WWW.THESIS.DISLIB.INFO
FREE ELECTRONIC LIBRARY - Online materials, documents
 
<< HOME
CONTACTS



Pages:     | 1 |   ...   | 9 | 10 || 12 | 13 |   ...   | 27 |

«Equity Style Investing RONG, WU How to cite: Equity Style Investing, Durham theses, Durham University. RONG, WU (2013) Available at Durham E-Theses ...»

-- [ Page 11 ] --

The higher premiums of small and value stocks during the economic recessional periods is intriguing. On the one hand, rational risk-based explanations may argue that such style premiums results from great risk associated with holding small and value stocks, especially in bad economic times. Chan and Chen (1991) and Gertler and Gilchrist (1994) argue that small firms are in distress or young, poorly collateralised that have limited access to credit markets. Fama and French (1992, 1995) claim that value firms tend to have high financial leverage and cash flow problems. Hence naturally size and value premiums should be higher in recessional periods, reflecting the vulnerability of small and value stocks to bad economic regimes over the business cycles. Consistently, Black and McMillan (2005) show that the responsiveness of value stocks to changes in economic conditions increase during contractions. Zhang (2005) argues that value and growth firms have different ability in investing (disinvesting) in good (bad) times and the dispersion of risk between value and growth stocks is high in bad times, while the risk differential is low or even negative in good times. Thus value stocks are riskier than growth stocks, especially in bad times when the price of risk is high. Petkova and Zhang (2006) also contend that value stocks are more (less) risky than growth stocks in bad (good) times when the expected risk premium is high (low). These studies suggest that on a rational framework size and value premiums emerge as bearing for higher business cycle risks.

On the other hand, however, in a consumption-based asset pricing framework, small and value stocks are not more risky because they are able to offer relative better returns when investors’ marginal utility of wealth is high. Conventional asset pricing model such as CAPM assumes that investors only care about the performance of their portfolios. In essence, typical investors would be concerned with both the investment returns and their end of period wealth. Barberis and Thaler (2003) argue that stocks failing to pay out at bad times but instead pay out at good times are risky because during bad times investors’ marginal utility of wealth is high. Hence it is suggested that the higher returns of size and value stocks are the result of market underreaction to stocks in such specific asset classes. Obviously, while both competing arguments sound interesting, it is impossible to disentangle them without further investigation.

Table 3-3 Profit of Simple Style Investing (J, K) = (6, 12) and (12, 6) At the end of each month, all UK non-financial stocks are classified into quintiles in ascending order according to their previous J-month company characteristics. The quintile portfolios are formed using equally-weighted (EW) and value weighted (VW) schemes. The number of stocks in Q1 and Q5 is identical. All portfolios are held in the following K month after formation and the average monthly returns over the Kholding period are calculated using “overlapping portfolios” methodology proposed by Jegadeesh and Titman (1993). The zero-cost hedge portfolios are formed as to long Q1 stocks and to short Q5 stocks for research variable PC, MTBV and MV. For research variable DY, the hedge portfolio is to long Q5 and short Q1.The table reports average monthly returns in 12 and 6-month holding period for the long, short and the hedge portfolios based on 6 and 12-month company characteristics respectively. The column titled “%0” gives the percentage of positive hedge portfolio returns. The t ratios in brackets are calculated based on the Newey-West (1987) heteroscedasticity and autocorrelation consistent standard errors with lags equal to K testing periods. *, ** and *** denote significance at the 10%, 5% and 1% levels, respectively.

–  –  –

01/1982-12/1993 2.27 0.88 1.39 77.0 6.92 2.78 4.14 100.0 2.64 1.03 1.61 78.8 1.71 0.85 0.86 61.9 5.46 2.05 3.42 81.8 2.01 0.94 1.07 63.5

–  –  –

01/1982-12/2004 2.10 0.54 1.56 78.9 5.61 2.73 2.88 81.8 2.38 0.72 1.66 79.2 1.62 0.49 1.13 64.4 3.72 0.72 3.00 81.8 1.79 0.51 1.28 65.8

–  –  –

01/1982-12/2004 2.16 0.43 1.73 78.9 5.71 2.84 2.87 81.0 2.45 0.62 1.82 79.1 1.62 0.42 1.21 65.3 3.32 0.92 2.40 81.0 1.76 0.46 1.30 66.5

–  –  –

01/1982-12/1993 0.84 1.78 0.95 70.6 3.59 4.71 1.12 72.7 1.06 2.02 0.96 70.8 0.87 1.35 0.48 55.6 -1.08 4.97 6.05 72.7 0.71 1.64 0.93 56.9

–  –  –

01/1982-12/2004 0.65 1.45 0.80 63.2 2.95 3.72 0.78 68.2 0.84 1.64 0.80 63.6 0.63 1.23 0.60 55.1 -0.63 2.69 3.32 72.7 0.52 1.35 0.83 56.5

–  –  –

Table 3-3 (continued) Panel B: Portfolios based on DY 01/1982-12/1993 0.76 1.79 1.03 71.9 3.62 4.90 1.28 70.0 0.98 2.03 1.05 71.8 0.90 1.10 0.20 54.5 -2.37 4.76 7.13 80.0 0.65 1.38 0.73 56.5

–  –  –

01/1982-12/2004 0.59 1.47 0.88 65.3 2.91 3.84 0.92 66.7 0.78 1.66 0.88 65.4 0.57 1.16 0.59 56.2 -1.05 2.36 3.41 61.9 0.44 1.25 0.82 56.7

–  –  –

01/1982-12/1993 2.09 0.88 1.21 67.5 6.56 3.20 3.36 72.7 2.45 1.07 1.38 67.9 1.93 1.05 0.88 61.9 5.73 1.74 3.99 72.7 2.23 1.11 1.13 62.8

–  –  –

01/1982-12/2004 1.73 0.57 1.16 67.2 5.34 3.18 2.16 72.7 2.03 0.78 1.24 67.7 1.50 0.68 0.83 58.3 3.44 0.85 2.59 68.2 1.66 0.69 0.97 59.1

–  –  –





01/1982-12/1993 2.18 0.76 1.42 74.4 6.35 3.60 2.75 70.0 2.50 0.97 1.52 74.0 2.11 0.97 1.14 66.9 5.09 2.40 2.69 70.0 2.34 1.08 1.26 67.2

–  –  –

01/1982-12/2004 1.80 0.48 1.32 71.1 5.22 3.46 1.75 71.4 2.08 0.72 1.36 71.1 1.61 0.68 0.93 59.9 3.04 1.22 1.82 66.7 1.73 0.72 1.00 60.5

–  –  –

01/1982-12/1993 2.26 1.24 1.02 61.9 5.14 4.28 0.86 54.5 2.49 1.49 1.01 61.3 1.94 1.12 0.82 54.8 5.12 2.40 2.72 72.7 2.19 1.22 0.97 56.2

–  –  –

01/1982-12/2004 1.68 0.97 0.71 56.3 5.25 2.19 3.05 63.6 1.97 1.07 0.90 56.9 1.48 0.84 0.64 54.7 4.96 1.17 3.79 72.7 1.77 0.87 0.90 56.1

–  –  –

01/1982-12/1993 2.31 1.16 1.15 61.2 5.00 4.24 0.76 50.0 2.51 1.40 1.12 60.3 2.00 0.99 1.01 58.7 5.20 1.76 3.44 70.0 2.25 1.05 1.20 59.5

–  –  –

01/1982-12/2004 1.69 0.92 0.77 57.0 5.30 2.09 3.22 61.9 1.97 1.01 0.97 57.4 1.53 0.74 0.79 56.2 5.19 0.97 4.22 76.2 1.82 0.76 1.06 57.8

–  –  –

3.4.3 Predicted and unpredicted returns across styles The empirical results in the previous section suggest that the relative style returns based on firm characteristics PC, DY, MTBV and MV may be caused by the business cycle risks or investors’ underreaction to specific asset classes. This section explores the relative importance of the predicted and unpredicted component from the business cycle model in explaining the style return premiums.

Recall that Equation (7) predicts the one-month-ahead single stock

returns. The predicted return of stock i for a given point of time t is:

–  –  –

Where ̂ is the vector of estimated coefficients obtained from a time-series recursive regression based on the 60-month rolling window that contains stocks with at least 24 months return data.

Equation (8) stands for exact pricing specification and the unpredicted return portion of Equation (7) is ̂, representing stock returns adjusted for the business cycle risk. The estimated intercept of Equation (7) is excluded from the explained portion of Equation (7).

Chordia and Shivakumar (2002) argue that this time-varying intercept may capture some of the return patterns in the formation periods and therefore could lead to control for the cross-sectional variations in average returns that are unrelated with the business cycles.

To better understand the dynamics of predicted and unpredicted stock returns around the portfolio formation point, Figure 3-3 plots the median predicted and unpredicted returns for stocks within quintiles 1, 3 and 5. The quintiles are formed the same as in Table 3-3. For brevity only styles based on formation and testing period (12, 6) are presented. For a given stock i in each month t, the model parameters are estimated using equation (7) based on the observations from months t  19 to t  1. Using the estimated coefficients, the predicted returns for that stock from time period t  18 to t  5 are recorded and the above procedures are repeated until all the stocks in that quintile are covered. If economic exogenous forces are the key factor affecting equity style returns over time, one would expect to see that the business cycle model predicts stock returns in a consistent and systematic way.

Figure 3-3 suggests that the predicted and unpredicted stock returns from the business cycle model seem to vary systematically across different quintiles. For quintiles sorted on characteristics PC and MTBV, the predicted portions are systematically lower for value stocks (Q1) than for growth stocks (Q5) around the formation period, and the unpredicted returns of value stocks appear to be systematically larger than growth stocks before and after the formation point. Such systematic patterns are strongest for size quintiles. This suggests that the macroeconomic variables are unable to capture the divergent return patters of stocks across quintiles sorted on PC, MTBV and MV.

Instead, the pricing errors, namely the business cycle risk-adjusted returns, point to the right sign of observed size and value premiums.

However, stocks sorted on equity characteristics DY seem to tell a different story. The predicted returns of value stocks in DY quintiles are always larger than growth stocks before and in the formation period, and the unpredicted returns of value stocks are smaller than growth stocks. Although the business cycle model predicts that small size value stocks of high dividend yield do not outperform in the testing period, larger size value stocks could comfortably outperform growth stocks. Moreover, consistent with the evidence of strong value premium based on realized returns of DY quintiles, business cycle risk adjusted value premiums in the testing periods are negative, indicating that the business cycle model could indeed capture the dynamics of relative stock returns across DY quintiles.

In summary, given the evidence of significant size and value premiums based on the realised stock returns, it is tempting to conclude that the relative returns for stocks in quintiles sorted on firm characteristic of PC, MTBV and MV are mainly determined by the unpredicted portions of the business cycle model, while the divergent style return for stocks sorted by characteristics of DY are captured by Equation (7). Hence value premiums based on characteristics PC and MTBV, and the size premium in the U.K. stock market are likely due to the mispricing of stock prices relative to common risk factors. But the outperformance of value stocks characterised by high DY values is likely to be driven by business cycle conditions, and therefore such value premium may be interpreted as the compensation for bearing business cycle risks.

Figure 3-3 Median predicted and unpredicted returns around formation period In each month t, all U.K. non-financial stocks are classified into 5 quintiles in ascending order based on the average previous J-month characteristics PC, DY, MTBV and MV. Each stock must have at least 24-month observations and the expected return of individual stock is estimated by Equation (7) using a set of economic pervasive variables relating to the business cycles. This Figure depicts the median predicted and unpredicted returns of quintile portfolios Q1, Q3 and Q5 for the 6-month holding period around the 12-month formation period (i.e. from t-18 to t+5 month, J = 12, K = 6). It is suggested that the unpredicted return components from the business cycle model vary systematically across quintiles based on PC, MTBV and MV, while the business cycle model captures the variations on average returns in DY quintiles.

–  –  –

0.02

-0.02

–  –  –

-0.06 0.05

-0.08

–  –  –

-0.03 0.01

-0.04 0.00

-19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5

-0.05

–  –  –

0.09 0.00 0.08 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5

-0.01 0.07

-0.02 0.06 0.05 -0.03 0.04 -0.04

–  –  –

3.4.4 Style premiums after adjusting for the predicted returns from the business cycle model Given the evidence on the profitability of simple style investing strategies, this section examines how the predicted and unpredicted returns from Equation (7) are related to the U.K. size and value premiums in more detail.

If business cycle risk is the only exogenous driving force to determine such divergent style return patterns, arguably controlling for business cycle effects could substantially reduce the return differentials across styles. Hence the hedge portfolio returns would not be significant if the predicted ability of Equation (7) is already accounted for. For this investigation, the same simple style investing strategies as described in Section 3.3.2 are implemented. However, to control for the business cycle effect impounded in stock returns, when calculating the hedge portfolio returns in the K-month testing period, the observed (realised) stock returns are replaced with the unpredicted returns (i.e. intercept plus residual) from the business cycle model. As mentioned in Section 3.4.3, the intercept of Equation (7) is not included in the predicted return part because this time-varying component may capture the cross-sectional information that is not related to the business cycle.

Table 3-5 presents the hedge portfolio returns using the predicted and unpredicted stock returns in the K-month testing period, representing style premiums after controlling for the firm-specific information and business cycle effects, respectively.



Pages:     | 1 |   ...   | 9 | 10 || 12 | 13 |   ...   | 27 |


Similar works:

«Unready, Unwilling and Ageing Ethnic Baby Boomers and their Parents Statewide Resources Centre 150 Palmerston Street, Carlton VIC 3053 T 9349 4122 F 9349 4967 ECCV Policy Discussion Paper 2009 The Ethnic Communities’ Council of Victoria (ECCV) Inc. was established in 1974 as a voluntary community based organisation. It is now a broadly based, statewide, peak advocacy body representing ethnic and multicultural communities in Victoria. ECCV's role includes supporting, consulting, liaising with...»

«James K. Polk: A Clear and Unquestionable Destiny ( Biographies in American Foreign Policy #6) Thomas M. Leonard whilst he used to be elected President in 1845, James K. Polk used to be simply forty nine years old-at that point the youngest president ever to be elected. He confronted a conflicted country at the verge of great territorial expansion. James K. Polk's 4 years in workplace marked the best interval of territorial acquisition within the heritage of the country-what big apple...»

«Financial Services Guide Why this Guide is important to you This Guide explains the financial planning services we provide, as well as giving you important information that will help you decide if you want to use any of these services. It explains who we are and:  AMP Financial Planning, the company that authorises us to provide our services  the services we provide  how we deal with a complaint if you are unhappy with our services  how we and AMP Financial Planning are paid AMP...»

«Instructions for authors, subscriptions and further details: http://rise.hipatiapress.com Students’ Mathematics Learning from Kindergarten through 8th Grade: The Long­Term Influence of School Readiness Katerina Bodovsky & Ming­Jong Youn1 1) Department of Education Policy Studies, Pennsylvania State University, United States of America. Date of publication: June 25th, 2012 To cite this article: Bodovsky, K., Youn, M. (2012). Students’ Mathematics Learning from Kindergarten through 8th...»

«SAGE INTERNATIONAL SCHOOL OF BOISE FINANCIAL MANAGEMENT POLICY Table of Contents 7000 SERIES—FINANCIAL MANAGEMENT PAGE # 7000 Goals Budget 7100 Budget and Program Planning 7110 Budget Implementations and Execution 7120 Budget Adjustments Accounting System 7200 Accounting System Design 7210 Fixed Assets and Management (GASB Statement 34) 7220 Documentation and Approval of Claims 7225 Financial Fraud and Theft Prevention 7230 Financial Reporting and Audits 7250 Records Retention 7260 Student...»

«Matthias Freise, Miikka Pyykkönen, and Eglė Vaidelytė A Panacea for all Seasons? Civil Society and Governance in Europe This introduction gives an overview of the edited volume and a preliminary answer to the overarching question. It illustrates that hopes and expectations concerning the role of civil society in modern times that are formulated by many feature writers and politicians are frequently unrealistic. Nevertheless, although civil society is definitely not a panacea for all seasons,...»

«43 Havlík, V. The 2013 Parliamentary Election in the Czech Republic The 2013 Parliamentary Election in the Czech Republic Vlastimil Havlík ∗ (havlik@fss.muni.cz) Abstract The article describes the context and the results of the 2013 early general election in the Czech Republic. The election were called a er the dissolution of the Chamber of Deputies following an alleged corruption scandal that involved the Prime Minister Nečas. The elections did not produce a clear winner, and—from a...»

«Munich Personal RePEc Archive Future of The European Union Budget: Budget Review Works Semih Bilge and Ferdi Celikay Eskisehir Osmangazi University 30 December 2007 Online at https://mpra.ub.uni-muenchen.de/42151/ MPRA Paper No. 42151, posted 27 October 2012 12:51 UTC Avrupa Birliği Bütçesinin Geleceği: Bütçe Revizyon Çalışmaları Avrupa Birliği Bütçesinin Geleceği: Bütçe Revizyon Çalışmaları Semih BİLGE* Ferdi ÇELİKAY** Özet Avrupa Birliği bütçesi, Birlik bünyesinde...»

«Report An Assessment of France’s Assertive Mideast Policy Sigurd Neubauer* 10 March 2016 Al Jazeera Centre for Studies Tel: +974-40158384 jcforstudies@aljazeera.net http://studies.aljazeera.n France has been under a state of emergency since November after attacks in Paris [AP] Abstract Even though it has been suggested that U.S. diminishing influence in the Arab world along with the rise of Iran as a regional power has enabled France to fill a vacuum by increasing its defense sales o Saudi...»

«Studies of Changing Societies: Comparative and Interdisciplinary Focus Vol. 1'(1)2012 SCS Journal INTRODUCTION INTO THE ENGLISH SCHOOL AND THE CURRENT REALITY RELATED RESEARCH TOPICS © Lin Ren, Doctor Candidate, Center for Global Politics, Free University Berlin E-Mail: linren@zedat.fu-berlin.de This paper declares the basic claims and divisions of the English School. It introduced the basic concepts, such as international system, international society and world society. Debates within the...»

«Recent Green Books in Celebration of Earth Day 2010 Boston College Libraries Nature and landscape: an introduction to environmental aesthetics/ Allen Carlson. New York: Columbia University Press, c2009. Call No: O'Neill Stacks BH301.E58 C38 2009 Climate justice: ethics, energy, and public policy/ James B. Martin-Schramm. Minneapolis: Fortress Press, c2010. Call No: O'Neill Stacks BT695.5.M374 2010 Gaia and climate change: a theology of gift events/ Anne Primavesi. London; New York:...»

«Preliminary Evaluation of the Office of the Commissioner of Financial Regulation and the Banking Board Recommendation: Full Evaluation The Sunset Review Process This evaluation was undertaken under the auspices of the Maryland Program Evaluation Act (§ 8-401 et seq. of the State Government Article), which establishes a process better known as “sunset review” because most of the agencies subject to review are also subject to termination. Since 1978, the Department of Legislative Services...»





 
<<  HOME   |    CONTACTS
2017 www.thesis.dislib.info - Online materials, documents

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.