The Attributes, Behavior, and Performance of U.S. Mutual Funds

This article examines the risk and return characteristics of U.S. mutual funds. We employ an equilibrium version of the Arbitrage Pricing Theory (APT) and a principal-components-based statistical technique to identify performance benchmarks. We also consider the Capital Asset Pricing Model (CAPM) as an alternative. We implement a procedure for overcoming the rotational indeterminacy of factor models. This procedure is a hybrid of statistical factor estimation and prespecification of factors. We estimate measures of timing ability for the CAPM and extend it to the APT. We find that this timing test is misspecified due to noninformation-based changes in mutual fund betas. We develop a modification of the timing measure that, under certain conditions, distinguishes true timing ability from noninformation-based beta changes

A Test for the Number of Factors in an Approximate Factor Model

An important issue in applications of multifactor models of asset returns is the appropriate number of factors. Most extant tests for the number of factors are valid only for strict factor models, in which diversifiable returns are uncorrelated across assets. In this paper we develop a test statistic to determine the number of factors in an approximate factor model of asset returns, which does not require that diversifiable components of returns be uncorrelated across assets. We find evidence for one to six pervasive factors in the cross-section of New York Stock Exchange and American Stock Exchange stock returns

A Test for the Number of Factors in an Approximate Factor Model

An important issue in applications of multifactor models of asset returns is the appropriate number of factors. Most extant tests for the number of factors are valid only for strict factor models, in which diversifiable returns are uncorrelated across assets. In this paper we develop a test statistic to determine the number of factors in an approximate factor model of asset returns, which does not require that diversifiable components of returns be uncorrelated across assets. We find evidence for one to six pervasive factors in the cross-section of New York Stock Exchange and American Stock Exchange stock returns

The Attributes, Behavior, and Performance of U.S. Mutual Funds

This article examines the risk and return characteristics of U.S. mutual funds. We employ an equilibrium version of the Arbitrage Pricing Theory (APT) and a principal-components-based statistical technique to identify performance benchmarks. We also consider the Capital Asset Pricing Model (CAPM) as an alternative. We implement a procedure for overcoming the rotational indeterminacy of factor models. This procedure is a hybrid of statistical factor estimation and prespecification of factors. We estimate measures of timing ability for the CAPM and extend it to the APT. We find that this timing test is misspecified due to noninformation-based changes in mutual fund betas. We develop a modification of the timing measure that, under certain conditions, distinguishes true timing ability from noninformation-based beta changes

A measure of stock market integration for developed and emerging markets

If equity markets are financially integrated, the price of risk should be the same across markets. If the markets are not financially integrated - possibly because of barriers to capital flows across markets - the price of risk may differ across markets. The author investigates one measure of financial integration between equity markets. He uses a multifactor equilibrium Arbitrage Pricing Theory to define risk and to measure deviations from the"law of one price."He applies the integration measure to equities traded in 24 countries (four developed, and 20 emerging). The measure of market segmentation tends to be much larger for emerging markets than for developed markets, which is consistent with larger barriers to capital flows into or out of the emerging markets. The measure tends to decrease over time, which is consistent with growing levels of integration. Large values of adjusted mispricing occur around periods of economic turbulence and periods in which capital controls change significantly. So, the adjusted mispricing estimates measure not only the level of deviation from the law of one price, but also the revaluations inherent in moving from one regime to another.Banks&Banking Reform,Economic Theory&Research,International Terrorism&Counterterrorism,Payment Systems&Infrastructure,Markets and Market Access,Banks&Banking Reform,Access to Markets,Markets and Market Access,International Terrorism&Counterterrorism,Economic Theory&Research

Understanding Stock Price Behavior around the Time of Equity Issues

It is well-documented that stock prices rise significantly prior to an equity issue, and fall upon announcement of the issue. We expand on earlier studies by using a large sample which includes OTC firms, by examining the cross-sectional properties of the price rise, and by using accounting data to track the pattern of debt ratios and Tobin's q around the time of equity issues. We consider a number of explanations for our results, and conclude that the data is largely consistent with informational models in which managers are asymmetrically informed about the value of the firm. Surprisingly, debt ratios do not increase prior to equity issues, suggesting that strained debt capacity is not the main reason for equity issues. The behavior of Tobin's q is consistent with equity issues being used to finance new investments.

Intraday Patterns in the Cross-section of Stock Returns

Motivated by the literature on investment flows and optimal trading, we examine intraday predictability in the cross-section of stock returns. We find a striking pattern of return continuation at half-hour intervals that are exact multiples of a trading day, and this effect lasts for at least 40 trading days. Volume, order imbalance, volatility, and bid-ask spreads exhibit similar patterns, but do not explain the return patterns. We also show that short-term return reversal is driven by temporary liquidity imbalances lasting less than an hour and bid-ask bounce. Timing trades can reduce execution costs by the equivalent of the effective spread

An intertemporal equilibrium beta pricing model

This article develops an intertemporal, discrete-time, competitive equilibrium version of the arbitrage pricing theory, (APT) and explores the econometric implications of this model under various restrictions on investor preferences and on the dynamic behaviour of dividends. We describe conditions under which the econometric technique typically used for estimating and testing the APT can be shown to be consistent with our economic model. We relate our intertemporal version of the APT to the static APT and to Merton's intertemporal capital asset pricing model