Liquidity Risk, Return Predictability, and Hedge Funds' Performance: An Empirical Study

This article analyzes the effect of liquidity risk on the performance of equity hedge fund portfolios. Similarly to Avramov, Kosowski, Naik, and Teo (2007), (2011), we observe that, before accounting for the effect of liquidity risk, hedge fund portfolios that incorporate predictability in managerial skills generate superior performance. This outperformance disappears or weakens substantially for most emerging markets, event-driven, and long/short hedge fund portfolios once we account for liquidity risk. Moreover, we show that the equity market-neutral and long/short hedge fund portfolios' "alphas” also entail rents for their service as liquidity providers. These results hold under various robustness test

Earnings Management and the Role of Moral Values in Investing

In this study, we use earnings management to examine (1) how investors regard a CEO’s commitment to honesty and (2) the impact of their perceptions, in light of their own moral values, on their investment decisions. In two laboratory experiments using students as investor proxies, we find that investors perceive a CEO as being more committed to honesty when they believe the CEO has engaged less in earnings management. A one standard deviation increase in a CEO’s perceived commitment to honesty, compared to that of another CEO, leads to a 40% reduction in the importance the investors assigned, when making investment decisions, to differences in the two CEOs’ claimed future returns. This effect is particularly pronounced among investors with a proself value orientation. For prosocial investors, their moral values and those they attribute to the CEO directly influence their investment decisions, with returns playing a secondary role. Our findings contrast with the idea, implicit in the literature on ‘sin’ stocks, that morality is a niche concern. By contrast, we find that moral values play a significant role for distinct types of investors and that they influence investment decisions for both moral and pecuniary reasons

Analyse des données de marchés pour la période: 01/1983 - 04/1999

This study examines for three countries, that is the US, the UK and Switzerland, whether interest rate and credit risks are priced in the equity excess returns of their respective stock market indexes over the period January 1983 - respectively February 1993 and January 1988 - to April 1999, by estimating both two-factor and three-factor versions of Merton's ICAPM. The degree of dependence and causality between the domestic credit risk premia in order to assess the potential benefits of international diversification is also studied. Only weak evidence of systematic interest rate risk pricing is found, while under systematic credit risk can be concluded that market and credit risks are both positively and significantly priced. Finally the authors fail to observe strong relationships between the credit risk premia estimated on the three stock markets

Liquidity Risk, Return Predictability, and Hedge Funds' Performance: An Empirical Study

This article analyzes the effect of liquidity risk on the performance of equity hedge fund portfolios. Similarly to Avramov, Kosowski, Naik, and Teo (2007),(2011), we observe that, before accounting for the effect of liquidity risk, hedge fund portfolios that incor- porate predictability in managerial skills generate superior performance. This outperfor-mance disappears or weakens substantially for most emerging markets, event-driven, and long/short hedge fund portfolios once we account for liquidity risk. Moreover, we show that the equity market-neutral and long/short hedge fund portfolios' “alphas” also entail rents for their service as liquidity providers. These results hold under various robustness tests

Margining in derivatives markets and the stability of the banking sector

We investigate the effects of margining, a widely-used mechanism for attaching collateral to derivatives contracts, on derivatives trading volume, default risk, and on the welfare in the banking sector. First, we develop a stylized banking sector equilibrium model to develop some basic intuition of the effects of margining. We find that a margin requirement can be privately and socially sub-optimal. Subsequently, we extend this model into a dynamic simulation model that captures some of the essential characteristics of over-the-counter derivatives markets. Contrarily to the common belief that margining always reduces default risk, we find that there exist situations in which margining increases default risk, reduces aggregate derivatives' trading volume, and has an ambiguous effect on welfare in the banking sector. The negative effects of margining are exacerbated during periods of market stress when margin rates are high and collateral is scarce. We also find that central counterparties only lift some of the inefficiencies caused by margining

ESG rating disagreement and stock returns

Using environmental, social, and governance (ESG) ratings from seven different data providers for a sample of firms in the S&P 500 Index between 2010 and 2017, we studied the relationship between ESG rating disagreement and stock returns. We found that stock returns are positively related to ESG rating disagreement, suggesting a risk premium for firms with higher ESG rating disagreement. The relationship is primarily driven by disagreement about the environmental dimension. We discuss the practical implications of our findings for firms’ equity cost of capital as well as for investment managers and asset owners who use ESG investment strategies