Benjamin Auer

Liquid Betting against Beta in Dow Jones Industrial Average Stocks

The authors considered liquidity and transaction costs in the practical implementation of betting against beta (BAB) strategies. Using the 30 highly liquid stocks of the Dow Jones Industrial Average over 1926–2013, they analyzed whether the beta anomaly exists and, if so, whether it can be exploited within that universe. With respect to its existence, they found strong evidence of an inverse risk–return relationship. With respect to its exploitability, they found that pure BAB trading portfolios and mixed portfolios (combinations of the pure portfolios and the S&P 500 Index) generate significant abnormal returns that cannot be explained by standard asset-pricing factors. Their results hold both before and after transaction costs and are robust in various settings. The beta anomaly can be considered a persistent anomaly in finance because it has been documented worldwide and is based on solid theory. A recent study, however, argues that the trading efficacy of betting against beta (BAB) strategies may be limited because of illiquidity barriers. To investigate this issue, we explicitly considered liquidity and the role of transaction costs in the practical implementation of BAB strategies. Using the 30 highly liquid stocks of the Dow Jones Industrial Average over 1926–2013, we analyzed whether the anomaly exists and, if so, whether it can be exploited within that universe. With regard to its existence, we found strong evidence of an inverse risk–return relationship. Our results concerning its exploitability reveal that BAB trading portfolios generate significant abnormal returns that cannot be explained by the standard asset-pricing factors of size, book-to-market, and momentum. For example, a portfolio that is long in the 15 stocks with the lowest betas and short in the 15 stocks with the highest betas has historically had a monthly Sharpe ratio of 0.086 after transaction costs. Also, combining this portfolio with the S&P 500 Index increases the monthly Sharpe ratio from 0.089 (for the S&P 500 alone) to 0.146 (for the optimal mix) after transaction costs. Editor’s note: The authors may have a commercial interest in the topics discussed in this article. Editor’s note: This article was reviewed and accepted by Executive Editor Robert Litterman.

Sufficient conditions under which SSD- and MR-efficient sets are identical

Three approaches are commonly used for analyzing decisions under uncertainty: expected utility (EU), second-degree stochastic dominance (SSD), and mean-risk (MR) models, with the mean–standard deviation (MS) being the best-known MR model. Because MR models generally lead to different efficient sets and thus are a continuing source of controversy, the specific concern of this article is not to suggest another MR model. Instead, we show that the SSD- and MR-efficient sets are identical, as long as (a) the risk measure satisfies both positive homogeneity and consistency with respect to the Rothschild and Stiglitz (1970) definition(s) of increasing risk and (b) the choice set includes the riskless asset and satisfies a generalized location and scale property, which can be interpreted as a market model. Under these conditions, there is no controversy among MR models and they all have a decision-theoretic foundation. They also offer a convenient way to compare the estimation error related to the empirical implementation of different MR models.

Superstitious seasonality in precious metals markets? Evidence from GARCH models with time-varying skewness and kurtosis

In this article, we analyse whether the Friday the 13th effect documented by Kolb and Rodriguez (1987) can be observed in precious metals markets. Specifically, we use dummy-augmented GARCH models to investigate the impact of this specific calendar day on the conditional means of gold, silver, palladium and platinum returns. The specification of the GARCH model follows a flexible class recently proposed by León et al. (2005) that incorporates time-varying skewness and kurtosis by applying a Gram–Charlier series expansion of the normal density function. Our results for the period from July 1996 to August 2013 provide three important insights. First, there is no evidence that human superstition regarding bad luck Fridays affects precious metals markets in a negative way, i.e. returns on Fridays the 13th are not significantly lower than on regular Fridays. Second, besides showing robustness in a variety of settings, we can confirm this main result in a sensitivity check, where we replace the dummy variables by a new measure of investor attention, recently promoted by Da et al. (2011), that is based on Google search volumes. Third, as an important by-product of our study, we can show that there is significant evidence of time-varying skewness and kurtosis in precious metals returns.

Does the financial crisis influence the random walk behaviour of international stock markets

In this note, we use several modern multiple variance ratio tests (VR tests) to investigate whether the financial crisis has an impact on the random walk behaviour of international stock markets. Grouping a pre-crisis- and a crisis-panel in developed, emerging and frontier markets, respectively, and using daily returns of selected Morgan Stanley Capital International (MSCI) International Equity Indices we find that markets classified as developed or emerging mostly follow a random walk whereas we find the opposite for frontier markets. Frontier markets show a higher proportion of countries that experience changes in the random walk behaviour and changes from random walk to nonrandom walk are more frequent. We also find that the choice of multiple VR test does not matter for this kind of analysis.

ON THE ROLE OF SKEWNESS, KURTOSIS, AND THE LOCATION AND SCALE CONDITION IN A SHARPE RATIO PERFORMANCE EVALUATION SETTING

In recent years, researchers and practitioners have invested considerable effort in the development of new investment fund performance measures that account for mean, variance and the higher moments of the return distribution. To justify the application and necessity of the new performance measures in decision-making, some authors argue that the theoretical conditions required to use the Sharpe ratio are violated by high skewness and kurtosis in empirical asset return data. In this note, we highlight that high levels of skewness and kurtosis and even cross-sectional variations in skewness and kurtosis do not allow a decision-theoretic rejection of the Sharpe ratio. However, we also point out that while it is hard to discard the measure on decision-theoretic grounds, it can be challenged on technical grounds because it has several undesirable properties.

Extreme Value Theory, Asset Ranking and Threshold Choice: A Practical Note on VAR Estimation

We analyze asset rankings derived from state-of-the-art peak-over-threshold (POT) approaches to estimate value-at-risk (VaR). Supported by a variety of robustness checks, we gain three important insights for portfolio managers investing in equity and commodity markets. First, even though POT methods are known to yield more precise VaR estimates than classic techniques based on the normal distribution assumption or historical simulation, all techniques yield almost identical rankings. Second, even though the choice of threshold crucially influences VaR estimates, it does not significantly change asset rankings. These two results are most pronounced when the portfolio managers focus is on identifying the best or worst assets in terms of VaR. Third, unconditional and conditional POT approaches differ considerably in the rankings they generate. Thus, neglecting the non-independent-and-identically-distributed property of returns can lead to distinctly different decisions in a risk-based asset selection process.

Can consumption-based asset pricing models explain the cross-section of investment funds returns?

Using the parametric Generalized Method of Moments (GMM) methodology of Hansen (1982) and the nonparametric approach of Hansen and Jagannathan (1991), this note investigates the ability of Consumption-based Asset Pricing Models (CCAPMs) to explain the cross-section of investment funds returns in the German market. The parametric analysis shows that both the classic power utility model of Hansen and Singleton (1982) and the habit formation extension of Campbell and Cochrane (1999) are not rejected, but require high risk-aversion to be consistent with the data. Furthermore, only the power utility model suffers from a risk-free rate puzzle. The nonparametric results are not accompanied by a risk-free rate puzzle for both models but the models still show high risk aversion. So using adequate test assets and evaluation methods, this note fully supports Cochrane (2006) saying that work explaining asset returns with consumption-based models should be dying out since there are preferences that can coherently describe the data with high risk-aversion.

Green, greener, greenest: Identifying ecological trends and leading entities by means of environmental ratings

Abstract In this article, we analyse whether industries worldwide significantly react to the changing environmental demands of their stakeholders. Specifically, we test the hypothesis of increasing environmentally responsible company behaviour in recent years. We do this by constructing environmental industry ratings based on a novel data-set covering three geographic regions and 42 industries from 2009 to 2015 and by fitting robust trend regression models to these ratings. Interestingly, we cannot observe a general upward trend in all industries and regions. In other words, the ‘green wave’ does not appear to carry all business sectors. This becomes particularly clear when looking at rankings derived from estimated trends. Industries in Europe show especially significant downward trends. Even though most European industries are currently rated higher than their counterparts in the Asia-Pacific region and North America, these trends indicate that Europe may lose this leading position in the future. Besides delivering such general tendencies, our estimated trends combined with the current rating levels provide important decision support. They show which industry sectors and regions are particularly (un)interesting for socially responsible investment products, ecologically conscious applicants or environmentally responsible consumers.

On the evaluation of soccer players: a comparison of a new game-theoretical approach to classic performance measures

In this article, we analyse the relation of a new measure for evaluating the importance of soccer players, recently proposed by Hiller (2015), to classic metrics of player performance. Using state-of-the-art bootstrap correlation testing and a data set of teams for the German soccer league (Bundesliga), we find evidence that even though this new game-theoretical approach has no significant correlation to a large number of performance measures, it is significantly related to some of the most important measures typically used in academic research (e.g. the player scores published by sports magazines and the number of played matches). These results indicate that the theoretically appealing new measure can be considered an interesting variable in pay–performance regressions and should be used accordingly in future research.

Ein Überblick über die lineare Regression

Prof. Dr. Horst Rottmann ist Professor für Volkswirtschaftslehre, Finanzmärkte, Statistik an der Hochschule Amberg-Weiden, sowie Forschungsprofessor am ifoInstitut für Wirtschaftsforschung an der Universität München. Zu seinen Forschungsschwerpunkten zählen die empirische Wirtschaftsforschung und angewandte Ökonometrie, die Arbeitsmarktund Produktivitätsforschung sowie die Finanzmarktanalyse. Seine Forschungsund Lehrtätigkeit ist begleitet von zahlreichen wissenschaftlichen Analysen und kontinuierlichen Publikationen.