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An Analysis of Passive and Active Bond Mutual Fund Performance

By Michael J. Kiffel

The literature on the performance differential between passively and actively managed equity mutual funds is thorough: passively managed funds generally outperform their active counterparts except in the rare presence of highly-skilled managers. However, there exists limited academic research regarding fixed income mutual funds. This study utilizes the Fama-French bond risk factors, TERM and DEF, in a dual-step multivariate linear regression analysis to determine this performance differential between passively and actively managed bond mutual funds. The funds are comprised of either corporate or government bonds, spanning three categorizations of average maturities. Overall, it is determined that passively managed bond funds offer higher net returns than those offered by actively managed funds. Additionally, the regressions demonstrated that DEF possesses a high degree of predictive power and statistical
significance.

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Advisor: Edward Tower | JEL Codes: C55, G10, G11

Vanguard’s Index Funds vs. Vanguard’s Managed Funds: a Nine Style Box and Fama-French Multi-Variable Regression Approach

By Susheel Nalla

Many investors struggle to determine whether they want to invest in managed funds or indexed funds when they build portfolio. Vanguard, founded by John Bogle, a strong advocate for indexed investing has seen his company grow to over $3.9 trillion in funds. In the last three years $1 trillion of new money has come into their passive funds as investors are moving towards saving on cheaper expense ratios. However, many people like Vanguard’s former CIO Gus Sauter believe that managed funds can deliver additional value to their investors by keeping expense ratios low and hiring the world’s best managers. This study looks at Vanguard indexed and managed funds in three different market capitalizations organized nine style boxes to see whether Vanguard’s strategy of low management expense ratios provides additional value to their own benchmarks. This study uses two comparison methods to analyze market returns of these funds from 2006-2016. First, indexed and managed Vanguard funds will be compared using a Morningstar nine-style box to directly see differences in return rates and estimate riskiness of these assets through standard deviations. Second, the Fama-French three-factor model will be used to create a regression explaining where the fund returns may be coming from. This method will determine the SMB and HML of the funds telling us the size of the equities in the fund along with their value premium over book value. Also, a market coefficient will be determined to see how close these funds are relative to a market benchmark. Overall, it is determined that Vanguard indexed funds in small-cap and mid-caps are slightly better investments based on returns and exposure to risk along with their equity composition. Based on the same criteria, large-cap funds perform slightly better than their indexed counterparts.

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Advisor: Edward Tower | JEL Codes: C55, G10, G11, G12

Evaluating Stock and Bond Portfolio Allocations using CAPER and Tobin’s Q

By Jayanth Ganesan

I test whether an investor can increase the returns on their portfolio over the long-term by timing the market using measures of market value, such as the Tobin’s q ratio and the Cyclically Adjusted Price Earnings (CAPE or Shiller-CAPE). To test this proposition, I examine contrarian investor strategies proposed by Smithers and Wright (2000) and investor strategies based on different equity-fixed income combination portfolios. I seek to determine whether these strategies produce higher risk-adjusted returns than buy-and-hold equity strategies such as those proposed by Siegel (2014) for long-term portfolios. I also examine whether Siegel’s theory that stocks are better investment vehicles than bonds for investment horizons greater than 20 years. In my study, buy-and-hold portfolios composed of the S&P 500 have additional annualized returns of 1.5% than portfolios which reallocate funds in alternative securities based on CAPE and q thresholds. I conclude that for long-term investment horizons, an investor is unlikely to increase portfolio returns by reallocating funds to an alternative asset class when stocks are overvalued. However, I do not find that stocks are better investment vehicles compared to bonds as portfolio with bonds have a lower portfolio risk in my sample. I believe that the effectiveness q ratios for market timing is likely to be independent of how the q ratio is calculated. As suggested by Asness (2015), I find that portfolios that utilize both value and trend investing principles with CAPE and q may outperform portfolios that utilize only value-based market timing strategies. I conclude that CAPE and q based timing strategies are difficult to implement without detailed knowledge of future stock valuations.

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Advisor: Edward Tower | JEL Codes: G11, G14 | Tagged: Information on Market Efficiency, Investment Decisions, Portfolio Choice

Google Search Volume Index: Predicting Returns, Volatility and Trading Volume of Tech Stocks

By Rui Xu

This paper investigates the efficacy of using Google Search Volume Index (SVI), a publicly available tool Google provides via Google Trends, to predict stock movements within the tech sector. Relative changes in weekly search volume index are recorded from April 2004 to March 2015 and correlated with weekly returns, realized volatility and trading volume of 10 actively traded tech stocks. Correlations are drawn for three different time periods, each representing a different stage of the financial business cycle, to find out how Search Volume Index correlates with stock market movements in economic recessions and booms. Google SVI is found to be significantly and positively correlated with trading volume and weekly closing price across 2004 to 2015, and positively correlated with realized volatility from 2009-2015. There exists a positive correlation between weekly stock returns and SVI for half of the stocks sampled across all 3 periods. The regression model was a better fit before and during the recession, suggesting the possibility of stronger “herding” behavior during those periods than in recent years.

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Advisor: Edward Tower | JEL Codes: G1, G14, G17 | Tagged: Analysis, Information, market efficiency, Stock Returns

How does being a Serial Creator affect Probability of Campaign Success on Kickstarter?

By Minn Khine

This paper seeks to address the issue of how being a serial creator impacts campaign success on Kickstarter. My hypothesis is that being a serial creator – someone who has created 2 or more projects on Kickstarter – has a positive effect on probability of campaign success but there are diminishing marginal returns to this effect. A regression analysis over a sample of over 187 thousand Kickstarter projects from its inception in 2008 until December 2014 yields the following findings, which supports my hypothesis. I found that being a serial creator does have a positive effect on campaign success but there is diminishing marginal returns to being a serial creator. Furthermore, number of updates, number of reward levels, having a video, number of backers, FB Shares, FB Friends, and Number of Projects Backed all have positive effects on campaign success. On the other hand, comments, funding goal, and duration have negative effects on campaign success. The effect of the Fed Fund Rate on campaign success is inconclusive. In terms of how project characteristics and creator characteristics affect first time creators and serial creators differently, I found that Updates, Video, FBShares, FBFriends, and Goal matter less as number of projects created increases, in other words, for serial creators who’ve gathered more project experience. On the other hand, Rewards, Backers, ProjectsBacked, Comments, and Duration matter more as number of projects created increases.

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Advisor: Edward Tower, Grace Kim | JEL Codes: G21, G24, L26 | Tagged: Crowdfunding, Kickstarter, Serial creator

What is the Effect of Regulatory Supervision on the Profitability and Outreach of Microfinance Institutions?

By Nikolaus Axmann

Regulatory supervision is an important part of the formal banking process. As microfinance institutions have developed and multiplied, they have become more closely regulated, which has allowed many of them to evolve into more traditional banks. But there are concerns over microfinance regulation, as complying with regulatory can be costly, particularly for smaller institutions. Using high-quality cross-sectional data from the Microfinance Information eXchange, I conduct ordinary least squares and instrumental variables regression of regulatory supervision on profitability and outreach of microfinance institutions. Controlling for the non-random assignment of regulation using instrumental variables, I find that regulation is correlated with higher average loan sizes and less lending to women, but increased profitability among for-profit microfinance institutions. The results are consistent with the hypothesis that for-profit microfinance institutions change their business model in response to regulation by cutting outreach to lending sectors that are generally more costly per dollar lent. In contrast, nonprofit microfinance institutions do not adjust loan sizes or reduce lending to women in
response to regulation, although their profitability does not increase either.

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Advisor: Edward Tower | JEL Codes: F6, F61, F63 | Tagged: Development, Microfinance, Regulation

Government Allocation of Import Quota Slots to US Films in China’s Cinematic Movie Market

By Sabrina McCutchan

The Chinese government implements a complex regulatory system to decrease the market share of imported Hollywood films for theatrical release. The import quota, censorship, and competitive release-scheduling policies in particular severely limit Hollywood’s access to the Chinese market. However, because the government has a monopoly on film distribution and receives nearly half of all box office receipts from Hollywood films, I expect that the profit incentive is comparatively more important than protectionist motives in the decision to import a Hollywood film or grant it a revenue-sharing quota slot. This paper’s findings support this hypothesis. Using a probit model, I find that three strong predictors of Chinese box office, namely US box office, Hong Kong box office, and the action genre, positively predict entry to the Chinese market and the allocation of a revenue-sharing quota slot for US-movies released in 2012.

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Advisor: Edward Tower | JEL Codes: F14, F19 | Tagged: China, Hollywood, Motion Pictures, Protectionism, Quota

Enhanced versus Traditional Indexation for International Mutual Funds: Evaluating DFA, Wisdom Tree and RAFI PowerShares

By Heehyun Lim

This paper uses stye analysis to compare the performance of traditional international index funds and enhanced international index funds. It attempts to measure the value added beyond classic indexation by the consideration of fundamentals. By employing Sharpe’s style analysis, I formulate a synthetic portfolio composed of DFA traditional funds to imitate each enhanced index fund portfolio’s performance. Then I compare the return and volatility of each portfolio. The result shows that half of enhanced fund portfolios tested in the paper outperforms their traditional synthetic portfolio, while the other half under-perform.

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Advisor: Edward Tower | JEL Codes: G11, G15 | Tagged: Enhanced Index Fund, Fundamental, Indexation, Style Analysis

Are Asset Allocation Funds Good at Market Timing?

By Yunze Chen

“Don’t forget that your incredible success in consistently making each move at the right time in the
market is but my pathetic failure in making each move at the wrong time. … … I don’t know anyone who can do it successfully, nor anyone who has done so in the past. Heck, I don’t even know anyone who knows anyone who has timed the market with consistent, successful, replicable results.” (John Bogle, quoted in The Finance Buff, 2011).

John C. Bogle, the founder of the Vanguard Group, has long insisted on the superiority of index funds over actively managed mutual funds and the foolishness of attempts to time the market. He published two articles in the Journal of Portfolio Management showing that in eight out of nine style categories, managed mutual funds had lower risk-adjusted returns than the corresponding indexes did. While this demonstrates the failure of stock picking by mutual funds to serve investors well, it says nothing about their ability to time the market by changing styles. Managers of asset allocation funds often use a flexible combination of stocks, bonds, and cash; some, but not all, shift assets frequently based on analysis of business-cycle trends. To test his view of market timing, we evaluated the returns of 82 major asset allocation funds by comparing them with the returns of corresponding baskets of Vanguard’s index funds over a 13-year time span. We find that on average the index funds have higher risk-adjusted returns. We conclude that “simplicity is the ultimate sophistication” applies to mutual fund investments.

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Advisor: Edward Tower | JEL Codes: G10, G11, G20 | Tagged: Expense Ratio, Mutual fund families, Performance

Effects of Wages of Government Officials on Corruption in Developing Countries

By Vansh Muttreja

In a world where a majority of countries are suffering from corruption, it is important to study the causes of corruption and how it can be removed. There are many factors that affect corruption, and the one that this thesis focuses on is wages. The goal of this thesis is to understand the effects of wages of government officials on corruption levels in developing countries over time. The reason for looking particularly at developing countries is that corruption is higher and a bigger concern in such countries. The results of the analysis show that in order for developing countries to decrease corruption levels to those of the least 50 corrupt nations, there needs to be an increase of 422.51% in their government wages. The results are not suggestive for all developing countries because only a limited amount of developing countries were analyzed in this thesis. However, they do give us a glimpse into the negative relationship between corruption and wages.

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Advisor: Edward Tower, Kent Kimbrough

Questions?

Undergraduate Program Assistant
Jennifer Becker
dus_asst@econ.duke.edu

Director of the Honors Program
Michelle P. Connolly
michelle.connolly@duke.edu