Knowledge that Transforms

This paper argues that inferring long-horizon asset-return predictability from the properties of vector autoregressive (VAR) models on relatively short spans of data is potentially unreliable.We illustrate the problems that can arise by re-examining the findings of Bekaert and Hodrick (1992), who detected evidence of in-sample predictability in international equity and foreign exchange markets using VAR methodology for a variety of countries over the period 1981-1989.The VAR predictions are significantly biased in most out-of-sample forecasts and are conclusively outperformed by a simple benchmark model at horizons of up to six months.This remains true even after corrections for small sample bias and the introduction of Bayesian parameter restrictions.A Monte Carlo analysis indicates that the data are unlikely to have been generated by a stable VAR.This conclusion is supported by an examination of structural break statistics.Implied long-horizon statistics calculated from the VAR parameter estimates are shown to be very unreliable.

Jin-Wan Cho, Murugappa Krishnan, Prices as Aggregators of Private Information: Evidence from S&P 500 Futures Data, The Journal of Financial and Quantitative Analysis, Vol. 35, No. 1 (Mar., 2000), pp. 111-126

Christian S. Pedersen, Stephen E. Satchell, Small Sample Analysis of Performance Measures in the Asymmetric Response Model, The Journal of Financial and Quantitative Analysis, Vol. 35, No. 3 (Sep., 2000), pp. 425-450

The investment advice encapsulated in the Value Line Investment Survey's timeliness rankings is evaluated from 1965 to 1996 through time-series factor regressions, as well as by comparing recommendations to benchmark portfolios corresponding to their size, book-to-market, and momentum characteristics. In addition, recommendations that have experienced recent earnings surprises are purged to eliminate the effects of post-earnings announcement drift. There is evidence that Value Line recommendations exhibit performance beyond what is predicted by existing models of expected return. However, once transactions costs have been accounted for, it is doubtful profitable abnormal returns could have been realized.

This paper studies the relation between fund performance and fund attributes in the Swedish market. Performance is measured as the alpha in a linear regression of fund returns on several benchmark assets, allowing for time-varying betas. The estimated performance is then used in a cross-sectional analysis of the relation between performance and fund attributes such as past performance, flows, size, turnover, and proxies for expenses and trading activity. The results show, among other things, that good performance is to be found among small equity funds, low-fee funds, funds whose trading activity is high, and in some cases, funds with good past performance.

Scott Gibson, Assem Safieddine, Sheridan Titman, Tax-Motivated Trading and Price Pressure: An Analysis of Mutual Fund Holdings, The Journal of Financial and Quantitative Analysis, Vol. 35, No. 3 (Sep., 2000), pp. 369-386

Turan G. Bali, Testing the Empirical Performance of Stochastic Volatility Models of the Short-Term Interest Rate, The Journal of Financial and Quantitative Analysis, Vol. 35, No. 2 (Jun., 2000), pp. 191-215

We examine the impact of merger announcements on portfolios of acquiring firm and target firm common stock from 1919 to 1930. Despite vast changes in the economic and regulatory environment, overall acquisition profitability has remained remarkably constant over the last 70 to 80 years. Target firm shareholders in the 1920s clearly gained from takeovers, averaging abnormal returns in excess of 15%, while acquiring firm shareholders essentially broke even. Synergistic or monopolistic gains from consolidation were minimal. Unlike the more recent experience, target firm and acquiring firm abnormal returns were largely unaffected by the mode of acquisition, the means of financing, or the degree of industrial relatedness.

We analyze the dividend behavior of the aggregate stock market. We propose a model that assumes managers minimize the costs of adjustment associated with being away from their target dividend payout. The target is expressed as a function of lagged stock prices and permanent earnings, generalizing previous models of dividend behavior. We present a new method for measuring unobserved permanent earnings based on the Kalman filter. Our specification of dividend behavior is strongly supported by the data both relative to alternative models and over time. We find significant evidence of dividend smoothing and dividends conveying information regarding unexpected positive changes in current permanent earnings. We also find that both the speed of adjustment of dividends to target dividends and tests of signaling are sensitive to the specification of the model.

We distinguish between horizontal and vertical joint ventures, and find correspondingly different valuation effects. Horizontal joint ventures create synergistic gains that are shared by the partners. In contrast, vertical joint ventures generate gains only for suppliers. This is similar to the patter we find for simple contracts, which suggests economic similiarities between vertical joint ventures and contracts. Analysing firms' choices between these contracting options, we find that firms choose vertical joint ventures over simple contracts when potential hold-up problems are severe and when suppliers face finance constraints. The results d not support a risk-sharing motive for joint ventures.