Browsing by Author "Edelen, Roger M."
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- Essays on Factor ModelsLin, Chun-Wei (Virginia Tech, 2024-05-16)This dissertation consists of three chapters describing the applications of factor models in different fields of asset pricing. The first chapter addresses the following issue: Prominent volatility-based factor pricing models focus exclusively on the second moment of asset returns, and hence, tend to identify volatile factors but with little risk premia. This chapter demonstrates that a simple asset return transform can arbitrarily upset the ranking of volatility-based factors, but not their prices of risks. Accordingly, we propose a new framework to identify factors based on their prices of risks, or the so-called principally priced risk factors (PPRFs). We construct these factors by generalizing the standard Sharpe ratio for a single asset to a set of assets, incorporating information from both the first and second moments of asset returns. The PPRF framework improves out-of-sample pricing performance in both equity and currency markets. The second chapter identifies the origins of covariance in institutional trading. Conceptually, we introduce two perspectives: the asset perspective, which prioritizes assets as the key market fundamentals, and the manager perspective, which prioritizes fund managers as the key market fundamentals that drive institutional trading covariance. Empirically, we establish that the asset perspective is the primary driver of covariance in institutional trading. Our analysis documents two further empirical patterns. First, returns stemming from the covariance in institutional trading from the asset perspective have higher volatility, offering valuable insights into the demand-based asset pricing literature. Second, the persistence in trading often breaks down during economic downturns, suggesting potential connections to the uncertainty-based business cycle literature. Finally, the third chapter examines the impact of changes in monetary policy rules on the asset valuations of firms with different profitability. I have the following two empirical findings. First, during periods of hawkish monetary policies, the 'profitability premium'— the expected extra return on investments in more profitable firms — tends to increase. Second, when analyzing the factors mediating this effect, changes in inflation expectations play a more significant role in influencing the profitability premium during transitions to a hawkish monetary regime, compared to the effects of real interest rate adjustments on production costs. These observations suggest a possible mechanism by which monetary policy may have different long-term effects on firms with different characteristics.
- Examination of long-run performance of momentum portfolios: Implications for the sources and profitability of momentumLi, Yao (Virginia Tech, 2019-09-20)This dissertation investigates the long-term performance of momentum portfolios. Its results show striking asymmetries for winners and losers and imply potentially different causes for the winner and loser components of momentum. After separately examining winners and losers relative to their respective benchmark portfolios with no momentum, we find winner momentum is smaller in magnitude, persists only for six months, and its higher return fully reverses. This is consistent with the notion that winner momentum is an overreaction to positive news and potentially destabilizing. Loser momentum is larger in magnitude, lasts for about one year, and its lower return does not reverse in the long run. This is consistent with the notion that loser momentum is an underreaction to negative news and suggests investors hold on to losers for too long. The lack of reversal for losers departs from prior studies whose findings are driven by the use of monthly rebalanced portfolio. Rebalancing cumulates an upward bias caused by noise-induced price volatility, which disproportionately affects losers more. This greater upward bias in losers creates an illusion that the winner minus loser return reverses. More appropriate approaches such as the buy-and-hold portfolio documents significantly less reversal. Existing theories that potentially conform to the overreaction of winners and underreaction of losers include overconfidence (Daniel, Hirshleifer, and Subrahmanyam, 1998), representativeness and conservatism (Barberis, Shleifer, and Vishny, 1998), interaction between agents holding asymmetric information (Hong and Stein, 1999), and investors' asymmetric response to fund performance (Vayanos and Woolley, 2013).
- Institutional segmentation of equity markets: causes and consequencesHosseinian, Amin (Virginia Tech, 2022-07-27)We re-examine the determinants of institutional ownership (IO) from a segmentation perspective -- i.e. accounting for a hypothesized systematic exclusion of stocks that cause high implementation or agency costs. Incorporating segmentation effects substantially improves both explained variance in IO and model parsimony (essentially requiring just one input: market capitalization). Our evidence clearly establishes a role for both implementation costs and agency considerations in explaining segmentation effects. Implementation costs bind for larger, less diversified, and higher turnover institutions. Agency costs bind for smaller institutions and clienteles sensitive to fiduciary diligence. Agency concerns dominate; characteristics relating to the agency hypothesis have far more explanatory power in identifying the cross-section of segmentation effects than characteristics relating to the implementation hypothesis. Importantly, our study finds evidence for interior optimum with respect to the institution's scale, due to the counteracting effect between implementation and agency frictions. We then explore three implications of segmentation for the equity market. First, a mass exodus of publicly listed stocks predicted to fall outside institutions' investable universe helps explain the listing puzzle. There has been no comparable exit by institutionally investable stocks. Second, institutional segmentation can lead to narrow investment opportunity sets, which limit money managers' ability to take advantage of profitable opportunities outside their investment segment. In this respect, we construct pricing factors that are feasible (ex-ante) for institutions and benchmark their performance. We find evidence consistent with the demand-based asset pricing view. Specifically, IO return factors yield higher return premia and worsened institutional performance relative to standard benchmarks in an expanding institutional setting (pre-millennium). Third, we use our logistic model and examine the effect of aggregated segmentation on the institutions' portfolio returns. Our findings suggest that investment constraints cut profitable opportunities and restrict institutions from generating alpha. In addition, we find that stocks with abnormal institutional ownership generate significant positive returns, suggesting institution actions are informed.
- S&P 500 Indexers, Delegation Costs, and Liquidity MechanismsEdelen, Roger M.; Blume, Marshall E. (2004)