samples. Finally, we observe that analysts' forecast errors seasoned with the signs of various time-series forecast errors (as well as the signs of their own forecast errors) outperform those without seasoning. This indicates that analysts' forecast errors can still be improved by employing the instrumental variables technique.     

DETERMINANTS OF ACCOUNTING POLICY CHOICE IN THE AUSTRALIAN PROPERTY INDUSTRY: A PORTFOLIO APPROACH

The objective of this research is to explain accounting policy choice in the Australian property industry by reference to costly contracting theory. This paper makes three departures from the predominant literature. First, instead of focusing on a single policy choice, it focuses on a portfolio of 15 choices. Second, instead of measuring each policy choice dichotomously, it measures the dollar effect of each policy choice. Finally, the research focuses on the impact of policy choices on owners' equity as well as income. The results confirm the importance of compensation arrangements as a determinant of accounting policy choice but fail to provide evidence that debt constraints or political costs are significant determinants of accounting policy choice. These results suggest that including property firms in a more heterogeneous sample may reduce the power of tests on the debt constraints and political costs hypotheses. More generally (when compared to previous research) the results suggest that the determinants of policy choice are likely to be industry specific.