Martijn Cremers

Deviations from Put-Call Parity and Stock Return Predictability

Deviations from put-call parity contain information about future stock returns. Using the difference in implied volatility between pairs of call and put options to measure these deviations, we find that stocks with relatively expensive calls outperform stocks with relatively expensive puts by 50 basis points per week. We find both positive abnormal performance in stocks with relatively expensive calls and negative abnormal performance in stocks with relatively expensive puts, which cannot be explained by short sale constraints. Rebate rates from the stock lending market directly confirm that our findings are not driven by stocks that are hard to borrow. The degree of predictability is larger when option liquidity is high and stock liquidity low, while there is little predictability when the opposite is true. Controlling for size, option prices are more likely to deviate from strict put-call parity when underlying stocks face more information risk. The degree of predictability decreases over the sample period. Our results are consistent with mispricing during the earlier years of the study, with a gradual reduction of the mispricing over time.

Can Large Pension Funds Beat the Market? Asset Allocation, Market Timing, Security Selection and the Limits of Liquidity

We analyze the three components of active management (asset allocation, market timing and security selection) in the net performance of U.S. pension funds and relate these to fund size and the liquidity of the investments. On average, the funds in our sample have an annual net alpha of 89 basis points that is evenly distributed across the asset allocation, market timing, and security selection components. Stock momentum fully explains the positive alpha in security selection, whereas “time series momentum” drives market timing. While larger pension funds have lower investment costs, this does not lead to better net performance. Rather, all three components of active management exhibit substantial diseconomies of scale directly related to illiquidity. Our results suggest that especially the larger pension funds would have done better if they invested more in passive mandates without frequent rebalancing across asset classes.

Patient Capital Outperformance: The Investment Skill of High Active Share Managers Who Trade Infrequently

Among high active share portfolios—whose holdings differ substantially from their benchmark—only those with patient investment strategies (with holding durations of over two years) on average outperform, over 2% per year. Funds trading frequently generally underperform, including those with high active share. Among patient funds, separating closet index from high active share funds matters, as low active share funds on average underperform even with patient strategies. Our results suggest that U.S. equity markets provide opportunities for longer-term active managers, perhaps because of the limited arbitrage capital devoted to patient and active investment strategies.

The Performance of Direct Investments in Real Assets: Natural Resources, Infrastructure and Commercial Real Estate

This paper considers the performance of direct investments in three real asset classes: natural resources (namely timberland and farmland), energy infrastructure and commercial real estate. Using publicly available data for a period starting in 1978 (for real estate) or 1996 (for infrastructure) and ending in 2012, we document that investing in these real asset classes would have provided significant diversification benefits relative to a traditional portfolio consisting of only public equities and government bonds, without evidence of deteriorating overall performance. However, and with the exception of timberland investments, the real asset classes did not provide any inflation hedging benefits over our time period. Further, the diversification benefits of direct investments in natural resources are lower in times that equity markets go down. Significant challenges of investing in real assets include illiquidity, generally long holding periods, and information uncertainty.

Thirty Years of Shareholder Rights and Stock Returns

This paper explores the robustness of the positive association between shareholder rights and abnormal stock returns (using the Fama-French-Cahart four factor model) and potential explanations thereof. Utilizing hand-collected shareholder rights data for the 1978-1989 period in conjunction with the existing post-1990 RiskMetrics data, we document that: (1) over the 1978-2007, the association is generally robust to a variety of controls and estimating abnormal returns at the portfolio or firm-level; (2) this association co-varies with merger and acquisition (MA (3) while being acquired and making acquisitions are both strongly associated with abnormal stock returns, these effects do not explain the positive association; and (4) once the four factor model is supplemented with the Cremers, Nair & John (2009) takeover factor – which captures risk associated with time-varying investment opportunities and thus relates to the state of the M&A market – the association disappears.

CEO Compensation and Stock Mispricing: How Do Boards React to Mutual Fund Flow-Driven Price Pressure?

The endogeneity of board structure complicates studies of board decisions on CEO compensation. Using mutual fund flow-driven trading pressure as an exogenous shock to stock price informativeness of CEO effort, we examine how boards adjust CEO pay in response to such exogenous price movements. Consistent with economic efficiency, boards rely more on accounting and less on stock performance in setting CEO bonuses when the stock price becomes less informative. Boards consisting of directors with greater advising ability are more likely to make such adjustments. We find only weak evidence that boards selectively adjust bonuses to benefit the CEO.

Emerging Market Outperformance: Publicly Traded Affiliates of Multinational Corporations

Publicly traded emerging market affiliates of large multinational corporations (headquartered and mostly also listed in developed markets) have shown remarkably good performance over the past fourteen years. These affiliates combined high performance with lower volatility, outperforming both their local markets and the wider emerging markets, but not at the expense of significant greater downside volatility. Their performance during the financial crisis was particularly good, compared with both their local markets and the developed markets, and especially so in Asia. In our analysis, we suggest two main reasons for this outperformance: improved corporate governance and a stabilizing role of the parent companies. Both seem critical specifically in financial crises. These two features may give affiliates a clear comparative advantage over their local competitors, a benefit that should endure in the foreseeable future.

Challenging the Conventional Wisdom on Active Management: A Review of the Past 20 Years of Academic Literature on Actively Managed Mutual Funds

Just over 20 years have passed since the publication of Mark Carhart’s landmark 1997 study on mutual funds. Its conclusion—that the data did “not support the existence of skilled or informed mutual...

Treasury Yield Implied Volatility and Real Activity

We show that at-the-money implied volatility of options on futures of 5-year Treasury notes (Treasury ‘yield implied volatility’) predicts both the growth rate and volatility of gross domestic product, as well as of other macroeconomic variables, like industrial production, consumption, and employment. This predictability is robust to controlling for the term spread, credit spread, stock returns, stock market implied volatility, and several other variables that prior literature showed to predict macroeconomic activity. Our results indicate that Treasury yield implied volatility is a useful forward-looking state variable to characterize risks and opportunities in the macro economy.

Shadow Pills and Long-Term Firm Value

This paper analyzes the value impact of the right to adopt a poison pill – or “shadow pill” – on long-term firm value, exploiting the natural experiment provided by the staggered adoption of poison pill laws that validated the use of the pill in 35 U.S. states over the period 1986 to 2009. We document that the availability of a shadow pill results in an economically and statistically significant increase in firm value, especially for firms more engaged in innovation or with stronger stakeholder relationships. Our findings are robust to different specifications, including matching and portfolio analysis, and provide support to the bonding hypothesis of takeover defenses.We analyze the impact of the right to adopt a poison pill – a “shadow pill” – on pill policy and firm value by exploiting the quasi-natural experiment provided by U.S. states’ staggered adoption of poison pill laws that validate the pill. We document that a strengthened shadow pill promotes the use of actual poison pills and increases firm value – especially for more innovative firms or firms with stronger stakeholder relationships, and for hostile acquisition targets. Our findings suggest shadow pills create value for some firms by reducing their contracting costs with stakeholders and increasing their bargaining power in takeovers.