The value of coskewness in evaluating mutual funds

Recent asset pricing studies demonstrate the relevance of incorporating the coskewness in Asset Pricing Models, and illustrate how this component helps to explain the time variation of ex-ante market risk premiums. This paper analyzes the role of coskewness in mutual funds performance evaluation. We find evidence that adding a coskewness factor is economically and statistically significant. We document that some managers are managing the coskewness and show, in general, a persistent behaviour on time in their coskewness policy. One of the most striking results is that many negative (positive) alpha funds measured relative to the CAPM risk adjustments would be reclassified as positive (negative) alpha funds using a model with coskewness. Therefore, a ranking of funds based on risk adjusted returns without considering coskewness would generate an erroneous classification. Moreover, some fund characteristics, such as the turnover ratio or the category, are related to the likelihood of managing coskewness

A Factor-Adjusted Multiple Testing Procedure with Application to Mutual Fund Selection

In this article, we propose a factor-adjusted multiple testing (FAT) procedure based on factor-adjusted p-values in a linear factor model involving some observable and unobservable factors, for the purpose of selecting skilled funds in empirical finance. The factor-adjusted p-values were obtained after extracting the latent common factors by the principal component method. Under some mild conditions, the false discovery proportion can be consistently estimated even if the idiosyncratic errors are allowed to be weakly correlated across units. Furthermore, by appropriately setting a sequence of threshold values approaching zero, the proposed FAT procedure enjoys model selection consistency. Extensive simulation studies and a real data analysis for selecting skilled funds in the U.S. financial market are presented to illustrate the practical utility of the proposed method. Supplementary materials for this article are available online

Evaluating and Investing in Equity Mutual Funds

Our framework for evaluating and investing in mutual funds combines observed returns on funds and passive assets with prior beliefs that distinguish pricing-model inaccuracy from managerial skill. A fund's alpha' is defined using passive benchmarks. We show that returns on non-benchmark passive assets help estimate that alpha more precisely for most funds. The resulting estimates generally vary less than standard estimates across alternative benchmark specifications. Optimal portfolios constructed from a large universe of equity funds can include actively managed funds even when managerial skill is precluded. The fund universe offers no close substitutes for the Fama-French and momentum benchmarks.

Passive investing before and after the crisis: investors' views on exchange-traded funds and competing index products

Investment in exchange-traded funds (ETFs) has been remarkably robust in the course of the recent financial crisis. This paper analyzes investors' perceptions of ETFs and other indexing products by comparing the answers to two surveys of ETF users carried out in 2008 and 2009, before and after the height of the financial crisis. We find that the crisis has divided the ETF market in two segments. Whereas ETFs in standard asset classes have been unaffected by the crisis, ETFs for alternative asset classes face challenges. However, ETFs are generally well ranked in comparison to other indexing products – presumably because of an increased focus on liquidity and transparency

The Integration of Securitized Real Estate and Financial Assets

Empirical evidence suggests that U.S. REITs are integrated with common stocks, but not with bonds. The design of the real estate security is likely to impact upon results, however, and it would seem important to analyze the topic of integration for another type of real estate security. Swiss real estate funds constitute an ideal candidate for such an examination as their institutional and legal setup differs substantially from that of other countries. We analyze the integration of such funds with both the stock and bond markets using an APT framework. We employ both the Xu (2003) method and an innovative procedure to determine endogenous and exogenous factors, respectively. Integration is assessed by means of two alternative tests. Our results suggest that Swiss real estate funds are more integrated with stocks than with bonds. Further, we show that the degree of integration between real estate and stocks is due to a stock market factor and changes in expected inflation. No integrating factor is found between real estate and bond funds. Finally, it is found that unexpected inflation is a segmenting factor between real estate securities and financial assets.Securitized Real Estate; Statistical APT; Macroeconomic APT; Market Integration; Risk Factors

Insurer Climate Risk Disclosure Survey: 2012 Findings and Recommendations

2012 was the warmest year on record in the Lower 48 states and the second most extreme weather year in U.S. history. This is not a coincidence. Extreme weather -- stronger, more damaging storms, unprecedented drought and heat in some regions and unprecedented rainfall and flooding in others -- are the predictable consequences of rising global temperatures.Eleven extreme weather events each caused at least a billion dollars in losses last year in the United States. A single event, Hurricane Sandy, caused more than $50 billion in economic losses. Insurance companies are on the hook for tens of billions of dollars in claims as a result of Sandy and other severe weather events. And American taxpayers are on the hook for tens of billions of dollars themselves, thanks to losses sustained by the National Flood Insurance Program as well as disaster relief spendingThis raises a fundamental question: Is the insurance industry prepared? Have insurers analyzed and measured their climate-related risk? Are they planning for life in a warmer world? These should be essential questions for insurance regulators in all 50 states to be asking, and some are

The value of coskewness in mutual fund performance evaluation.

Recent asset pricing studies demonstrate the relevance of incorporating coskewness in asset pricing models, and illustrate how this component helps to explain the time variation of ex-ante market risk premiums. This paper analyzes the role of coskewness in mutual fund performance evaluation and finds evidence that adding a coskewness factor is economically and statistically significant. It documents that coskewness is sometimes managed and shows persistence of the coskewness policy over time. One of the most striking results is that many negative (positive) alpha funds, measured relative to the CAPM risk adjustments, would be reclassified as positive (negative) alpha funds using a model with coskewness. Therefore, performance ranking based on risk-adjusted returns without considering coskewness could generate an erroneous classification. Moreover, some fund characteristics, such as turnover ratio or category, are related to the likelihood of managing coskewness.Coskewness; Mutual funds; Performance measures;