In this paper, we investigate the performance persistence of hedge funds over time horizons between 6 and 36 months based on a merged sample from the Lipper/TASS and CISDM databases for the time period from 1994 to 2008. Unlike previous literature, we use a panel probit regression approach to identify fund characteristics that are significantly related to performance persistence. We then investigate the performance of two-way sorted portfolios where sorting is based on past performance and one of the additional fund characteristics identified as persistence-enhancing in the probit analysis. We find statistically and economically significant performance persistence for time horizons of up to 36 months. Although we identify several fund characteristics that are strongly correlated with the probability of observing performance persistence, we find only one fund characteristic, a strategy distinctiveness index that attempts to measure manager skills and the uniqueness of the hedge fund's trading strategies, to have the ability to systematically improve performance persistence up to a time horizon of 24 months. The economic magnitude of this improvement amounts to a sizeable increase in alpha by approximately 4.0% and 2.3% p.a. for annual and biennial rebalancing, respectively.
In this paper, we investigate the performance persistence of hedge funds over time horizons between 6 and 36 months based on a merged sample from the Lipper/TASS and CISDM databases for the time period from 1994 to 2008. Unlike previous literature, we use a panel probit regression approach to identify fund characteristics that are significantly related to performance persistence. We then investigate the performance of two-way sorted portfolios where sorting is based on past performance and one of the additional fund characteristics identified as persistence-enhancing in the probit analysis. We find statistically and economically significant performance persistence for time horizons of up to 36 months. Although we identify several fund characteristics that are strongly correlated with the probability of observing performance persistence, we find only one fund characteristic, a strategy distinctiveness index that attempts to measure manager skills and the uniqueness of the hedge fund's trading strategies, to have the ability to systematically improve performance persistence up to a time horizon of 24 months. The economic magnitude of this improvement amounts to a sizeable increase in alpha by approximately 4.0% and 2.3% p.a. for annual and biennial rebalancing, respectively.
This paper investigates the effect of superstar CEOs on their competitors.
Exploiting shocks to CEO status due to awards provided by major media outlets,
we document a significant outperformance of competitors of superstar CEOs to a
control sample of competitors of observationally equivalent CEOs who do not win
an award. We observe an increase in risk-taking of superstar competitors
subsequent to the award and identify an increase in innovation activity as a
channel of the increased risk-taking. Our empirical identification strategy uses
matching techniques to ensure that our treatment and control samples behave very
similarly prior to the CEO award, alleviating endogeneity concerns and
supporting a causal interpretation of our results.
Recent research questions the existence of a conglomerate discount. This study addresses two of the most important explanations for the conglomerate discount and finds evidence in support of an economically and statistically significant discount. The first explanation is that the risk-reducing effect of diversification increases debt value and consequently the use of the book value of debt leads to an underestimation of firm value in diversified firms. We show that the effect of using an imputed market value of debt reduces the conglomerate discount only by a small fraction. However, consistent with the value-transfer hypothesis, we find the discount to increase in leverage and no discount for all-equity firms. An agency cost-based explanation, which reconciles these conflicting findings, is that managers in levered firms become aligned with creditors and reduce firm risk at the expense of shareholders. Hence, the diversification discount only occurs in levered firms and stems from conflicts of interest between managers and shareholders over corporate risk taking. Second, the conglomerate discount may emerge from a neglect of the endogenous nature of the diversification decision. We first show that the conglomerate discount in fact disappears when we account for endogeneity in a Heckman selection model. However, when we account for fixed effects, the conglomerate discount remains statistically and economically significant, also in a Heckman selection-model or instrumental variables framework.
This study investigates the efficiency of markets as to the relative pricing of similar risk by using implied volatilities of options on highly correlated indexes and a statistical arbitrage strategy to profit from potential mispricings. It first analyzes the interrelationships over time of the 3 most highly correlated and liquid pairs of US stock indexes. Based on this analysis, the paper derives a relative relationship between implied volatilities for each pair. If this relationship was violated, a relative mispricing was suspected. A simple no-arbitrage barrier was used to identify significant deviations and a statistical arbitrage trade was implemented each time such a deviation was recorded. It was found that, although many deviations can be observed, only some of them are large enough to be exploited profitably in the presence of bid-ask spreads and transaction costs.
We analyze whether newspaper content can predict aggregate future stock returns. Our study is based on articles published in the Handelsblatt, a leading German Financial newspaper, from July 1989 to March 2011. We summarize newspaper content in a systematic way by constructing word-count indices for a large number of words. Wordcount indices are instantly available and therefore potentially valuable
Financial indicators. Our main Finding is that the predictive power of newspaper content has increased over time, particularly since 2000. We Find that a cluster analysis approach increases the predictive power of newspaper articles substantially. To obtain optimal predictive power, we need at least seven clusters. Our analysis shows that newspaper content is a valuable predictor of future DAX returns in and out of sample.
This study investigates the announcement and issuance effects of offering convertible bonds and exchangeable bonds using data for the Swiss and German markets during January 1996 and May 2003. The analysis suggests that announcement effects of convertible bonds and exchangeable bonds are associated with significantly negative abnormal returns. German firms exhibit a stronger reaction than Swiss firms, possibly for institutional reasons.We also investigate the effect of the market return of the announcement effect and find that the negative abnormal returns are significantly more pronounced when previous market returns have been negative. Furthermore, we analyze the relation between the announcement effects and equity components by controlling for the equity signal sent to the market. We find the size of the equity component of an issue to have a strong influence on the announcement effect for convertible but not for exchangeable securities and offer an explanation for this difference.
This study investigates the relationship between governance, investment performance and asset allocation of pension funds in Switzerland. Our sample includes survey data from 139 Swiss occupational pension plans for which we develop a governance metric comprising attributes of organisational design, management incentives, target setting, investment strategy, investment processes, risk management, monitoring, and transparency. We find empirical evidence that pension fund governance is positively related to excess returns, benchmark outperformance and Sharpe ratios. Pension funds in the top governance quartile outperform those in the bottom quartile by approximately 1% in terms of average excess returns and benchmark deviation. Furthermore, our study results indicate that asset allocation decisions are not related to governance, but rather to institutional factors.
We show that the introduction of a leverage constraint improves the practical implementation of characteristics-based portfolios. The addition of the constraint leads to significantly lower transaction costs, to a reduction of negative portfolio weights, and to a decrease in volatility and misspecification risk. Furthermore, it allows investors to implement any desired level of leverage. In this study, we include 12 characteristics, thereby extending the classical size, bookto-market and momentum paradigm. We report several key indicators such as the proportion
of negative weights, Sharpe ratio, volatility, transaction costs, the transaction cost-adjusted certainty equivalent returns, and the Herfindahl-Hirschman index. Analyzing the sensitivity of these key indicators to the choice of multiple combinations of the 12 characteristics, to risk aversion,and to estimation sample size, we show that constrained policies are much less sensitive to these parameters than their unconstrained counterparts. Finally, for quadratic utility, we derive a semi-closed analytical form for the portfolio weights. Overall, we provide a comprehensive extension of characteristics-based portfolio choice and contribute to a better understanding and implementation of the allocation process.
