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Year 2013, Volume: 2 Issue: 4, 101 - 127, 01.12.2013

Abstract

References

  • Bauer, R., Cosemans, M. and Eichholtz, P. (2007), The performance and persistence of individual investors: rational agents or tulip maniacs? Working Paper (Maastricht University).
  • Ben-Rephael, A., Kadan, O. and Wohl, A. (2010), The diminishing liquidity premium, Working Paper.
  • Berk, J. B. and Green, R. C. (2004), Mutual fund flows and performance in rational markets, Journal of Political Economy, Vol. 112, pp. 1269-1295.
  • Bollen, N. and Busse, J. A. (2005), Short-term persistence in mutual fund performance, Review of Financial Studies, Vol. 18, pp. 569-597.
  • Brennan, M. J., Chordia, T. and Subrahmanyam, A. (1998), Alternative factor specifications, security characteristics and the cross-section of expected stock returns, Journal of Financial Economics, Vol. 49, pp. 345-373.
  • Brennan, M. J., Chordia, T., Subrahmanyam, A. and Tong, Q. (2009), Sell-side illiquidity and the cross-section of expected stock returns, Working Paper.
  • Brown, K. C., Harlow, W. V. and Starks, L. T. (1996), Of tournaments and temptations: an analysis of managerial incentives in the mutual fund industry, Journal of Finance, Vol. 51, pp. 85
  • Brown, S. J. and Goetzmann, W. N. (1995), Performance persistence, Journal of Finance, Vol. 50, pp. 679-698.
  • Brown, S. J., Goetzmann, W. N., Ibbotson, R. G. and Ross, S. A. (1992), Survivorship bias in performance studies, Review of Financial Studies, Vol. 5, pp. 553-580.
  • Busse, J. A. (2001), Another look at mutual fund tournaments, Journal of Financial and Quantitative Analysis, Vol. 36, pp. 53-73.
  • Carhart, M. M. (1997), On persistence in mutual funds performance, Journal of Finance, Vol. 52, pp. 57-82.
  • Carlson, R. S. (1970), Aggregate performance of mutual funds, 1948-1967, Journal of Financial and Quantitative Analysis, Vol. 5, pp. 1-32.
  • Chance, D. M. (2011), The alpha bias in asset allocation performance measurement. Working Paper (Available at SSRN: http://ssrn.com/abstract=1866301).
  • Chen, H. L., Jegadeesh, N. and Wermers, R. (2000), The value of active mutual fund management: an examination of the stockholdings and trades of fund managers, Journal of Financial and Quantitative Analysis, Vol. 35, pp. 343-368.
  • Chevalier, J. and Ellison, G. (1997), Risk-taking by mutual funds as a response to incentives, Journal of Political Economy, Vol. 105, pp. 1167-1200.
  • Chordia, T., Huh, S. W. and Subrahmanyam, A. (2009), Theory-based illiquidity and asset pricing, Review of Financial Studies, Vol. 22, pp. 3629-3668.
  • Chordia, T. and Shivakumar, L. (2006), Earnings and price momentum, Journal of Financial Economics, Vol. 80, pp. 627-656.
  • Chordia, T., Subrahmanyam, A. and Anshuman, V. R. (2001), Trading activity and expected stock returns, Journal of Financial Economics, Vol. 59, pp. 3-32.
  • Connor, G. and Korajczyk, R. A. (1988), Risk and return in an equilibrium APT: application of a new test methodology, Journal of Financial Economics, Vol. 21, pp. 255-289.
  • Cremers, M. and Petajisto, A. (2009), How active is your fund manager? A new measure that predicts performance, Review of Financial Studies, Vol. 22, pp. 3329-3365.
  • Elton, E. J., Gruber, M. J. and Blake, C. R. (1996), Survivorship bias and mutual fund performance, Review of Financial Studies, Vol. 9, pp. 1097-1120.
  • Fama, E. F. and French, K. R. (1993), Common risk factors in the returns on stocks and bonds, Journal of Financial Economics, Vol. 33, pp. 3-56.
  • Fama, E. F. and French, K. R. (1996), Multifactor explanations of asset pricing anomalies, Journal of Finance, Vol. 51, pp. 55-84.
  • Ferson, W. E. and Harvey, C. R. (1999), Conditioning variables and the cross section of stock returns, Journal of Finance, Vol. 54, pp. 1325-1360.
  • Ferson, W. E. and Schadt, R. W. (1996), Measuring fund strategy and performance in changing economic conditions, Journal of Finance, Vol. 51, pp. 425-461.
  • Goetzmann, W. N. and Ibbotson, R. G. (1994), Do winners repeat? Journal of Portfolio Management, Vol. 20, pp. 9-18.
  • Goriaev, A. P., Nijman, T. E. and Werker, B. J. (2005), Yet another look at mutual fund tournaments, Journal of Empirical Finance, Vol. 12, pp. 127-137.
  • Graham, J. R. and Campbell, H. R. (1997), Grading the performance of market-timing newsletters, Financial Analysts Journal, Vol. 53, pp. 54-66.
  • Grinblatt, M. and Titman, S. (1992), The persistence of mutual fund performance, Journal of Finance, Vol. 47, pp. 1977-1984.
  • Grinblatt, M., Titman, S. and Wermers, R. (1995), Momentum investment strategies, portfolio performance and herding: a study of mutual fund behavior, American Economic Review, Vol. 85, pp. 1088-1105.
  • Gruber, M. J. (1996), Another puzzle: the growth in actively managed mutual funds, Journal of Finance, Vol. 51, pp. 783-810.
  • Hendricks, D., Patel, J. and Zeckhauser, R. (1993), Hot hands in mutual funds: short run persistence of relative performance, 1974-1988, Journal of Finance, Vol. 48, pp. 93-130.
  • Hendricks, D., Patel, J. and Zeckhauser, R. (1997), The j-shape of performance persistence given survivorship bias, Review of Economics and Statistics, Vol. 79, pp. 161-166.
  • Hunter, D., Kandel, E., Kandel, S. and Wermers, R. (2009), Endogenous benchmarks, Working Paper (University of Maryland).
  • Ippolito, R. A. (1989), Efficiency with costly information: a study of mutual fund performance, 1965-1984, Quarterly Journal of Economics, Vol. 104, pp. 1-23.
  • Ippolito, R. A. (1992), Consumer reaction to measures of poor quality: evidence from the mutual fund industry, Journal of Law and Economics, Vol. 35, pp. 45-70.
  • Jegadeesh, N. and Titman, S. (1993), Returns to buying winners and selling losers: implications for stock market efficiency, Journal of Finance, Vol. 48, pp. 65-91.
  • Jensen, M. C. (1968), The performance of mutual funds in the period 1945-1964, Journal of Finance, Vol. 23, pp. 389-416.
  • Kaplan, S. N. and Schoar, A. (2005), Private equity performance: returns, persistence and capital flows, Journal of Finance, Vol. 60, pp. 1791-1823.
  • Knuth, D. E. (1981), The Art of Computer Programming: Semi-Numerical Algorithms, volume 2, Addison-Wesley Publishing Co.
  • Kosowski, R., Timmermann, A., Wermers, R. and White, H. (2006), Can mutual fund stars really pick stocks? New evidence from a bootstrap analysis, Journal of Finance, Vol. 61, pp. 2551-2595. Kumar, A. (2009), Dynamic style preferences of individual investors and stock returns, Journal of Financial and Quantitative Analysis, Vol. 44, pp. 607-640.
  • Malkiel, B. G. (1995), Returns from investing in equity mutual funds 1971 to 1991, Journal of Finance, Vol. 50, pp. 549-572.
  • Otten, R. and Bams, D. (2002), European mutual fund performance, European Financial Management, Vol. 8, pp. 75-101.
  • Ross, S. A. (1976), The arbitrage theory of capital asset pricing, Journal of Economic Theory, Vol. 13, pp. 341-360.
  • Sharpe, W. F. (1964), Capital asset prices: a theory of market equilibrium under conditions of risk, Journal of Finance, Vol. 19, pp. 425-442.
  • Sharpe, W. F. (1966), Mutual fund performance, Journal of Business 39, pp. 119-138.
  • Shukla, R. and Trzcinka, C. (1994), Persistent performance in the mutual fund market: tests with funds and investment advisors, Review of Quantitative Finance and Accounting, Vol. 4, pp. 1151
  • Sirri, E. R. and Tufano, P. (1998), Costly search and mutual fund flows, Journal of Finance, Vol. 53, pp. 1589-1622.
  • Spiegel, M. and Wang, X. (2006), Cross-sectional variation in stock returns: liquidity and idiosyncratic risk, Working Paper (Yale University).
  • Treynor, J. L. (1965), How to rate management of investment funds, Harvard Business Review, Vol. 43, pp. 63-75.
  • Wermers, R. (2004), Is money really smart? New evidence on the relation between mutual fund flows, manager behavior and performance persistence, Working Paper (University of Maryland).
  • Zheng, L. (1999), Is money smart? A study of mutual fund investors' fund selection ability, Journal of Finance, Vol. 54, pp. 901-933.

Evaluating The Short-Term Excess-Return: A New Methodology

Year 2013, Volume: 2 Issue: 4, 101 - 127, 01.12.2013

Abstract

In this paper, a new methodology for evaluating short-term excess return is suggested. The intuition behind this methodology is derived from the forward rate calculation and it does not require that the betas remain constant over time. The new methodology is compared with other short-term estimators and substantial score and ranking differences are found. In addition, the short-term estimators are analyzed based onaspects of expected value and variance and the conclusion is that the new methodology is the better one. Simulation tests support this result. Finally, the new methodology also yields performance scores and rankings that are the most consistent with their long-term counterparts.

References

  • Bauer, R., Cosemans, M. and Eichholtz, P. (2007), The performance and persistence of individual investors: rational agents or tulip maniacs? Working Paper (Maastricht University).
  • Ben-Rephael, A., Kadan, O. and Wohl, A. (2010), The diminishing liquidity premium, Working Paper.
  • Berk, J. B. and Green, R. C. (2004), Mutual fund flows and performance in rational markets, Journal of Political Economy, Vol. 112, pp. 1269-1295.
  • Bollen, N. and Busse, J. A. (2005), Short-term persistence in mutual fund performance, Review of Financial Studies, Vol. 18, pp. 569-597.
  • Brennan, M. J., Chordia, T. and Subrahmanyam, A. (1998), Alternative factor specifications, security characteristics and the cross-section of expected stock returns, Journal of Financial Economics, Vol. 49, pp. 345-373.
  • Brennan, M. J., Chordia, T., Subrahmanyam, A. and Tong, Q. (2009), Sell-side illiquidity and the cross-section of expected stock returns, Working Paper.
  • Brown, K. C., Harlow, W. V. and Starks, L. T. (1996), Of tournaments and temptations: an analysis of managerial incentives in the mutual fund industry, Journal of Finance, Vol. 51, pp. 85
  • Brown, S. J. and Goetzmann, W. N. (1995), Performance persistence, Journal of Finance, Vol. 50, pp. 679-698.
  • Brown, S. J., Goetzmann, W. N., Ibbotson, R. G. and Ross, S. A. (1992), Survivorship bias in performance studies, Review of Financial Studies, Vol. 5, pp. 553-580.
  • Busse, J. A. (2001), Another look at mutual fund tournaments, Journal of Financial and Quantitative Analysis, Vol. 36, pp. 53-73.
  • Carhart, M. M. (1997), On persistence in mutual funds performance, Journal of Finance, Vol. 52, pp. 57-82.
  • Carlson, R. S. (1970), Aggregate performance of mutual funds, 1948-1967, Journal of Financial and Quantitative Analysis, Vol. 5, pp. 1-32.
  • Chance, D. M. (2011), The alpha bias in asset allocation performance measurement. Working Paper (Available at SSRN: http://ssrn.com/abstract=1866301).
  • Chen, H. L., Jegadeesh, N. and Wermers, R. (2000), The value of active mutual fund management: an examination of the stockholdings and trades of fund managers, Journal of Financial and Quantitative Analysis, Vol. 35, pp. 343-368.
  • Chevalier, J. and Ellison, G. (1997), Risk-taking by mutual funds as a response to incentives, Journal of Political Economy, Vol. 105, pp. 1167-1200.
  • Chordia, T., Huh, S. W. and Subrahmanyam, A. (2009), Theory-based illiquidity and asset pricing, Review of Financial Studies, Vol. 22, pp. 3629-3668.
  • Chordia, T. and Shivakumar, L. (2006), Earnings and price momentum, Journal of Financial Economics, Vol. 80, pp. 627-656.
  • Chordia, T., Subrahmanyam, A. and Anshuman, V. R. (2001), Trading activity and expected stock returns, Journal of Financial Economics, Vol. 59, pp. 3-32.
  • Connor, G. and Korajczyk, R. A. (1988), Risk and return in an equilibrium APT: application of a new test methodology, Journal of Financial Economics, Vol. 21, pp. 255-289.
  • Cremers, M. and Petajisto, A. (2009), How active is your fund manager? A new measure that predicts performance, Review of Financial Studies, Vol. 22, pp. 3329-3365.
  • Elton, E. J., Gruber, M. J. and Blake, C. R. (1996), Survivorship bias and mutual fund performance, Review of Financial Studies, Vol. 9, pp. 1097-1120.
  • Fama, E. F. and French, K. R. (1993), Common risk factors in the returns on stocks and bonds, Journal of Financial Economics, Vol. 33, pp. 3-56.
  • Fama, E. F. and French, K. R. (1996), Multifactor explanations of asset pricing anomalies, Journal of Finance, Vol. 51, pp. 55-84.
  • Ferson, W. E. and Harvey, C. R. (1999), Conditioning variables and the cross section of stock returns, Journal of Finance, Vol. 54, pp. 1325-1360.
  • Ferson, W. E. and Schadt, R. W. (1996), Measuring fund strategy and performance in changing economic conditions, Journal of Finance, Vol. 51, pp. 425-461.
  • Goetzmann, W. N. and Ibbotson, R. G. (1994), Do winners repeat? Journal of Portfolio Management, Vol. 20, pp. 9-18.
  • Goriaev, A. P., Nijman, T. E. and Werker, B. J. (2005), Yet another look at mutual fund tournaments, Journal of Empirical Finance, Vol. 12, pp. 127-137.
  • Graham, J. R. and Campbell, H. R. (1997), Grading the performance of market-timing newsletters, Financial Analysts Journal, Vol. 53, pp. 54-66.
  • Grinblatt, M. and Titman, S. (1992), The persistence of mutual fund performance, Journal of Finance, Vol. 47, pp. 1977-1984.
  • Grinblatt, M., Titman, S. and Wermers, R. (1995), Momentum investment strategies, portfolio performance and herding: a study of mutual fund behavior, American Economic Review, Vol. 85, pp. 1088-1105.
  • Gruber, M. J. (1996), Another puzzle: the growth in actively managed mutual funds, Journal of Finance, Vol. 51, pp. 783-810.
  • Hendricks, D., Patel, J. and Zeckhauser, R. (1993), Hot hands in mutual funds: short run persistence of relative performance, 1974-1988, Journal of Finance, Vol. 48, pp. 93-130.
  • Hendricks, D., Patel, J. and Zeckhauser, R. (1997), The j-shape of performance persistence given survivorship bias, Review of Economics and Statistics, Vol. 79, pp. 161-166.
  • Hunter, D., Kandel, E., Kandel, S. and Wermers, R. (2009), Endogenous benchmarks, Working Paper (University of Maryland).
  • Ippolito, R. A. (1989), Efficiency with costly information: a study of mutual fund performance, 1965-1984, Quarterly Journal of Economics, Vol. 104, pp. 1-23.
  • Ippolito, R. A. (1992), Consumer reaction to measures of poor quality: evidence from the mutual fund industry, Journal of Law and Economics, Vol. 35, pp. 45-70.
  • Jegadeesh, N. and Titman, S. (1993), Returns to buying winners and selling losers: implications for stock market efficiency, Journal of Finance, Vol. 48, pp. 65-91.
  • Jensen, M. C. (1968), The performance of mutual funds in the period 1945-1964, Journal of Finance, Vol. 23, pp. 389-416.
  • Kaplan, S. N. and Schoar, A. (2005), Private equity performance: returns, persistence and capital flows, Journal of Finance, Vol. 60, pp. 1791-1823.
  • Knuth, D. E. (1981), The Art of Computer Programming: Semi-Numerical Algorithms, volume 2, Addison-Wesley Publishing Co.
  • Kosowski, R., Timmermann, A., Wermers, R. and White, H. (2006), Can mutual fund stars really pick stocks? New evidence from a bootstrap analysis, Journal of Finance, Vol. 61, pp. 2551-2595. Kumar, A. (2009), Dynamic style preferences of individual investors and stock returns, Journal of Financial and Quantitative Analysis, Vol. 44, pp. 607-640.
  • Malkiel, B. G. (1995), Returns from investing in equity mutual funds 1971 to 1991, Journal of Finance, Vol. 50, pp. 549-572.
  • Otten, R. and Bams, D. (2002), European mutual fund performance, European Financial Management, Vol. 8, pp. 75-101.
  • Ross, S. A. (1976), The arbitrage theory of capital asset pricing, Journal of Economic Theory, Vol. 13, pp. 341-360.
  • Sharpe, W. F. (1964), Capital asset prices: a theory of market equilibrium under conditions of risk, Journal of Finance, Vol. 19, pp. 425-442.
  • Sharpe, W. F. (1966), Mutual fund performance, Journal of Business 39, pp. 119-138.
  • Shukla, R. and Trzcinka, C. (1994), Persistent performance in the mutual fund market: tests with funds and investment advisors, Review of Quantitative Finance and Accounting, Vol. 4, pp. 1151
  • Sirri, E. R. and Tufano, P. (1998), Costly search and mutual fund flows, Journal of Finance, Vol. 53, pp. 1589-1622.
  • Spiegel, M. and Wang, X. (2006), Cross-sectional variation in stock returns: liquidity and idiosyncratic risk, Working Paper (Yale University).
  • Treynor, J. L. (1965), How to rate management of investment funds, Harvard Business Review, Vol. 43, pp. 63-75.
  • Wermers, R. (2004), Is money really smart? New evidence on the relation between mutual fund flows, manager behavior and performance persistence, Working Paper (University of Maryland).
  • Zheng, L. (1999), Is money smart? A study of mutual fund investors' fund selection ability, Journal of Finance, Vol. 54, pp. 901-933.
There are 52 citations in total.

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Journal Section Articles
Authors

Sharon Garyn Tal This is me

Publication Date December 1, 2013
Published in Issue Year 2013 Volume: 2 Issue: 4

Cite

APA Tal, S. G. (2013). Evaluating The Short-Term Excess-Return: A New Methodology. Journal of Business Economics and Finance, 2(4), 101-127.

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