John M. Geppert

An Anatomy Of Trading Strategies: Evidence From China

Using a pooled cross-sectional time series approach, we evaluate profits of momentum strategies and identify the sources of profits in Chinas stock market. Momentum strategies generate significant and negative returns in the A-share market on investment horizons at one month and at and above nine months. In the B-share market, momentum strategies yield significant and negative returns at and above twelve months. Decomposition analysis finds that the negative returns are predominately attributed to the time series profitability of stock returns. Although momentum strategies generate significant and positive returns over the period after China opened its once foreign-restricted B-share market to domestic individual investors, the relative importance of the time series predictability and the cross-sectional variation does not change.

Asset pricing models: a comparison

We empirically test and compare the performance of the traditional capital asset pricing model (CAPM), the three-moment CAPM and the Fama–French (FF) three-factor model using the FF 25 portfolios data. Based on the time-series and the cross-sectional tests, the FF three-factor model outperforms the other models. In the cross-sectional tests, the three-moment CAPM has a higher R 2 than CAPM but in the time-series regression, the performances of CAPM and the three-moment CAPM are comparable.

Testing purchasing power parity in the presence of transaction costs

This paper examines long-run purchasing power parity (PPP) using a new formulation of PPP in the presence of transaction costs. Our results strongly support the proposition that PPP holds as a long-run equilibrium condition.

Factor price equalization: a cointegration approach

Factor Price Equalization: A Cointegration Approach. — Previous studies of factor price equalization have generated mixed results. It is argued that the limited success often results from the fact that labor cost time series are nonstationary, and hence traditional OLS models are misspecified. In this paper, the cointegration approach is utilized to test for the existence of a long-run relationship between factor prices. It is shown that indices of labor cost per unit of manufacturing output for six major industrialized nations are indeed cointegrated. These results support the hypothesis that factor prices possess a long-run equilibrium relationship.ZusammenfassungAngleichung der Faktorpreise - Eine Kointegrations-Analyse. - Frühere Untersuchungen zur Angleichung der Faktorpreise haben zu gemischten Ergebnissen geführt. Die Verfasser meinen, der begrenzte Erfolg einiger der früheren Studien sei darauf zurückzuführen, daβ die Zeitreihen der Lohnkosten nicht stationär sind und deshalb die traditionellen OLS-Modelle falsch spezifiziert sind. Wenn ein Bündel von Zeitreihen nicht stationär ist, aber eine oder mehrere stationäre lineare Kombinationen dieser Reihen bestehen, dann werden solche Zeitreihen als kointegriert bezeichnet. In diesem Aufsatz wird der Kointegrations-Ansatz benutzt, um zu testen, ob eine langfristige Beziehung zwischen Faktorpreisen besteht. Es zeigt sich, daβ die Indizes der Lohnkosten pro Produkteinheit für sechs gröβere Industrieländer tatsächlich kointegriert sind. Diese Ergebnisse stützen die Hypothese, daβ die nationalen Faktorpreise in einer langfristigen Gleichgewichtsbeziehung stehen.

Mutually beneficial loan workouts

Loan losses are a natural part of the lending function of a bank. When default occurs, a bank must decide to foreclose or forebear on the loan. The forbearance decision involves a negotiation of a workout arrangement permitting the borrower to continue to invest in the project. This paper models the bank’s workout decision and differs from other papers by jointly modelling the borrower’s decision to accept a workout arrangement. The result is the set of conditions that yield a mutually agreeable workout. Alternative cases are examined to determine the impact of size and borrower alternatives on the acceptance/rejection of a workout decision.

An error-correction model for forecasting changes in foreign currency futures spreads

The foreign currency futures pricing model of Amin and Jarrow (1991) is used to develop a model that predicts the primary determinants of foreign currency futures spreads. Our data set consists of daily observations of futures prices, spot exchange rates, and Eurocurrency LIBOR for the British pound and Japanese yen from January 2, 1990 to December 31, 2004. Using a 5-year moving window methodology, we find repeated evidence of cointegration between the futures spread, spot exchange rates, and interest rates over ten different estimation periods. An errorcorrection model is used to develop a trading strategy that generates significant out-of-sample profits.

The Effect of Time-Series and Cross-Sectional Heterogeneity on Panel Unit Root Test Power

Panel unit root tests represent a significant advancement in addressing the low power of unit root tests by exploiting cross-sectional and time-series information. In this article we employ Monte Carlo techniques to quantify the power improvements due to cross-sectional information and assess test sensitivity to heterogeneous data. Pooling the data alleviates negative effects of slowly adjusting equilibrium relations as well as persistence in the forcing variable. However, if the panel contains a mixture of unit root and stationary series, the power of the test decreases substantially and the interpretation of the results becomes tenuous. The Southern Finance Association and the Southwestern Finance Association.

An Empirical Investigation of the Campbell-Cochrane Habit Utility Model

This paper tests whether the Campbell and Cochrane (1999) habit utility model generates a valid stochastic discount factor for the 25 Fama-French size/book-to-market and size/momentum sorted portfolios. Campbell and Cochrane (1999) derive a consumption based habit utility asset pricing model and calibrate it to aggregate US stock market data. However, they do not test whether their model is consistent with a larger cross section of asset returns. We test their model using the methodology of Hansen and Jagannathan (1991) and Burnside (1994) . In contrast to previous studies, we find that for reasonable parameter values, the models stochastic discount factor is inside the Hansen-Jagannathan bounds and therefore satisfies the necessary conditions for a valid stochastic discount factor. We trace the difference between our results and previous studies to the method used to estimate the models parameters and the parameter values themselves. Copyright (c) 2009 The Authors Journal compilation (c) 2009 Blackwell Publishing Ltd.

An Empirical Analysis of the Dynamic Relation among Investment, Earnings and Dividends

The separation principle implies independence among a firm’s financing, investment, and dividend decisions and that investment policy is the sole determinant of firm value. One important implication of the separation principle is that investment decisions of the firm should never be impacted by the firm’s dividend decisions. However, recent work suggests that payout policy is also a first-order value determinant, suggesting interdependence between a firm’s dividend and investment decisions. We empirically examine and quantify the relation between dividends and investment by modeling the dynamics of investment, earnings and dividends at the firm level in a vector autoregression (VAR) framework for a large cross-section of firms. Results show that shocks to dividends do have long-run consequences for investment and vice versa, implying bi-directional interdependence, evidence against the separation principle. Long-run dynamics from impulse responses show that on average, for a

Long-Run Diversification Potential in Emerging Stock Markets

1.00 shock to dividends, there is an immediate decrease in investment of