Tyler R. Henry

Ex-Dividend Profitability and Institutional Trading Skill

We use institutional trading data to examine whether skilled institutions exploit positive abnormal ex-dividend returns. Results show that institutions concentrate trading around certain ex-dates, and earn higher profits around these events. Dividend capture trades represent 6% of all institutional buy trades but contribute 15% of overall abnormal returns. Institutional dividend capture trading is persistent. Institutional ex-day profitability is also strongly cross-sectionally related to trade execution skill. The relation between execution skill and profits disappears around placebo, non-ex-days. Results suggest that skilled institutions target certain opportunities rather than benefiting uniformly through time. Furthermore, only skilled institutions can profit from dividend capture.

Fixed Income Fund Performance across Economic States

We evaluate the performance of fixed income mutual funds using stochastic discount factors motivated by continuous-time term structure models. Time-aggregation of these models for discrete returns generates new empirical “factors,” and these factors contribute significant explanatory power to the models. We provide a conditional performance evaluation for US fixed income mutual funds, conditioning on a variety of discrete ex-ante characterizations of the states of the economy. During 1985–1999 we find that fixed income funds return less on average than passive benchmarks that do not pay expenses, but not in all economic states. Fixed income funds typically do poorly when short-term interest rates or industrial capacity utilization rates are high, and offer higher returns when quality-related credit spreads are high. We find more heterogeneity across fund styles than across characteristics-based fund groups. Mortgage funds underperform a GNMA index in all economic states. These excess returns are reduced, and typically become insignificant, when we adjust for risk using the models.

Does MAX Matter for Mutual Funds

We examine the lottery characteristics of mutual funds. We proxy for lottery characteristics using past extreme daily returns within a month, or MAX. We find that high MAX funds underperform both in portfolio sorts and cross-sectional regression tests. This result suggests that the MAX effect documented for individual stocks is also present within diversified portfolios of mutual funds. Using mutual fund flows, we also show direct evidence of strong retail, but not institutional, investor demand for high MAX funds. Overall, our findings indicate that retail investors exhibit demand for lottery-like funds that are likely to suffer from future underperformance.