James M. Mahoney

The performance of investment newsletters

This paper analyzes the recommendations of common stocks made by the investment newsletters followed by the Hulbert Financial Digest. We conclude that, taken as a whole, the securities that newsletters recommend do not outperform appropriate benchmarks. Our data provide modest evidence that the future performance of a newsletter is related to its past performance, when performance is measured by raw returns. However, evidence of persistence vanishes when performance is measured by abnormal returns. We find little, if any, evidence of herding, i.e., cross-sectional dependence of recommendations, across newsletters. Newsletters tend to recommend securities that have performed well in the recent past. Finally, newsletters with poor past performance are more likely to go out of business.

Real Estate Investment Trusts, Small Stocks, and Bid-Ask Spreads

This study examines the liquidity of Real Estate Investment Trusts (REITs), as measured by their bid-ask spread. We find that REIT spreads have increased over the period 1986-1990, are inversely related to market capitalization, and are similar in magnitude to spreads on other stocks of comparable size. Analysis of variance tests indicate that REIT spreads are similar across equity, mortgage and hybrid asset types. Multivariate regression results indicate that market capitalization is the primary determinant of REIT bid-ask spreads, and spreads are larger for National Association of Securities Dealers Automated Quotations (NASDAQ) REITs than for New York Stock Exchange (NYSE) REITs. The regression results also indicate that spreads are lower for equity REITs than for mortgage or hybrid REITs, and are inversely related to the fraction of the REITs shares held by institutional investors. The similarity between REIT spreads and those of other common stocks holds in both bull and bear real estate markets and suggests that, from a liquidity perspective, REITs are similar to other common stocks. Copyright American Real Estate and Urban Economics Association.

Risk Management of Correlation Products

Trading units within the banking and dealer community that trade exotic instruments are well aware of the hazards of using traditional tools in analyzing the risks resulting from positions taken in their specialized markets. The global risk management systems within these organizations have been slower to recognize the new risk profiles created by more recently traded exotic instruments. For traditional risks that are separable, the evaluation of risk at the individual trading units and the subsequent aggregation of risk across trading units captures the risks inherent in the portfolio. However, with non-traditional, non-separable risks, this division (by trading unit) and subsequent aggregation (by risk managers) of risks may obscure an increasing amount of risk found in the firms trading operation.