Rosa Rodríguez

Can output explain the predictability and volatility of stock returns

In this paper we have studied the ability of relatively standard equilibrium asset pricing models to explain two important empirical regularities of asset returns extensively documented in the literature: i) returns can be predicted by a set of macro variables; and ii) returns are very volatile. Those empirical regularities are relevant because they have often been used to reject market efficiency. In the analysis we have made use of the approximation technology in the solution of intertemporal asset pricing models recently developed by Campbell (1993) in the form suggested by Restoy and Weil (1997). We have obtained evidence from eight OECD economies using both quarterly and annual observations. Equilibrium models seem generally to find fewer difficulties in explaining the volatility of returns than their predictability for general output processes. In the case of the United States, for annual frequencies the observed predictability and volatility of asset returns are broadly compatible with the predictions of equilibrium models for a reasonable specification of preferences.

Performance evaluation considering the coskewness: A stochastic discount factor framework

Purpose – The paper aims to examine the performance of Spanish mutual funds between 1999 and 2003. Design/methodology/approach - The methodolgy uses the stochastic discount factor (SDF) framework across a variety of models developed in the recent asset pricing literature. This approach is a fairly recent innovation in the evaluation of investment performance. Findings - The present work complements the research of Farnworth et al. and Fletcher and Forbes, adding a new issue to the SDF, the third co-moment of asset returns. Recent asset pricing studies show the relevance of the component of an assets skewness related to the market portfolios skewness, the coskewness, and how it helps to explain the time-variation of ex-ante market risk premiums. It is found that the effects of adding coskewness to evaluate the performance is significant even when factors based on size, book-to-market and momentum are included. Practical implications - The omission of a coskewness factor may lead to erroneous evaluations of a funds performance, and therefore, issues such as the persistence of performance should be revised. Originality/value - This paper explores, for the first time, the effects of incorporating a coskewness factor in the analysis of investment performance, both in an unconditional and a conditional framework using SDF models.

Why is Timing Perverse

The existence of negative market timing, even for passive portfolios, poses a relevant puzzle when assessing portfolio management. In this paper, we develop a simple theoretical model so as to explain why such perverse market timing might occur and why those stocks with the lowest beta in upward markets exhibit pronounced negative timing. Our explanation is based on the existence of higher correlations of stocks in down markets than in up markets. We find that changes in beta, which drives timing, has four components; however, just two of these, mean covariance shift and covariances dispersion map, serve to explain the asymmetric behavior across stocks. We find that a high percentage of the negative market timing ability identified for mutual funds in the literature could be explained by this bias.

A study on short-selling constraints: total ban versus partial ban

This article analyses the effect of short-selling constraints on market volatility. Between 2011 and 2012, two different types of short-sale bans were imposed on the Spanish stock market: first, a partial ban on financial companies, and later, a total ban affecting all stocks. Using panel data and different measures of risk, we study whether both types of constraints were effective in reducing market volatility or whether there were differences between them. Our results show evidence that market volatility was reduced under both types of bans, with a more powerful effect observed under the total ban.

Accurately measuring gold mutual fund performance

Since the price of gold began climbing dramatically over a decade ago, gold-related industries have received a great deal of attention from investors. Moreover, investing in gold mutual funds has become a promising alternative to investing in gold directly because of the inherent difficulties involved in purchasing the commodity. However, gold’s insensitivity to market factors requires a novel benchmark to adjust the returns of gold funds to risk. In the absence of this risk correction, gold mutual fund managers appear to perform systematically better than equity fund managers, although incorporating the new benchmark shows that this appearance is deceptive.

Idiosyncratic volatility, conditional liquidity and stock returns

There is strong evidence showing that stocks with higher levels of idiosyncratic risk provide relatively lower returns than stocks with lower levels of it. This paper points out that this negative idiosyncratic risk - expected returns relation is not pervasive over time, and provides a plausible explanation for its time-varying nature. Our results suggest that following recessions, the conditional pricing of liquidity creates a correction in prices of the high idiosyncratic volatility stocks that persists up to 9 months. As a result, the negative relation between idiosyncratic risk and expected returns is not observed following recessions.

Modelling Electricity Swaps with Stochastic Forward Premium Models

We present a new model for pricing electricity swaps. Two general factors affect all contracts but unique risk factors affect each contract. General factors are average swap prices and deterministic trend-seasonal components, and unique factors are forward premiums. Innovations follow MNIG distributions. We estimate the model with data from the European Energy Exchange. The model outperforms four competitors, both in in-sample valuation and in out-of-sample forecasting, and in fitting the term structure of volatilities by market segments. Competitor models are (i) diffusion spot prices, (ii) jump-diffusion spot prices with time dependent volatility, (iii) HJM-based and (iv) Levy multifactor model with NIG distributions. Value-at-Risk measures based on normality strongly underestimate tail risk whereas our model gives estimates that are more accurate.

The Relevance of Portfolio Management Core Competencies in Outsourcing Decisions

This empirical paper analyzes the role of investment companies’ core competencies in explaining the growing importance of outsourcing within the mutual fund industry. We demonstrate that management companies tend to allocate portfolios that are not within their core competencies (defined as the main asset classes or investment objectives managed) to subadvisors whose core competency coincides with the outsourced mutual fund. We investigate the efficiency of such decisions in terms of performance, and the findings suggest that selecting a subadvisor according to core competency improves mutual fund performance. We also observe evidence that in-house fund management improves when firms outsource their non-core funds.

Optimal diversification across mutual funds

We evaluate a strategy that minimizes the specific risk of investing in a reasonable number of mutual funds. Our results are consistent with the previous studies, which suggest that actively managed mutual funds are not totally diversified. Our strategy behaves well in terms of diversification, not only in-sample but also out-of-sample. Using different benchmarks, minimizing idiosyncratic risk is also the best strategy for investors seeking alpha.

Diversificating the Undiversified Mutual Fund World

One of the major advantages of Equity mutual funds is that they allow retail investors to attain a diversified portfolio, which could not be easily obtained buying individual stocks. Our results indicate that mutual funds are not totally diversified; they hold a significant part of idiosyncratic risk and, in general, retail investors do not hold diversified portfolios of funds as it is possible to highly reduce the percentage of the idiosyncratic risk with respect to the total variance of their portfolios. A strategy selecting funds that minimize the idiosyncratic risk of the portfolio (MIR) behaves well in terms of diversification even for those investors worried about the alpha of funds. The benefits of diversification hold even out-of-sample. Finally we use downside risk measures to confirm that mutual funds do not seem to be well diversified and this drawback increases as the investor’s risk aversion increases.