Yuxing Yan

Skewness persistence with optimal portfolio selection

Abstract Existing studies have found that ex post stock returns are positively skewed, but such skewness is only persistent for individual stocks, not for portfolios. This implies that the ex post knowledge of skewness may not be useful in ex ante portfolio selection. However, the portfolios in these studies are not optimally formed because preferences for skewness are not taken into consideration when forming these portfolios. It is more meaningful to see if the positive skewness would persist in optimally formed mean–variance–skewness efficient portfolios. Using stocks from both Japanese and US markets and a bootstrap method, we find that the portfolios optimally formed by using a polynomial goal programming method, which considers preference for skewness, greatly enhances skewness persistence over time. Our results are robust across both Japanese and US stocks. However, the skewness persistence is stronger for portfolios formed with monthly data than that with weekly data. These findings have practical implications to investors with skewness preferences.

Monitoring and bank loan pricing

Abstract In this paper, we examine the influence of contract costs on the pricing of bank loans. We find that the loan spread depends on a banks screening and monitoring incentives, which varies across differentially regulated classes of banks. This leads to significant price disparities in the loan market. In particular, the US branches of Japanese banks participate in syndicated lending to US firms that charge significantly higher spreads compared to syndicated loans to US firms without Japanese participation. This pricing disparity is primarily due to regulatory differences. We also find that as specialized intermediaries, banks price loans based primarily on their own monitoring.

Value versus growth stocks in Singapore

Abstract This study examines value and growth stocks in Singapore. Specifically, we examine the value premium up to 5 years after the value and growth portfolio formation. We also examine if growth (value) stocks really indicate higher (lower) company profits in the later years, whether analysts’ forecasts are overly optimistic/pessimistic, and if earnings and earnings growth exhibit mean reversion. Our findings are, first, there is a value premium for Singapore stocks, but the premium is concentrated in the first 2 years after the portfolio formation. Second, value (growth) stocks do indicate low (high) earnings growth rates and low (high) return on equity (ROE) in the following years. Third, earnings growth is significantly overestimated for growth stocks but it is not underestimated for value stocks, indicating a one-way over-reaction. Finally, there is some evidence of mean reversion for excess ROE but not for excess earnings growth rates.

Measuring the timing ability of mutual fund managers

This paper discusses the ARCH (Autoregressive Conditional Heteroscedasticity) effect on the Treynor‐Mazuy index (TM), which is used to overcome shortcomings of other indices to measure the timing ability of mutual fund managers. The assumption behind theTreynor‐Mazuy index is that the variances of individual portfolios and the market index are constant. The ARCH technique developed by Engle [4] is used to test whether the relaxation of the above assumption has material impacts on the TM index. It is found that for most mutual funds, the assumption of constant variance is not correct. Rather, under certain conditions for some specific mutual funds, such as when the time horizon is very short, the assumption of constant volatility is reasonable. Using univariate ARCH(1) to model returns of mutual funds, we got different α (selectivity ability), β2p (timing ability), and TM values compared with those calculated with the conventional TM index. Thus, we should be cautious when applying the TM index to evaluate performance of mutual funds.

Red vs. Blue Stocks: Politics and Profitability of Firms

This paper shows the impact of politics on a firm’s profitability. The Republican Party has a color of red, while the Democratic Party is coded blue. In this paper, we show that the equity market’s performance is statistically the same whoever occupies the White House. However, at the firm level we see a quite different picture. Over the years, 4.35 percent of firms could be labeled as blue meaning their stocks perform better when the sitting president comes from the Democratic Party. The red firms count for 5.11 percent. The rest, 90.54 percent of all US firms, are colorless. In an election year, the excess volatility of colored stocks increases dramatically, 48 percent more volatile than colorless ones. In addition, a zero-investment portfolio formed by longing and shorting opposite colored stocks at the beginning of a new administration generates an abnormal return of 9.3 percent per year.