Hendrik Scholz

Interest Rate Risk Rewards in Stock Returns of Financial Corporations: Evidence from Germany

The interest rate sensitivity of stock returns of financial and non-financial corporations is a well-known phenomenon. However, only little is known about the part of total stock returns that is attributable to the compensation an investor receives for being exposed to interest rate risk when investing in equity securities. We pursue here a benchmark portfolio approach, constructing benchmark portfolios having the same interest rate risk exposure as a particular stock. By studying the time series of returns of these asset-specific benchmarks, we find: i) Regardless of the industry considered, the interest rate risk benchmarks of German corporations have mostly earned a significantly positive reward. ii) Returns of interest rate risk benchmarks of financial institutions exceeded significantly those of non-financial corporations. iii) An investor willing to bear nothing but the average interest rate risk of German financial institutions would have earned a mean return of about or even exceeding 70% of the corresponding total stock returns. iv) Returns of the interest rate risk benchmarks of the German insurance sector were significantly higher than those of German banks, which seems to contradict conventional market wisdom that insurances hedge interest rate risks.

The Sharpe ratio's market climate bias: Theoretical and empirical evidence from US equity mutual funds

This article analyses the impact of market climates on the Sharpe ratios (SRs) of funds. On the basis of a common factor model, we derive analytically how market climates impact the SR – taking into account the abilities of fund managers. This applies especially to the mean of the market returns during the evaluation period: The performance of funds with relatively high unsystematic risk is biased upwards in outstandingly negative market climates, and vice versa. Our empirical study of US equity mutual funds supports these theoretical insights. We show that the SR of poorly diversified funds is biased upwards in bear markets, and vice versa. Subsequently, we confirm that actual fund SRs depend on especially the mean excess returns of the market. Thus, the SR does not provide a meaningful assessment of fund performance, especially in extraordinary times. We therefore suggest using the ‘normalised’ Sharpe ratio in future empirical research, in order to avoid the bias of SRs and rankings due to market climate.

Short-term persistence in hybrid mutual fund performance: The role of style-shifting abilities

Our study analyzes the performance of hybrid mutual funds. Based on two extended Carhart models we determine total fund performance by comparing fund returns to investable fund-specific style benchmarks. Using daily returns and a quarterly measurement interval, we present an innovative return-based approach to decompose total performance into in-quarter abnormal performance and style-shifting performance. In addition, we split total style-shifting performance into active and passive components. In this context, we confirm possible benefits of these performance measures by analyzing several simulated investment strategies. Our empirical study covers 520 hybrid mutual funds from 10/1998 to 12/2009 and shows that hybrid mutual funds (i) do not outperform their benchmarks on average, (ii) partially show positive in-quarter abnormal performance and style-shifting abilities, and (iii) exhibit short-term persistence in in-quarter abnormal performance but not in style-shifting abilities.

Sensitivity of Stock Returns to Changes in the Term Structure of Interest Rates — Evidence from the German Market

For a long time, interest rates have been considered one of the macroeconomic factors determining stock returns. The role of interest rates in the return generating process of stocks has therefore been extensively investigated in general, but particularly so with regard to financial institutions, which are often deemed to be more sensitive to changes in interest rates than stocks from other industries. Generally, this specific sensitivity has been attributed to i.) the predominant role of financial (i.e. nominal) assets and liabilities on the balance sheets of financial intermediaries and ii.) the maturity transformation performed especially by depository institutions and the resulting maturity mismatch of assets and liabilities (see [14] for an extensive review).

Enhancing the Profitability of Earnings Momentum Strategies: The Role of Price Momentum, Information Diffusion and Earnings Uncertainty

Recent literature indicates that stock characteristics proxying for behavioral biases reinforce the earnings momentum effect. Using data from the investable German HDAX, we analyze whether returns of earnings momentum strategies can be enhanced in a way that not only survives common risk adjustments but also maintains profitability after trading costs. For our liquid stock universe, we find that the rate of information diffusion has the strongest impact. A bivariate sort on earnings momentum and market capitalization yields gross Carhart alphas of up to 22% per year. The abnormal returns are largely robust to reasonable levels of trading costs.

Zur Relevanz von Sharpe Ratio und Treynor Ratio: Ein investorspezifisches Performancemaß

I. Einleitung Zweidimensionale Performancemaße wie die Sharpe Ratio und die Treynor Ratio werden von der Praxis regelmäßig herangezogen, um zum Beispiel ... wie im Folgenden ... die Leistung von Investmentfonds zu beurteilen. Umso erstaunlicher ist, dass es kaum wissenschaftlich fundierte Aussagen zu der Frage gibt, welche Performancemaße ein Anleger ... ausgehend von einem konkreten Entscheidungsproblem ... zur Beurteilung der Performance und zur Auswahl von Fonds nutzen sollte. Eher pauschal erfolgt regelmäßig die Empfehlung, Maße auf der Basis des Gesamtrisikos heranzuziehen, sofern der Großteil des Vermögens eines Anlegers in nur einen Fonds investiert werden soll (bzw. investiert wurde). Hingegen sei es besser, sich an Maßen auf der Basis des systematischen Risikos zu orientieren, sofern ein relativ geringer Teil des Vermögens in einen Fonds zu investieren ist. Diese Tendenzaussagen sind zwar richtig, helfen dem Anleger bei der Auswahlentscheidung aber in der Regel kaum. Bisher fehlt die ökonomische Begründung traditioneller Performancemaße in praktisch relevanten Entscheidungssituationen.

Does Style-Shifting Activity Predict Performance? Evidence from Equity Mutual Funds

This study introduces an innovative approach to measuring the “style-shifting activity” (SSA) of mutual funds using daily returns. Applying our new measure to a comprehensive sample of 2631 active US equity mutual funds, we show (i) that SSA predicts future performance, especially for current outperformers, and (ii) that SSA adds new information previously not captured by alternative return-based activity measures such as tracking error or R-squared. Comparing the three measures, we show that SSA captures activity very selectively, which makes it a stable and reliable predictor of future performance. Tracking error and R-squared, however, seem to additionally capture some unobserved fund characteristics, as the direction and power of their predictions depend heavily on the consideration of time- and fund-fixed effects. Moreover, investment strategies based on past SSA and past performance earn up to 2.4% (3.6%) p.a. risk-adjusted net (gross) returns which is economically and statistically significant.

Fristentransformation als Lösungsansatz für das Ertragsproblem von Banken

„Um unsere angespannte Ertragssituation auf Grund des Strukturwandels im Bankgewerbe in den Griff zu bekommen, mussen wir mehr denn je die Ertrags-potenziale der Fristentransforrnation ausschopfen.“ — So oder so ahnlich lauten haufig geauserte Statements des Managements vieler Kreditinstitute. Ungeachtet der verbundenen Messproblematik stellt der Ergebnisbeitrag aus der Fristentrans-formation bisher einen nicht unwesentlichen Teil des Gesamtergebnisses vieler Banken dar. Die zentrale Frage dieses Beitrags ist daher, ob und inwieweit eine Ausweitung der Fristentransforrnation zumindest einen Teil des Ertragsproblems der Banken losen kann. Oder sollten Banken kunftig gar auf die Fristentransformation verzichten?

Reversal and Momentum Patterns in Weekly Stock Returns: European Evidence

We analyze short-term reversal and medium-term momentum patterns in weekly stock returns in Europe. Focusing on raw and on stock-specific returns, our empirical results show for both return specifications i) a negative relation between weekly past returns and future returns in the short run and ii) a positive relation in the medium run. However, returns of reversal and momentum strategies based on stock-specific returns are less volatile. In further analyses, we find short-term reversal and medium-term momentum patterns to be connected to stock characteristics. Looking at the potential causes of these effects, our results do not corroborate that short-term reversal in weekly stock returns is due to an over- or underreaction to firm-specific news nor mainly driven by illiquidity. On the other hand, medium-term momentum in weekly stock returns can be connected to behavioral biases. Finally, our concluding tests confirm that our findings are robust among industries, in sub-periods, for the January effect and in varying market states.

Success and Failure on the Corporate Bond Fund Market

We present the first broad overview of the factors determining corporate bond fund success and failure in terms of performance and survival. We show that the main determinant of survival is size. Performance matters only for small funds while large funds survive unconditionally, consistent with maintaining fee revenues. We neither find persistence in performance nor diseconomies of scale. This is due to advantages of larger funds in corporate bond trading. Other fund and family characteristics are unrelated to performance and survival, contrasting previous finings in equity funds. Thus, there are similarities but also important differences between the factors determining success and failure on the corporate bond and equity fund markets.