W. V. Harlow and Keith C. Brown The debate over the value of active portfolio management has often centered on whether the average active manager is capable of producing returns that exceed expectations. We argue that a more useful way to frame this issue is to focus on identifying those managers who are the most… Read more
Articles
THE STOCK MARKET’S REACTION TO UNEMPLOYMENT NEWS, STOCK-BOND RETURN CORRELATIONS, AND THE STATE OF THE ECONOMY
John H. Boyd, Ravi Jagannathan and Qianqiu Liu We confirm Boyd et al.’s (2005) finding that on average a surprise increase in unemployment is “good news” for stocks during economic expansions and “bad news” during economic contractions. Unemployment news bundles information about future interest rates, equity risk premium, and corporate earnings. For stocks as a… Read more
AGGREGATE IDIOSYNCRATIC RISK AND MARKET RETURNS
Turan G. Bali and Nusret Cakici This paper tests the empirical performance of a model-independent measure of aggregate idiosyncratic risk introduced by Bali and Cakici (2004) in the intertemporal capital asset pricing framework. The results indicate a significantly positive relation between the equal-weighted average stock volatility and the value-weighted portfolio returns on the NYSE/AMEX/NASDAQ stocks… Read more
THE RELATION BETWEEN FIXED INCOME AND EQUITY RETURN FACTORS
Jaime Lee, Terry Marsh, Robert Maxim and Paul Pfleiderer This paper provides an analysis of the relation between equity and fixed income returns over time. As measured by realized correlation, this relation has changed substantially over the last decade, from positive to negative through the market collapse and is currently around zero. We find “jumps”… Read more
HOW DO IPO ISSUERS PAY FOR ANALYST COVERAGE?
Michael T. Cliff and David J. Denis This article reports evidence consistent with the view that initial public offering (IPO) issuers purchase high-quality analyst coverage with greater underpricing of the IPO. Specifically, we report that underpricing is positively related to analyst coverage by the lead underwriter and to the presence of an all-star analyst on… Read more
S&P 500 INDEX CHANGES AND INVESTOR AWARENESS
Honghui Chen, Gregory Noronha and Vijay Singal We find that, on average, firms added to the S&P 500 index experience a permanent price increase, while those deleted from it suffer only a temporary price decline. Existing theories, such as a downward sloping demand curve, liquidity, and information, fail to explain the asymmetric response. We propose… Read more
EMPLOYEE STOCK OPTIONS AND TAXES
Courtney H. Edwards, John R. Graham, Mark H. Lang and Douglas A. Shackelford In this paper, we investigate the effect of stock options on the tax position of the firm. We argue that option tax deductions can significantly affect a firm’s marginal tax rate and that the effect is masked by current financial reporting rules… Read more
A DYNAMIC MODEL OF PORTFOLIO MANAGEMENT
Richard Grinold This paper presents a simplified model of dynamic active portfolio management. It is designed to answer questions about product design and provide a guide to better implementation. The model has four inputs: an information ratio that measures the anticipated ability to add value, a risk aversion parameter, a speed of decay of our… Read more
ARE THE PROBABILITIES RIGHT? DEPENDENT DEFAULTS AND THE NUMBER OF OBSERVATIONS REQUIRED TO TEST FOR DEFAULT RATE ACCURACY
Roger M. Stein Users of default prediction models often desire to know how accurate the estimated probabilities are. There are a number of mechanisms for testing this, but one that has found favor due to its intuitive appeal is the examination of goodness of fit between expected and observed default rates. While large data sets… Read more
SKILL-BASED INVESTMENT MANAGEMENT: THE NEXT EVOLUTION IN THE ASSET MANAGEMENT INDUSTRY
Pranay Gupta and Jan Straatman In this paper, we discuss the structure of investment management organizations from a business model perspective, investment structure perspective, and return analysis perspective. We argue that the definition of a business model to align the interest of the asset owner and asset manager is critical to maximizing investment returns. Failure… Read more