Contrary to what traditional asset pricing would imply, a strategy that bets against beta, by going long in low beta stocks and short in high beta stocks, tends to outperform the market. We consider a market in which diversity is maintained, i.e. no single stock can dominate the entire market, and we show that beta-arbitrage strategies mechanically out-perform the market portfolio. We provide empirical support to our explanation on equity country indices, equity sectors, individual stocks, and stock portfolios. Finally, we show how to construct optimal beta- arbitrage strategies that maximize the expected return relative to a given benchmark.
We use payroll data in the Austrian, German, and Swiss banking sector to identify incentive pay in the critical banking segments of treasury/capital market management and investment banking for 67 banks. We document an economically significant correlation of incentive pay with both the level and volatility of bank trading income - particularly for the pre-crisis period 2003 – 2007, in which incentive pay was strongest. This result is robust if we instrument the bonus share in the capital market divisions with the strength of incentive pay in unrelated bank divisions like retail banking.Moreover, pre-crisis incentive pay appears too strong for an optimal tradeoff between trading income and risk, which maximizes the net present value of trading income. Further analyses indicate that the bonus moderation during the crisis has removed excessive pre-crisis incentive pay.
This paper theoretically and empirically investigates how debt structure and strategic interaction among shareholders and debt holders in the event of default affect expected stock returns. The model predicts that expected stock returns are higher for firms that face high debt renegotiation difficulties and that have a large fraction of secured or convertible debt. Using a large sample of publicly traded U.S. firms for the period 1985–2012, the paper presents new evidence on the link between debt structure and stock returns that is supportive of the model’s predictions.
We revisit the apparent historical success of technical trading rules on daily prices of the DJIA index from 1897 to 2011, and use the False Discovery Rate as a new approach to data snooping. The advantage of the FDR over existing methods is that it selects more outperforming rules which allows diversifying against model uncertainty. Persistence tests show that, even with the more powerful FDR technique, an investor would never have been able to select ex ante the future best-performing rules. Moreover, even in-sample, the performance is completely o set by the introduction of low transaction costs. Overall, our results seriously call into question the economic value of technical trading rules that has been reported for early periods.
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.
Market liberalization may not result in full market integration if implicit barriers are important. We test this proposition for investable and non-investable segments of twenty- two emerging markets (EMs). We also measure the degree of integration for six major developed markets (DMs) as a meaningful benchmark. We find that while the DMs are close to fully integrated, both EM segments are not effectively integrated with the global economy. We quantify the importance of implicit barriers and show that better institutions, stronger corporate governance, and more transparent markets in EMs would jointly contribute to a higher degree of integration by about 20% to 30%. (JEL G15, F30, G30)
We investigate the evolution from 2000 to 2015 in the proportion of papers published by authors with a European affiliation in the three main international real estate journals. Then, we analyze papers with at least one European author and/or concentrating on Europe published from 2008 to 2015 in the two main European real estate journals by authors’ country of affiliation, by country of study and by theme. Finally, we analyze linkages between country of affiliation and country of study and theme, respectively. Our results show that the proportion of papers published by European authors in the three main international real estate journals has increased during the 2000-2015 period. Our analyses of papers published in the two European real estate journals suggest that U.K.-based researchers are the most prolific. There is also a strong ‘home bias’ in that authors largely focus on the country in which they are based. The interest in housing and valuation increased markedly during the period. Finally, we report linkages between country of affiliation and theme.
We show how a method that has been applied to commercial real estate markets can be used to produce high frequency house price indexes for a city and for submarkets within a city. Our application of this method involves estimating a set of annual robust repeat sales regressions staggered by start date and then undertaking an annual-to-monthly (ATM) transformation with a generalized inverse estimator. Using transactions data for Louisville, Kentucky, we show that the method substantially reduces the volatility of high frequency indexes at the city and submarket levels. We demonstrate that both volatility and the benefits from using the ATM method are related to sample size.
This study investigates the impact of international financial regulation on listed real estate companies. In particular, we look at how three regulatory reforms undertaken in the aftermath of the global financial crisis have affected returns and credit default swap (CDS) spreads of real estate companies. The three reforms are aimed at regulating different segments of the market – Basel III targets banks, and could restrict the availability of bank debt to the sector, the Alternative Investment Fund Management Directive (AIFMD) targets funds, which could increase compliance costs and reduce the potential investor pool, while the European Market Infrastructure Regulation (EMIR) is aimed at derivative trading and could impact the cost of debt capital. We employ an event study methodology using daily financial market data and identify the regulatory events through news in the media. Regulatory event are identified based on news articles in major international financial newspapers and news agencies related to above regulations. The results show that, on average, market participants trading real estate equities and CDSs respond significantly to announcements about Basel III, AIFMD and EMIR, however, we observe differences across the countries the types of companies (large versus small, more leveraged versus less leveraged) and across the regulations. The strongest effects for equity are associated with Basel III and AIFMD. The effects on the credit side are much larger in scale but less frequent. The impact of the regulatory reforms is strongest for UK property companies, large companies and companies with high leverage. Overall, albeit not directly, the performance of listed property companies is significantly affected by news about financial regulatory reforms.
