Niall O'Sullivan

False Discoveries in UK Mutual Fund Performance

We use a multiple hypothesis testing framework to estimate the false discovery rate (FDR) amongst UK equity mutual funds. Using all funds, we find a relatively high FDR for the best funds of 32.8% (at a 5% significance level), which implies that only around 3.7% of all funds truly outperform their benchmarks. For the worst funds the FDR is relatively small at 7.6% which results in 22% of funds which truly underperform their benchmarks. For different investment styles, this pattern of very few genuine winner funds is repeated for all companies, small companies and equity income funds. Forming portfolios of funds recursively for which the FDR is controlled at a ‘acceptable’ value, produces no performance persistence for positive alpha funds and weak evidence of persistence for negative alpha funds.

The conditional pricing of systematic and idiosyncratic risk in the UK equity market

We test whether firm idiosyncratic risk is priced in a large cross-section of U.K. stocks. A distinguishing feature of our paper is that our tests allow for a conditional relationship between systematic risk (beta) and returns in our tests, i.e., conditional on whether the excess market return is positive or negative. We find strong evidence in support of a conditional beta/return relationship which in turn reveals conditionality in the pricing of idiosyncratic risk. We find that idiosyncratic risk is significantly negatively priced in stock returns in down-markets. Although perhaps initially counter-intuitive, we describe the theoretical support for such a finding in the literature. Our results also reveal a strong role for liquidity, size and momentum factors in explaining the cross-section of U.K. stock returns.

The Market-Timing Ability of Chinese Equity Securities Investment Funds

This study examines the market-timing performance of Chinese equity securities investment funds during the period from May 2003 to May 2014 using the parametric tests of Treynor–Mazuy and Henriksson–Merton as well as the Jiang (2003) non-parametric test. Based on the non-parametric approach, the study finds that only one fund among the sample of 419 funds possessed statistically significant market-timing skill, while 9% of the funds were statistically significant negative market timers. Most funds do not time the market. This conclusion is robust when controlling for publicly available information in evaluating ‘private’ timing ability. Consistent with studies of other markets such as the UK, a higher prevalence of successful market timers is found by the Treynor–Mazuy and Henriksson–Merton methods compared to the non-parametric procedure.

Stocks and Bonds: Eggs in the Same or Different Baskets - A Cointegration Analysis

The Johansen cointegration testing and estimation procedure is applied to examine the relationships among the stock markets, government bond markets and credit bond markets of the US, UK, Europe and Japan over the period 1985M1:2002M4. Asset class relationships are examined with returns denominated in dollars, sterling, euro and yen to determine whether long run diversification gains were achievable by international investors with these as base currencies. Cointegrating relations among currency hedged returns are also investigated. Cointegration findings, and by inference long run diversification opportunities, are found to be highly sensitive to the choice of currency in which returns are denominated and to whether currency risk is hedged, revealing the important role of exchange rates in international portfolio diversification.