The global ETF industry provides more complicated investment vehicles than low-cost index trackers. Instead, we find that the real investments of ETFs may deviate from their benchmarks to leverage informational advantages (which leads to a surprising stock-selection ability) and to help affiliated OEFs through cross-trading. These effects are more prevalent in ETFs domiciled in Europe. Moreover, ETF flows seem to respond to additional risk. These results have important normative implications for consumer protection and financial stability. Received March 18, 2017; Editorial decision October 14, 2018 by Editor Raman Uppal. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"The Unexpected Activeness of Passive Investors: A Worldwide Analysis of ETFs","authors":"S. Cheng, M. Massa, H. Zhang","doi":"10.1093/rapstu/ray011","DOIUrl":"https://doi.org/10.1093/rapstu/ray011","url":null,"abstract":"\u0000 The global ETF industry provides more complicated investment vehicles than low-cost index trackers. Instead, we find that the real investments of ETFs may deviate from their benchmarks to leverage informational advantages (which leads to a surprising stock-selection ability) and to help affiliated OEFs through cross-trading. These effects are more prevalent in ETFs domiciled in Europe. Moreover, ETF flows seem to respond to additional risk. These results have important normative implications for consumer protection and financial stability.\u0000 Received March 18, 2017; Editorial decision October 14, 2018 by Editor Raman Uppal. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"2 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2018-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73426865","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A stylized theoretical model with stochastic volatility suggests the existence of a trade-off between returns and volatility-of-volatility. Using the VVIX, a measure of the option-implied volatility of the volatility index, we confirm this prediction and detect that time-varying aggregate volatility-of-volatility commands an economically substantial and statistically significant negative risk premium. We find that a two-standard-deviation increase in aggregate volatility-of-volatility factor loadings is associated with a decrease in average annual returns of about 11%. These results are robust to controlling for aggregate volatility, jump risk, and several other characteristics and factor sensitivities, as well as various additional tests.
{"title":"How Aggregate Volatility-of-Volatility Affects Stock Returns","authors":"Fabian Hollstein, Marcel Prokopczuk","doi":"10.1093/RAPSTU/RAX019","DOIUrl":"https://doi.org/10.1093/RAPSTU/RAX019","url":null,"abstract":"A stylized theoretical model with stochastic volatility suggests the existence of a trade-off between returns and volatility-of-volatility. Using the VVIX, a measure of the option-implied volatility of the volatility index, we confirm this prediction and detect that time-varying aggregate volatility-of-volatility commands an economically substantial and statistically significant negative risk premium. We find that a two-standard-deviation increase in aggregate volatility-of-volatility factor loadings is associated with a decrease in average annual returns of about 11%. These results are robust to controlling for aggregate volatility, jump risk, and several other characteristics and factor sensitivities, as well as various additional tests.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"46 1","pages":"253-292"},"PeriodicalIF":13.1,"publicationDate":"2018-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78025068","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We price the risky component of specialness spreads—identified by their deviations from the expected auction cycle—within a dynamic term structure model estimated using daily prices of all outstanding Treasury securities and corresponding special collateral (SC) repo rates. This allows us to derive a time-varying SC risk premium that we quantitatively link to various price anomalies, such as the on-the-run premium. The SC risk premium explains about 80% of the on-the-run premium and a substantial share of other Treasury price anomalies, suggesting that unexpected fluctuations in the specialness spreads of recently-issued nominal Treasury securities are a common risk factor.
{"title":"Special Repo Rates and the Cross-Section of Bond Prices","authors":"Stefania D’Amico, N. A. Pancost","doi":"10.2139/ssrn.3190606","DOIUrl":"https://doi.org/10.2139/ssrn.3190606","url":null,"abstract":"\u0000 We price the risky component of specialness spreads—identified by their deviations from the expected auction cycle—within a dynamic term structure model estimated using daily prices of all outstanding Treasury securities and corresponding special collateral (SC) repo rates. This allows us to derive a time-varying SC risk premium that we quantitatively link to various price anomalies, such as the on-the-run premium. The SC risk premium explains about 80% of the on-the-run premium and a substantial share of other Treasury price anomalies, suggesting that unexpected fluctuations in the specialness spreads of recently-issued nominal Treasury securities are a common risk factor.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"39 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2018-05-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86152867","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
By using a unique data set on the organizational structure of fixed-income portfolio managers, that is, mutual funds and insurance companies, we study the effects of organizational hierarchy within a fund management team on bond investing. We document that team hierarchies reduce the portfolio managers’ incentive to collect and share soft information. Funds with multiple hierarchies invest less in bonds of local firms, hold less concentrated portfolios, and herd more with the market. Overall, they deliver lower portfolio performances. We also show that changes in fund hierarchy subsequently find their way into fund behaviors.
{"title":"Effects of Team Hierarchies on Bond Investing","authors":"M. Massa, Lei Zhang","doi":"10.1093/RAPSTU/RAW009","DOIUrl":"https://doi.org/10.1093/RAPSTU/RAW009","url":null,"abstract":"By using a unique data set on the organizational structure of fixed-income portfolio managers, that is, mutual funds and insurance companies, we study the effects of organizational hierarchy within a fund management team on bond investing. We document that team hierarchies reduce the portfolio managers’ incentive to collect and share soft information. Funds with multiple hierarchies invest less in bonds of local firms, hold less concentrated portfolios, and herd more with the market. Overall, they deliver lower portfolio performances. We also show that changes in fund hierarchy subsequently find their way into fund behaviors.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"649 1","pages":"278-315"},"PeriodicalIF":13.1,"publicationDate":"2017-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76836733","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using data until 2015, we document that oil price changes no longer predict G7 country equity index returns, as has been documented based on earlier sample periods. We use a structural VAR approach to obtain an oil price change decomposition into an oil supply shock, a global demand shock, and an oil-specific demand shock and argue that these three shocks should have different effects on equity markets. The conjecture that oil supply shocks and oil-specific demand shocks (global demand shocks) predict equity returns with a negative (positive) slope is supported by the empirical evidence over the 1986-2015 period. The results are statistically and economically significant and do not appear to be consistent with time-varying risk premia.
{"title":"Oil and Equity Return Predictability: The Importance of Dissecting Oil Price Changes","authors":"Haibo Jiang, Georgios Skoulakis, Jinming Xue","doi":"10.2139/SSRN.2822061","DOIUrl":"https://doi.org/10.2139/SSRN.2822061","url":null,"abstract":"Using data until 2015, we document that oil price changes no longer predict G7 country equity index returns, as has been documented based on earlier sample periods. We use a structural VAR approach to obtain an oil price change decomposition into an oil supply shock, a global demand shock, and an oil-specific demand shock and argue that these three shocks should have different effects on equity markets. The conjecture that oil supply shocks and oil-specific demand shocks (global demand shocks) predict equity returns with a negative (positive) slope is supported by the empirical evidence over the 1986-2015 period. The results are statistically and economically significant and do not appear to be consistent with time-varying risk premia.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"1 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2017-03-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82389581","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We propose a dynamic asset pricing model in which two assets with identical cash flows can trade at different prices not only because of differences in liquidity but counterparty risk. Counterparty risk reduces lenders or borrowers’ willingness to supply funds and collateral, incentives to shortsell and lend, and the likelihood for new bonds to be on special, thereby narrowing on-/off-the-run spreads and affecting asset prices in spot markets. Consistent with this prediction, we find that on-/off-the-run spreads are low when counterparty risk is high and this relationship is much stronger during the financial crisis.
{"title":"Repo Counterparty Risk and On-/Off-the-Run Treasury Spreads","authors":"Sheen X. Liu, Chunchi Wu","doi":"10.1093/RAPSTU/RAW008","DOIUrl":"https://doi.org/10.1093/RAPSTU/RAW008","url":null,"abstract":"We propose a dynamic asset pricing model in which two assets with identical cash flows can trade at different prices not only because of differences in liquidity but counterparty risk. Counterparty risk reduces lenders or borrowers’ willingness to supply funds and collateral, incentives to shortsell and lend, and the likelihood for new bonds to be on special, thereby narrowing on-/off-the-run spreads and affecting asset prices in spot markets. Consistent with this prediction, we find that on-/off-the-run spreads are low when counterparty risk is high and this relationship is much stronger during the financial crisis.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"106 1","pages":"81-143"},"PeriodicalIF":13.1,"publicationDate":"2016-11-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84977148","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Among the stylized features of international equity markets is the pronounced asymmetric nonlinear dependence and upward trend in correlations. Such features call into question investors' efforts to diversify internationally. We propose a model to capture those well understood characteristics of international equity index returns. Casting them in a dynamic portfolio problem, we evaluate the gains for a home-biased investor from including foreign assets in her portfolio. We find that accounting for the optimal dynamic demand for hedging on top of a standard mean-variance portfolio policy brings substantial benefits from international portfolio exposure. Such benefits become increasingly sizeable over long investment horizons.
{"title":"Where to Hide in Bad Times: Or Should One Still Diversify Internationally?","authors":"Redouane Elkamhi, D. Stefanova","doi":"10.2139/ssrn.2812623","DOIUrl":"https://doi.org/10.2139/ssrn.2812623","url":null,"abstract":"Among the stylized features of international equity markets is the pronounced asymmetric nonlinear dependence and upward trend in correlations. Such features call into question investors' efforts to diversify internationally. We propose a model to capture those well understood characteristics of international equity index returns. Casting them in a dynamic portfolio problem, we evaluate the gains for a home-biased investor from including foreign assets in her portfolio. We find that accounting for the optimal dynamic demand for hedging on top of a standard mean-variance portfolio policy brings substantial benefits from international portfolio exposure. Such benefits become increasingly sizeable over long investment horizons.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"19 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2016-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85107989","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Empirical research on the profitability of momentum investment strategies in emerging equity markets has presented mixed findings and therefore the momentum patterns in emerging equity markets have not been explained to the unanimous satisfaction of the researchers. This research re-examines the momentum returns and their determinants for stocks listed on Pakistan Stock Exchange using the data from 2001 to 2015. The analysis is also performed for the two sub-periods, from 2001 to 2007 and from 2009 to 2015, and the two sub-samples, financial firms and non-financial firms. Results show that over the complete sample period the momentum returns are positive and as high as the returns reported in early literature (for example, Jegadeesh & Titman, 1993), but they are not statistically significant. Similar results are obtained for the two sub-samples; however, for the two sub-periods, the momentum strategy yields completely contrasting results. For the first sub-period which experienced a high economic growth, low inflation and better governance, the momentum portfolios earned significant positive returns; whereas for the second sub-period which experienced a low economic growth, high inflation and poor governance, momentum returns are negative for most of the portfolios. Analysis also shows that momentum portfolios continue earning positive returns beyond the holding period indicating that the returns are not caused by temporary over- or under-reaction of investors in the market and they must be related to some systematic risk factors. However, the study does not find any evidence of relationship between beta and size factors and the momentum returns.
{"title":"Can Investors Benefit from Momentum Trading? Evidence from an Emerging Market","authors":"Sana Tauseef, M. Nishat","doi":"10.2139/ssrn.2799596","DOIUrl":"https://doi.org/10.2139/ssrn.2799596","url":null,"abstract":"Empirical research on the profitability of momentum investment strategies in emerging equity markets has presented mixed findings and therefore the momentum patterns in emerging equity markets have not been explained to the unanimous satisfaction of the researchers. This research re-examines the momentum returns and their determinants for stocks listed on Pakistan Stock Exchange using the data from 2001 to 2015. The analysis is also performed for the two sub-periods, from 2001 to 2007 and from 2009 to 2015, and the two sub-samples, financial firms and non-financial firms. Results show that over the complete sample period the momentum returns are positive and as high as the returns reported in early literature (for example, Jegadeesh & Titman, 1993), but they are not statistically significant. Similar results are obtained for the two sub-samples; however, for the two sub-periods, the momentum strategy yields completely contrasting results. For the first sub-period which experienced a high economic growth, low inflation and better governance, the momentum portfolios earned significant positive returns; whereas for the second sub-period which experienced a low economic growth, high inflation and poor governance, momentum returns are negative for most of the portfolios. Analysis also shows that momentum portfolios continue earning positive returns beyond the holding period indicating that the returns are not caused by temporary over- or under-reaction of investors in the market and they must be related to some systematic risk factors. However, the study does not find any evidence of relationship between beta and size factors and the momentum returns.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"1 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2016-06-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79990146","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We analyze the contribution of leisure preferences to a model of long-run risks in leisure and consumption growth. The marginal utility of consumption is affected by short- and long-run risks in leisure under nonseparable and recursive preferences. We match equity risk premia and macroeconomic moments with plausible coefficients of relative-risk aversion. Additionally, the model generates a less negative to positively sloped average real yield curve, depending on the elasticity of substitution between the consumption of nondurables and services and leisure. Further, the incorporation of leisure in utility allows us to derive model implications for the return on human capital.Received October 11, 2011; accepted December 24, 2015 by Editor Wayne Ferson.
{"title":"Leisure Preferences, Long-Run Risks, and Human Capital Returns*","authors":"Robert F. Dittmar, Francisco Palomino, Wei Yang","doi":"10.1093/RAPSTU/RAW001","DOIUrl":"https://doi.org/10.1093/RAPSTU/RAW001","url":null,"abstract":"We analyze the contribution of leisure preferences to a model of long-run risks in leisure and consumption growth. The marginal utility of consumption is affected by short- and long-run risks in leisure under nonseparable and recursive preferences. We match equity risk premia and macroeconomic moments with plausible coefficients of relative-risk aversion. Additionally, the model generates a less negative to positively sloped average real yield curve, depending on the elasticity of substitution between the consumption of nondurables and services and leisure. Further, the incorporation of leisure in utility allows us to derive model implications for the return on human capital.Received October 11, 2011; accepted December 24, 2015 by Editor Wayne Ferson.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"86 1","pages":"88-134"},"PeriodicalIF":13.1,"publicationDate":"2016-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84162444","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Stock returns are characterized by extreme observations, jumps that would not occur under the smooth variation of a Gaussian process. We find that jumps are prevalent in most countries. This has been little investigation of whether the jumps are internationally correlated. Their possible inter-correlation is important for investors because international diversification is less effective when jumps are frequent, unpredictable and strongly correlated. Public supervisors may also mind about widely correlated jumps, as they could bring down certain financial intermediaries. We investigate using daily returns on broad equity indexes from 82 countries and for several statistical measures of jumps. Various jump measures are not in complete agreement but a general pattern emerges. Jumps are internationally correlated but not as much as returns. Although the smooth variation in returns is driven strongly by systematic global factors, jumps are more idiosyncratic and most of them are found in Europe. Some pairs of correlated jumps occur simultaneously but not to the extent of correlated returns. JEL Classification: G11, G15
{"title":"Internationally Correlated Jumps","authors":"Kuntara Pukthuanthong, Richard Roll","doi":"10.1093/RAPSTU/RAU009","DOIUrl":"https://doi.org/10.1093/RAPSTU/RAU009","url":null,"abstract":"Stock returns are characterized by extreme observations, jumps that would not occur under the smooth variation of a Gaussian process. We find that jumps are prevalent in most countries. This has been little investigation of whether the jumps are internationally correlated. Their possible inter-correlation is important for investors because international diversification is less effective when jumps are frequent, unpredictable and strongly correlated. Public supervisors may also mind about widely correlated jumps, as they could bring down certain financial intermediaries. We investigate using daily returns on broad equity indexes from 82 countries and for several statistical measures of jumps. Various jump measures are not in complete agreement but a general pattern emerges. Jumps are internationally correlated but not as much as returns. Although the smooth variation in returns is driven strongly by systematic global factors, jumps are more idiosyncratic and most of them are found in Europe. Some pairs of correlated jumps occur simultaneously but not to the extent of correlated returns. JEL Classification: G11, G15","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"26 1","pages":"92-111"},"PeriodicalIF":13.1,"publicationDate":"2015-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82140058","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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