Stewart L. Brown

A Reformulation of the Portfolio Model of Hedging

The portfolio approach to hedging assumes that the primary motivation for hedging is risk reduction. The paper reexamines the portfolio approach to hedging and respecifies the model in such a way that hedge ratios are estimated using returns rather than price levels. Using the same data set, hedge ratios estimated using price levels differ from one while hedge ratios using returns are found to be insignificantly different from one. The results do not support the portfolio approach to hedging. Therefore, one must look elsewhere for empirical support for the risk-reduction theory of hedging.

Assimilating earnings and split information: Is the capital market becoming more efficient?

Abstract Recent studies have implied that the capital market has become more efficient with respect to the announcements of stock splits and corporate earnings. This study calculated residual returns associated with these announcements and then tested, by time period (early and late years), for a between period difference. The results suggest that for certain earnings and split announcements the market is no more efficient than it has been in the past.

Churning: Excessive Trading in Retail Securities Accounts

Churning involves excessive trading by stockbrokers in order to generate commissions. Current practice uses the turnover ratio to detect excessive trading. The turnover ratio is a flawed indicator of the actual harm of excessive trading which is commissions. This paper examines the intersection of law and financial analysis in the retail securities arena. A unique set of data from 23 actual churning cases is used to argue that the turnover ratio should be replaced by a more direct measure of the trading costs: the commission to equity ratio. An appropriate benchmark related to the return on common stocks is suggested to gauge excessive trading in a commission context.

Design considerations for large public sector defined contribution plans3

Abstract The paper identifies differences between private (401 (k)) plans, which have evolved under ERISA and existing public plans, which have not. Examination of model legislation reveals that public plans should largely conform to ERISA going forward and reflect best practices in the private sector. Empirical analysis of equity mutual funds with

Mutual Funds and the Regulatory Capture of the SEC

1.8 trillion in assets and institutional equity accounts with

EARNINGS CHANGES, STOCK PRICES, AND MARKET EFFICIENCY

98 billion in assets demonstrates efficiencies in separately procured institutional investment, administrative and educational services relative to retail investment products. The analysis points to tension between the duties of trustees and the demands of participants requesting large numbers of retail investment options.

Mutual Fund Advisory Fees: The Cost of Conflicts of Interest

Regulatory agencies are created to act in the public interest but often end up acting in the interests of those regulated. This is known as regulatory capture. The mutual fund industry is the custodian of massive levels of wealth of the investing public and is regulated by the Securities Exchange Commission (“the SEC”). Mutual fund assets are currently in the neighborhood of

Biased Estimators and Unstable Betas

16 trillion and these assets generate revenues in excess of

A Reformulation of the Portfolio Model of Hedging: Reply

100 billion per year for the firms that manage mutual funds. The investment management industry is incentivized to influence the regulators by whatever means available to maximize profits for their owners. This paper documents how the investment management industry has captured the SEC in certain key policy areas. As a result, the industry is able to siphon off billions of dollars per year in excessive and often hidden fees. Absent political considerations and industry interference, an uncaptured Commission focused on the best interested of investors could unilaterally rectify the worst abuses associated with excessive advisory and distribution fees.