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1 – 10 of over 8000Claudia Champagne, Aymen Karoui and Saurin Patel
The purpose of this paper is to propose a new measure of portfolio activity, the modified turnover (MT), which represents the portion of the portfolio that the manager changes…
Abstract
Purpose
The purpose of this paper is to propose a new measure of portfolio activity, the modified turnover (MT), which represents the portion of the portfolio that the manager changes from one quarter to the next. Compared with the traditional turnover, the MT measure has a distinct interpretation, relies on portfolio holdings, includes the effects of flows and ignores the effects of offsetting trades.
Design/methodology/approach
Using quarterly holdings data, the authors examine the relationship between fund turnover, performance, and flows for a sample of 2,856 actively managed mutual funds over the period 1991-2012. The authors provide numerical examples to illustrate how the suggested measure, MT, is different from the traditional turnover measure. The authors use panel regressions, simple and double sorts to examine the predictability of performance.
Findings
The authors find evidence that high MT predicts lower performance. The comparison between the highest and lowest quintiles sorted based on MT reveals a difference of −2.41 percent in the annual risk-adjusted return. Furthermore, high MT predicts lower net flows. The authors also find that MT relates positively to other activeness measures while volatility, flows, size, number of stocks, and the expense ratio are significant determinants of MT. Overall, the results suggest that frequent churning of a portfolio is value destroying for investors and signals a manager’s lack of skill.
Originality/value
The authors offer a simple measure, namely, MT, for estimating the fraction of a portfolio that changes from one quarter to the next. Armed with this tool, the authors investigate whether funds deviate from their previous quarter’s holdings because of valuable or noisy information, and whether such signals are exploited by fund investors.
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Luc Chavalle and Luis Chavez-Bedoya
This paper aims to analyze the impact of transaction costs in portfolio optimization in Peru. The study aims to compare the transaction costs structure applied in Peru with…
Abstract
Purpose
This paper aims to analyze the impact of transaction costs in portfolio optimization in Peru. The study aims to compare the transaction costs structure applied in Peru with respect to the ones applied in the USA, and over a few dimensions.
Design/methodology/approach
The paper opted for an empirical study analyzing the cost of rebalancing portfolios over a set period and dimensions. Stocks have been carefully selected using Bloomberg terminals, and portfolio designed then rebalanced using VBA programming. Over a few dimensions as type and number of stocks, holding period and trading strategy, the behavior of these different transaction costs has been compared. The analysis has been done for four different portfolios.
Findings
The paper provides empirical insights about how a retail investor actively trading in Peru can pay up to 14 times more in transaction costs than trading the same portfolio in the USA. These comparatively high transaction costs prevent retail investors to trade in the Peruvian stock market while fueling illiquidity to this market.
Research limitations/implications
The paper deals with a limited amount of Peruvian stocks. Researchers are encouraged to test the proposition further, including other dimensions.
Practical implications
The paper includes implications for any retail investor that wants to invest in Peruvian stocks, giving an insight about how expensive it is to actively rebalance a portfolio in Peru.
Originality/value
This paper fulfils an identified need to study how much it costs to actively invest on the stock market in Peru.
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Muhammad Wajid Raza, Muhammad Tahir Suleman and Adam Zaremba
Political risk is an important determinant of portfolio returns. The basic purpose of this study is to revisit the importance of political risk in a constrained portfolio, namely…
Abstract
Purpose
Political risk is an important determinant of portfolio returns. The basic purpose of this study is to revisit the importance of political risk in a constrained portfolio, namely, a Shariah-compliant equity portfolio (SCEP). Furthermore, the performance of such a constrained portfolio is also compared with a conventional portfolio that invests in all stocks.
Design/methodology/approach
The portfolios are constructed from stock-level data and invested in 61 international markets. The set of Shariah-compliant stocks is obtained with screening guidelines of Dow Jones Islamic Market indices. The weights of each constituent in both Shariah-compliant and conventional portfolios are driven by its relative exposure to political risk for the period 1996–2018.
Findings
Results show that, compared to conventional investors, Shariah-compliant investors gain substantial benefits when the allocation decision is based on political risk. A Shariah-compliant portfolio outperforms its conventional counterpart by 7.98% annually when tilted toward politically stable countries. The economic benefits further increase to 804 basis points when the portfolio allocates more funds to politically unstable countries. The tilted SCEP successfully reduces the downside risk, resulting in improved financial performance stability.
Originality/value
To the best of the authors’ knowledge, this is the first effort of its nature to highlight the importance of political risk in the context of SCEPs.
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Anurag Bhadur Singh and Priyanka Tandon
The present study tries to explore the various fund attributes that influence the mutual fund performance. Further, study examined the effect of mutual fund attributes namely, Net…
Abstract
Purpose
The present study tries to explore the various fund attributes that influence the mutual fund performance. Further, study examined the effect of mutual fund attributes namely, Net Asset Value (NAV), Portfolio turnover ratio (PTR), fund size (AUM), expense ratio (ExpR) and fund age (Age) on mutual fund's performance using gross return and risk-adjusted performance measures.
Design/methodology/approach
The study evaluated balanced panel data (short panel) comprising 81 Indian equity mutual fund schemes for the period of 2013–2019. The study estimated relationship between fund attributes (Net asset value, Portfolio turnover ratio, Fund age, fund size and Expense ratio) and fund performance (using gross return and risk-adjusted performance measures), through panel data regression using fixed-effects model as suggested by Hausman specification test on transformed data (due to high multicollinearity), with cluster-robust estimators due to the presence of heteroskedasticity in the model.
Findings
The findings of the study suggested that using gross return as fund performance measure, PTR, NAV, AUM, Age exhibit significant relationship with the fund performance whereas using risk-adjusted performance measures (Treynor ratio and Jensen alpha) NAV and ExpR significantly influences the fund performance. Identification of the significant relationship between fund characteristics and fund performance offers valuable insights to the investors and fund managers for rationally managing their portfolio with the ultimate objective of the wealth maximization.
Research limitations/implications
The study considered only 81 equity mutual fund schemes. Some of the data were not available at the time of the study due to the policy of the company. The present study contributes significantly in examining the expected association between fund attributes and fund performance in the context of Indian mutual fund industry where this relationship were explored less.
Practical implications
The findings of the present study will help the investors to take the rational investment decision with the ultimate objective of maximum return with minimal risk. The findings also offer significant germane to the stakeholders in making rational decision-making process.
Originality/value
There is dearth of study concerning the relationship between mutual fund characteristics and fund performance with respect to Indian mutual fund industry. Therefore, study provides valuable insights to the area of the portfolio selection and management with respect to Indian mutual funds.
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Mohammad Tariqul Islam Khan, Siow-Hooi Tan and Lee-Lee Chong
The purpose of this paper is to test the competing explanations of stated preferences for firm characteristics, optimism and overconfidence for trading activities in a single…
Abstract
Purpose
The purpose of this paper is to test the competing explanations of stated preferences for firm characteristics, optimism and overconfidence for trading activities in a single framework.
Design/methodology/approach
A survey methodology is followed to collect the data among retail investors in Malaysia using simple random sampling.
Findings
The findings show simultaneous identification of stated preferences for firm characteristics, optimism and overconfidence as determinants of trading activities. Preferences for firm’s profitability characteristics, management and product-related attributes and risky characteristics are likely to decrease investors’ trading activities. On the other hand, preferences for firm’s liquidity and trading volume characteristics with relative financial-domain optimism, personal investment optimism and better-than-average aspect of overconfidence are likely to increase investors’ trading activities.
Practical implications
This finding implies that investors should be careful not only in assessing firm’s characteristics but also need to understand the effects of optimism and overconfidence in trading decisions.
Originality/value
The study considers various aspects of optimism and overconfidence, and the stated preferences for firm characteristics, unlike one aspect of these behavioral biases and indirect observation of preferences for firm characteristics. Furthermore, the study considers trading frequency, annual portfolio turnover and trading intention, whereas earlier studies considered only one or two of these trading decisions.
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John R. Nofsinger and Abhishek Varma
The purpose of this paper is to explore some commonly held beliefs about individuals investing in over-the-counter (OTC) stocks (those traded on Over-the-counter Bulletin Board…
Abstract
Purpose
The purpose of this paper is to explore some commonly held beliefs about individuals investing in over-the-counter (OTC) stocks (those traded on Over-the-counter Bulletin Board (OTCBB) and Pink Sheets), a fairly pervasive activity. The authors frame the analysis within the context of direct gambling, aspirational preferences in behavioral portfolios, and private information.
Design/methodology/approach
Contrary to popular perceptions, the modeling of the deliberate act of buying OTC stocks at a discount brokerage house finds that unlike the typical lottery buyers/gamblers, OTC investors are older, wealthier, more experienced at investing, and display greater portfolio diversification than their non-OTC investing counterparts.
Findings
Behavioral portfolio investors (Shefrin and Statman, 2000) invest their money in layers, each of which corresponds to an aspiration or goal. Consistent with sensation seeking and aspirations in behavioral portfolios, OTC investors also display higher trading activity. Penny stocks seem to have different characteristics and trading behavior than other OTC stocks priced over one dollar. Irrespective of the price of OTC stocks, the authors find little evidence of information content in OTC trades.
Originality/value
The paper provides insight into individual investor decision making by empirically exploring the demographic and portfolio characteristics of individuals trading in OTC stocks.
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William Beaver, Maureen McNichols and Richard Price
We highlight key assumptions implicit in the models used by academics conducting research on market efficiency. Most notably, many academics assume that investors can borrow…
Abstract
We highlight key assumptions implicit in the models used by academics conducting research on market efficiency. Most notably, many academics assume that investors can borrow unlimited amounts and construct long-short portfolios at zero cost. We relax these assumptions and examine the attractiveness of long-short strategies as stand-alone investments and as a part of a diversified portfolio. Our analysis illustrates that the key benefit of long-short investing is adding diversification to a portfolio beyond what the market provides. We show that as stand-alone investments, nontrivial risk remains in the “hedge” strategies and that the returns generally do not beat the market in a head-to-head contest. Our findings raise questions about the degree of inefficiency in anomaly studies because plausible measures of costs generally offset strategy returns. The ability to achieve greater diversification may be, but is not necessarily, due to market inefficiency. We also highlight the key role of the generally ignored but critically important short interest rebate and show that absent this rebate, the long-short strategies we examine generally yield insignificant returns.
Daniel Pereira Alves de Abreu and Robert Aldo Iquiapaza
The aim of the study was to analyze the performance of Black-Litterman (BL) portfolios using a views estimation procedure that simulates investor forecasts based on technical…
Abstract
Purpose
The aim of the study was to analyze the performance of Black-Litterman (BL) portfolios using a views estimation procedure that simulates investor forecasts based on technical analysis.
Design/methodology/approach
Ibovespa, S&P500, Bitcoin and interbank deposit rate (IDR) indexes were respectively considered proxies for the national, international, cryptocurrency and fixed income stock markets. Forecasts were made out of the sample aiming at incorporating them in the BL model, using several portfolio weighting methods from June 13, 2013 to August 30, 2022.
Findings
The Sharpe, Treynor and Omega ratios point out that the proposed model, considering only variable return assets, generates portfolios with performances superior to their traditionally calculated counterparts, with emphasis on the risk parity portfolio. Nonetheless, the inclusion of the IDR leads to performance losses, especially in scenarios with lower risk tolerance. And finally, given the impact of turnover, the naive portfolio was also detected as a viable alternative.
Practical implications
The results obtained can contribute to improve investors practices, specifically by validating both the performance improvement – when including foreign assets and cryptocurrencies –, and the application of the BL model for asset pricing.
Originality/value
The main contributions of the study are: performance analysis incorporating cryptocurrencies and international assets in an uncertain recent period; the use of a methodology to compute the views simulating the behavior of managers using technical analysis; and comparing the performance of portfolio management strategies based on the BL model, taking into account different levels of risk and uncertainty.
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Sanjay Sehgal, Asheesh Pandey and Swapna Sen
In the present study, we investigate whether enhanced momentum strategies outperform price momentum strategies and if they show greater resilience and stability under adverse…
Abstract
Purpose
In the present study, we investigate whether enhanced momentum strategies outperform price momentum strategies and if they show greater resilience and stability under adverse market conditions. We also examine if such strategies are explained by prominent asset pricing models or are a result of behavioral mispricing.
Design/methodology/approach
Data consist of the equity shares of all companies listed on National Stock Exchange over the study period. To check the efficacy of enhanced momentum over price momentum, six momentum strategies have been designed and their raw as well as risk-adjusted returns using multi-factor models have been observed. Behavioral mispricing has been examined by constructing an investor attention index. Finally, few robustness tests have been performed to confirm the results.
Findings
We find that an enhanced momentum strategy which combines relative and absolute strength momentum outperforms conventional price momentum strategy in India. We also demonstrate that rational pricing models are not able to explain momentum profits for any of the strategies. Finally, we observe that investor overreaction is the possible explanation of momentum profits in India. Thus, our results confirm the role of behavioral mispricing in explaining momentum returns.
Originality/value
Our research is the first major attempt to study enhanced momentum strategies in the Indian context. We experiment with several new enhanced momentum strategies which have not been explored in prior literature. The findings have strong implications for global portfolio managers who wish to design profitable trading strategies.
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Antonio Cornelius Malfense Fierro, David Noble, Omaima Hatem and Waswa Balunywa
The purpose of this paper is to focus on large-scale portfolio entrepreneurship and its impact on the creation of stable wage employment in African economies.
Abstract
Purpose
The purpose of this paper is to focus on large-scale portfolio entrepreneurship and its impact on the creation of stable wage employment in African economies.
Design/methodology/approach
The three studies focussed on Egypt, Uganda, and Malawi were all exploratory, inductive, and qualitative studies, which involved semi-structured interviews with 65 entrepreneurial founders of some of these countries’ most prominent business portfolios between 2009 and 2012. The data were collected through face-to-face interviews, which lasted between one and four hours, with the founders of each of these portfolios.
Findings
This inductive and qualitative study finds a connection between the creation of stable wage-paying jobs and portfolio entrepreneurship in three countries, representing three of the four different archetypal African economies. It also finds a strong connection between the development of new industries and portfolio entrepreneurship.
Practical implications
The practical and societal implications of these findings are incredibly important. The current and looming shortage of stable wage employment in Africa is reaching calamitous proportions. The growth in religion-affiliated terrorism and high-risk economic migration to Europe can be directly related to the lack of employment opportunities in African nations. The findings indicate that portfolio entrepreneurs are major players in the creation of such employment opportunities and government policies focussing on this area, as compared to focussing solely on SMEs, may be more effective in mitigating some of the drivers for emigration and terrorism.
Originality/value
This is the only study of its kind that investigates the role of large-scale portfolio entrepreneurship in the growth of employment opportunities in Africa.
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