775 research outputs found
Improved testing for the efficiency of asset pricing theories in linear factor models
This paper suggests a refinement of the standard T2 test statistic used in testing asset pricing theories in linear factor models. The test is designed to have improved power characteristics and to deal with the empirically important case where there are many more assets than time periods. This is necessary because the case of too few time periods invalidates the conventional T2. Furthermore, the test is shown to have reasonable power in cases where common factors are present in the residual covariance matrix
Using Bayesian variable selection methods to choose style factors in global stock return models
This paper applies Bayesian variable selection methods from the statistics literature to
give guidance in the decision to include/omit factors in a global (linear factor) stock
return model. Once one has accounted for country and sector, it is possible to see which
style or styles best explains current asset returns. This study does not find compelling
evidence for global styles as useful explanatory factors, once country and sector have
been accounted for
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Asset Management with Price Impact and Fair Treatment of Clients
In light of recent regulatory initiatives focusing on fair treatment of customers in financial markets, this paper examines the agency problem created by an asset manager with market impact, segregated accounts and preference-based contracts. It illustrates how aggregate client welfare and assets under management are affected by the order in which clients' accounts are sequentially traded and demonstrates that the manager is unlikely to have incentives for equal treatment of clients. Effectively, she may conduct limited invisible transfers of wealth among largely uninformed clients by granting preferential market access to some of them and this may be purely the result of her dollar-alpha maximization efforts rather than size/importance-based client discrimination. Increased transparency and/or effective regulation in this area seem socially desirable since the manager's incentives and client welfare generally appear to be misaligned
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Social Welfare Issues of Financial Literacy
In the matter of financial literacy it is often supposed that more is automatically preferable to less. This paper considers to what extent this may be true generally, and specifically focuses on the case of investment forecasting skill (a significant component of an individual's financial literacy). We show that the while improved forecasting skill can increase an individual's own utility, the resulting increase in trading volume leads to higher asset price volatility. Under the plausible assumption that this volatility imposes disutility on non-investors, an interesting trade-off is exposed between the benefits of skill improvement which accrue to investors, and the costs suffered more broadly by society. The paper constructs a formal analytic framework in which to discuss these issues, examines under what conditions the marginal utility of skill is in fact monotonic for the individual and considers implications for policy-makers
GARCH model with cross-sectional volatility; GARCHX models
This study introduces GARCH models with cross-sectional market volatility, which we call GARCHX model. The cross-sectional market volatility is equlvalent to common heteroskedasticity in asset specific returns, which was suggested by Connor and Linton (2001) as an important component in individual asset volatility. Using UK and US data, we find that daily return volatility can be better specified with GARCHX models, but GARCHX models do not necessarily perform better than conventional GARCH models in forecasting
The disappearance of style in the US equity market
This paper investigates the modelling of style returns in the US and the returns to
style "tilts" based on forecasts of enhanced future style returns. We use hidden
Markov model to build our forecasts. Our finding that style returns are less
forecastible in more recent years is consistent with the hypothesis that style returns
are the result of anomalies rather than risk premia. The erosion of anomalous
returns as public awareness of their presence is translated into strategies that
arbitrage away the excess returns seems to be a hypothesis consistent with our
modelling results
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