Investment styles and the multifactor analysis of market timing skill

2017 ◽  
Vol 13 (1) ◽  
pp. 21-35
Author(s):  
Jarkko Peltomäki
Keyword(s):  
Factor Model ◽  
Market Timing ◽  
Investment Strategy ◽  
Investment Strategies ◽  
Analysis Model ◽  
Content Type ◽  
Multifactor Models ◽  
Multifactor Model ◽  
Investment Style ◽  
Investment Styles

Purpose The purpose of this paper is to present and demonstrate how the use of a multifactor model in the analysis of market timing skill can be misleading because the use of a multifactor model does not suit all investment styles equally well. If the factors of the analysis model do not span the portfolio holdings of a fund with less conventional investment strategy, the use of a multifactor model may even deteriorate the overall inference in measuring the market timing skill of a large sample of funds. Design/methodology/approach This study investigates the limitations of multifactor models in the analysis of market timing skill by applying the traditional Treynor-Mazuy and Henriksson-Merton analysis models of market timing skill using a set of “placebo” funds which are “natural” passive market timers. Findings The results of the study show that the incorporation of the Carhart four-factor model into the analysis of market timing skill considerably reduces the percentage of significant market timing results. But, as expected, the reduction of bias is not equal for different investment styles, and it works best when the factors of the analysis model are related to the investment style of the placebo portfolio. Practical implications This style-related limitation of multifactor models in the analysis of market timing skill may result in detecting funds with less conventional investment strategies as market timers since the factors used in the analysis are not likely to span their investment styles. Originality/value This study shows that the use of a multifactor model may lead to inferring passive market timers with less conventional investment styles as market timers. In addition, the findings of the study leave option replication approaches as more preferable bias corrections than multifactor extensions.

Overreaction evidence from large-cap stocks

2014 ◽  
Vol 13 (4) ◽  
pp. 310-325 ◽  
Author(s):  
Tibebe Abebe Assefa ◽  
Omar A. Esqueda ◽  
Emilios C. Galariotis
Keyword(s):  
Stock Returns ◽  
Factor Model ◽  
Investment Strategy ◽  
Past Performance ◽  
Content Type ◽  
Multifactor Models ◽  
Contrarian Strategy ◽  
Fama And French ◽  
Investment Portfolios ◽  
Three Factor

Purpose – The purpose of this paper is to assess the performance of a contrarian investment strategy focusing on frequently traded large-cap US stocks. Previous criticisms that losers’ gains are not due to overreaction but due to their tendency to be thinly traded and smaller-sized firms than winners are addressed. Design/methodology/approach – Portfolios based on past performance are constructed and it is examined whether contrarian returns exist. The Capital Asset Pricing Model (CAPM), Fama and French three-factor model and the Carhart’s (1997) momentum portfolio are used to test whether excess returns are feasible in a contrarian strategy. Findings – The results show an asymmetric performance following portfolio formation. Although both, winners and losers portfolios, have gains during holding periods, losers outperform winners at all times, and with a differential of up to 29.2 per cent 36 months after portfolio formation. Furthermore, the loser and the winner portfolios’ alphas are significant, suggesting that the CAPM and the multifactor models are unable to explain return differentials between winners and losers. Our evidence supports two main conclusions. First, stock market overreaction still holds for a sample of large firms. Second, this is robust to the Fama and French’s (1993, 1996) three-factor model and Carhart’s (1997) momentum portfolio. Findings emphasize the relevance of a contrarian strategy when rebalancing investment portfolios. Practical implications – Portfolio managers can improve stock returns by selling past winners and buying previous loser large-cap US stocks. Originality/value – This paper is the first, to the authors’ knowledge, to examine frequently traded large-cap US stocks to avoid infrequent trading and size concerns.

scholarly journals Profitability of Style based Investment Strategies: Evidence from India

2017 ◽  
Vol 9 (2) ◽  
pp. 1 ◽  
Author(s):  
Srividya Subramaniam ◽  
Gagan Sharma ◽  
Srishti Sehgal
Keyword(s):  
Factor Model ◽  
Explanatory Power ◽  
Investment Strategy ◽  
Investment Strategies ◽  
Price Momentum ◽  
Portfolio Managers ◽  
Earnings Momentum ◽  
Fama And French ◽  
Investment Styles ◽  
Three Factor

In this paper, we aim to identify profitable investment styles on the Indian stock market by using various combinations of important stock pricing anomalies consisting of. size, value, volume, profitability, earnings surprises, short term and long term prior returns. Using NSE200 stocks, three different investment styles viz. univariate, independent bivariate and conditional bivariate are constructed for the period July 2005-June 2016.Results show that on an absolute return basis, bivariate strategies do not seem to outperform univariate strategies. The unifactor CAPM is able to absorb 42% of the returns owing to the explanatory power of beta. After adjusting for risk using the three factor Fama and French (1993) model, 42% of the alphas are explained. However, additional risk factors from the Carhart (1997) model and Fama and French (2015) model do not provide any incremental explanatory power over the three factor model, recommending the use of the latter as a baseline to evaluate investment strategies in India. The highest supernormal returns of 1.1% per month are obtained from combining attributes and employing the conditional bivariate investment strategy viz.E2L1 (earnings momentum-Liquidity), M2S1 (price momentum-size), E2M3 (earnings momentum-price momentum). The findings are pertinent to portfolio managers, financial regulators and other stakeholders.

scholarly journals Risk and Performance of European Green and Conventional Funds

2021 ◽  
Vol 13 (8) ◽  
pp. 4226
Author(s):  
Tiago Gonçalves ◽  
Diego Pimentel ◽  
Cristina Gaio
Keyword(s):  
Business Cycle ◽  
Mutual Funds ◽  
Factor Model ◽  
World Market ◽  
The European Union ◽  
Single Factor ◽  
Multifactor Models ◽  
Multifactor Model ◽  
Negative Results ◽  
The Business Cycle

This paper analyzes how the risk-adjusted returns of green funds compare to those of conventional funds, between the years 2005 and 2020 for the European Union countries. Additionally, we tested how the performance of green funds correlates to the business cycle, subdividing their performance through expansionary and recessionary times. The findings are summarized as follows: our regression results demonstrated green and conventional funds exhibiting negative abnormal adjusted-returns against the developed world market benchmark for the single-factor and multifactor models. For the European market benchmark, we found environmental mutual funds presenting a positive performance for both models and conventional funds displaying negative results for the single-factor model and positive results for the multifactor model. The factor loadings for green funds indicated a negative load on momentum, book-to-market (HML) and size (SMB) factors, revealing a higher exposure to big and value companies. Subsampling per business cycle exhibited green mutual funds providing higher risk-adjusted returns to investors during crisis periods and mixed results for the non-crisis periods.

The profitability of herding: evidence from Taiwan

2018 ◽  
Vol 44 (7) ◽  
pp. 919-934 ◽  
Author(s):  
Chun-Da Chen ◽  
Riza Demirer
Keyword(s):  
Design Methodology ◽  
State Space Model ◽  
Investment Strategy ◽  
Investment Strategies ◽  
Past Performance ◽  
Absolute Deviation ◽  
Cross Sectional ◽  
Content Type ◽  
Space Model ◽  
High Level

Purpose The purpose of this paper is to show that the level of herding in an industry can be the basis for a profitable investment strategy. Design/methodology/approach The authors apply three different herding measures in the paper, including cross-sectional standard deviation, cross-sectional absolute deviation and non-linear model – state–space model. Findings The authors find that industries that experience a high level of herding yield higher subsequent returns regardless of their past performance. Consequently, the authors show that a herding-based investment strategy generates significant profits, even after adjusting for risk. The findings also show that the herding effect when combined with past performance as part of a conditional investment strategy yields significant profits regardless of the formation and holding periods. The findings suggest that the level of herding could serve as a systematic driver of returns and could be exploited for profitable investment strategies. Originality/value To the best of authors’ knowledge, this is the first study in the literature to show that herding by itself can serve as a determinant of returns regardless of past performance.

scholarly journals Sustainable Development Goals and Investment Strategies: The Profitability of Using Five-Factor Fama-French Alphas

2020 ◽  
Vol 12 (5) ◽  
pp. 1842 ◽  
Author(s):  
José Luis Miralles-Quirós ◽  
María Mar Miralles-Quirós ◽  
José Manuel Nogueira
Keyword(s):  
Sustainable Development ◽  
Sustainable Development Goals ◽  
Factor Model ◽  
Five Factor Model ◽  
Well Being ◽  
Good Health ◽  
Investment Strategy ◽  
Investment Strategies ◽  
Responsible Investment ◽  
Development Goals

This study focuses on assets related to Sustainable Development Goals (SDGs), which are the most recent aspect of the Socially Responsible Investment framework and have caught the attention of investors due to their investment opportunities as well as the global challenges that can be achieved. The profitability of developing an investment strategy is shown based on the value of the alphas obtained from the estimation of the Fama-French five-factor model when compared to an equally weighted portfolio, even when transaction costs are taken into consideration. In addition, it is proven that investors should focus their investments on two main SDGs: Good health and well-being (Goal 3) and Industry, innovation and infrastructure (Goal 9).

scholarly journals Mutual Fund Performance: Evidence from India

2019 ◽  
Vol 8 (4) ◽  
pp. 11714-11723
Keyword(s):  
Portfolio Management ◽  
Mutual Fund ◽  
Market Timing ◽  
Investment Strategy ◽  
Fund Performance ◽  
Mutual Fund Performance ◽  
Stock Selection ◽  
Multifactor Models ◽  
Fund Managers ◽  
Timing Ability

We empirically examine fund managers’ stock selection and market timing ability using various risk-adjusted measures such as CAPM and multifactor models of FamaFrench (1993) and Carhart (1997) to gauge mutual fund performance in India. The sample consists of 183 actively managed equity-oriented funds and covers the period from April 2000 to March 2018. The study, on the whole, documents some evidence of positive and significant stock selection ability but fails to yield any notable evidence of market timing ability of fund managers. Our results are robust according to various riskadjusted performance evaluation techniques, sub-period analysis, excluding the crisis period and at the individual fund level. The findings of our study are in line with the previous studies that report limited selectivity skill and market timing ability among fund managers. The main implication of the study is that active portfolio management may not be very rewarding in comparison to a passive investment strategy.

Do mutual fund managers' possess style liquidity timing abilities?

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mahfooz Alam ◽  
Valeed Ahmad Ansari
Keyword(s):  
Mutual Fund ◽  
Factor Model ◽  
Market Timing ◽  
Market Liquidity ◽  
Content Type ◽  
Fund Managers ◽  
Indian Context ◽  
Equity Mutual Funds ◽  
Equity Funds ◽  
Style Timing

PurposeThis paper investigates the style timing and liquidity style timing vis-à-vis the market, size, value and momentum factors of the actively managed Indian equity mutual funds.Design/methodology/approachWe examine the style timing of the funds using the augmented Carhart four-factor model by incorporating timing measures (Treynor and Mazuy; Henriksson and Merton). Based on this, the study explores the four-factor liquidity and volatility style timing exhibited by fund managers. The sample is from April 2000 to March 2018 and spans the volatile 2008 subprime economic crises. The sample comprised 182 actively managed equity funds from various sizes and was considered to be a well-diversified sample.FindingsThe results of our study provide strong evidence of market liquidity timing in India. No other style timing skills are observed in our analysis. Our results also imply that the fund managers might misidentify size timing as market timing if integrated liquidity timing measures are not employed, leading to false conclusions.Research limitations/implicationsThe findings of our study imply that the fund managers might misidentify size timing as market timing if integrated liquidity timing measures are not employed, leading to false conclusions.Originality/valueThis study, to our knowledge, is the first attempt to investigate the portfolio-based style timing in the Indian context.

scholarly journals Performance evaluation of the Turkish pension fund system

2019 ◽  
Vol 3 (1) ◽  
pp. 18-33
Author(s):  
Tolga Umut Kuzubas ◽  
Burak Saltoğlu ◽  
Ayberk Sert ◽  
Ayhan Yüksel
Keyword(s):  
Performance Evaluation ◽  
Pension Fund ◽  
Pension System ◽  
Factor Model ◽  
Market Timing ◽  
Excess Returns ◽  
Content Type ◽  
Timing Ability ◽  
Depth Analysis ◽  
Asset Class

Purpose The purpose of this paper is to provide an in-depth performance evaluation of funds offered by the Turkish pension system. Design/methodology/approach This paper compares aggregate fund index returns with the corresponding asset class returns, estimates a factor model to decompose excess returns to factor exposures, i.e., β return and excess return originating from residual α and analyzes persistence of fund returns using migration tables and Fama–MacBeth regressions and tests for market timing ability. Findings Majority of pension funds are unable to generate excess returns. Majority of funds are unable to generate a positive α and fund returns are predominantly driven factor exposures. There is evidence for slight persistence in returns, mainly due to factor exposures and funds do not exhibit market timing ability. Originality/value In this paper, the authors perform an in-depth analysis of pension fund performance for the Turkish pension fund system. The authors identify weaknesses and strengths of the pension fund industry and provide policy recommendations for a better design of pension fund system.

Determinants of divestiture methods for US firms: asset sell-off versus equity carve-out

2018 ◽  
Vol 17 (1) ◽  
pp. 41-57 ◽  
Author(s):  
Dung Pham ◽  
Thanh Nguyen ◽  
Hari Adhikari
Keyword(s):  
Service Industry ◽  
Market Timing ◽  
Investment Strategies ◽  
Content Type ◽  
Public Firms ◽  
Market Values ◽  
Long Run ◽  
Cash Payment ◽  
Wide Range ◽  
The Us

Purpose The purpose of this paper is to examine two different choices of corporate divestiture for US firms: selling off assets to public firms or issuing stocks in equity carve-outs. The authors identify industry-related, firm-specific, deal-related and market-timing factors that influence the choice between the two methods of divestiture. Design/methodology/approach The authors use the univariate tests, logistic regressions and buy-and-hold excess return computations to identify industry-related, firm-specific, deal-related and market-timing factors that influence the choice between the two methods of divestiture. Findings The results show that industry concentration, relative “hotness” of the equity carve-out market, market values of divested units and firm’s growth opportunities are all positively related to the probability of an equity carve-out selection. In contrast, firms in financial service industry, firms that divest smaller units and firms with higher asymmetric information mainly choose to divest assets through asset sell-offs. The findings also indicate that firms with higher leverage and/or higher cash flow constraint show a stronger likelihood for choosing either the equity carve-out option or asset sell-off with cash payment over asset sell-off with stock payment. In the long run, firms that sell-off their assets experienced better performance relative to firms that choose to carve-out. Research limitations/implications The authors recognize several limitations of this study. First, the findings use the data collected in the US market. These findings may not be necessarily true to non-US firms. Therefore, one possible extension of this paper is to further examine the determinants that drive the methods of divestiture for non-US firms. Second, the authors have not examined the association between the choices of divestiture and the subsequent long-term operating performance of the firms. This could be another interesting direction for research in the future. Practical implications The findings have some implication for the divestiture literature by providing a set of determinants which play important roles on firms’ choice between an asset sell-off and an equity carve-out. The findings also have important implications for a potential acquirer who is interested in buying a firm’s subsidiary. Specifically, by analyzing the aforementioned influencing factors, the acquirer might foresee the possibility of a carve-out method and plan its bidding offer accordingly. From investors’ perspective, knowing which factors affect firms’ divesting methods and their subsequent long-run stock performance is undoubtedly beneficial to their investment strategies. Originality/value Prior research has attempted to address the reasons why firms divest or the outcomes of those actions. This paper focuses on the factors that influence the choice of sell-off versus carve-out once the decision to divest has been made. In addition, the authors look at a wide range of factors including industry-related, firm-specific, deal-related and market timing.

One piece does not a puzzle make: the first-mover decision as one piece on the foreign investment strategy puzzle

2014 ◽  
Vol 8 (3) ◽  
pp. 193-208
Author(s):  
Bradley J. Koch
Keyword(s):  
Foreign Investment ◽  
Empirical Studies ◽  
Investment Strategy ◽  
Strategic Decision ◽  
Investment Strategies ◽  
Strategic Decisions ◽  
Content Type ◽  
First Mover Advantage ◽  
First Mover ◽  
Better Than

Purpose – The purpose of this paper is to analyze the first-mover decision as one decision of a set of strategic decisions that ultimately determine performance. Design/methodology/approach – The author used survey data collected from foreign-invested firms in Sichuan, China, to test for evidence that first-movers perform better than late-movers. Findings – The results reveal that there is a first-mover advantage when the other strategic variables are not included in the model. When the entire set of strategic variables is included, however, the first mover variable loses its significance and the willingness of the foreign partner to commit additional resources becomes the best predictor of performance. Consequently, it was argued that foreign investment strategies should be analyzed as a set of strategic decisions managers make to formulate the best mix. Originality/value – The empirical evidence for the first-mover advantage may not be as well grounded as many have thought. When the first-mover strategic decision is analyzed in isolation from other strategic variables, which is commonly done in many empirical studies, it indicates that firms that enter China before their competitors perform better. Unfortunately, it is more logical to assume that managers dynamically develop a set of strategic decisions that ultimately determine the firm’s performance. To extrapolate one static decision from the strategic decision set and make broad assertions about its effect of performance is an over-simplification of the strategic decision process.

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