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Category Archives: G14

Short Term Effectiveness of Chinese Stock Connect Program — a Study of the Pricing Dynamics of Cross-listed Stocks

by Kaiyu Ren

Abstract

This thesis examines the pricing dynamics of cross-listed stocks in the Chinese A-share and
Hong Kong H-share markets. By identifying an announcement-implementation window, I offer a
fresh perspective on the short-term price adjustment of cross-listed stocks around the launch of
the first Stock Connect program. My findings reveal a significant increase of the A-H price ratio,
but this price discrepancy appears to have been mitigated by the implementation of the Stock
Connect program.Additionally, my observations suggest the existence of market inefficiencies,
particularly among the groups of A-share stocks that are excluded from the Stock Connect
program.

Ronald Leven, Faculty Advisor

JEL codes: G14; G18

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Comparing the Performance of Active and Passive Mutual Funds in Developing and Developed Countries

By Nalini Gupta  

This paper seeks to test the hypothesis that developing countries or informationally inefficient countries should see higher returns for active mutual funds on average than passive funds and the trend should be reversed in developed nations or informationally efficient economies. This analysis is done using a cross section of eight countries, four developed and four developing. Using a fund universe of 20 active and 20 passive funds per country and controls such as volatility, market return, financial market development and Human Development Index among others, we see that there is no clear systematically dominant strategy between active and passive investment universally. While developing countries are associated with lower returns, we do not find a significant difference between active and passive based on development classification. A key finding is that an increase in liquidity, acting as proxy for informational efficiency, leads to a co-movement of active and passive returns in each country. The paper also lends itself to further analysis regarding confounding factor such as noise trading and movement of foreign capital which impact the effect of increased liquidity on mutual fund returns.

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Advisors: Professor Connel Fullenkamp, Professor Kent Kimbrough | JEL Codes: G1, G11, G14

The Impact of Post-IPO Private Equity Ownership on Long-Term Company Performance

By Maria Suhail and Cipriano Echavarría

This thesis contributes to existing knowledge of private equity (PE) by analyzing the
impact of PE ownership post-IPO upon the long-term performance of companies. It considers whether companies perform better when PE funds maintain their ownership stakes post-IPO and whether this performance is also impacted by the degree of ownership that is maintained after IPO. This study uses stock performance (measured by cumulative excess stock returns) as a proxy for long-run company performance. The paper constructs and analyzes a sample of 487 companies that underwent an IPO between 2004 and 2012 to determine the implications of the maintenance and level of PE ownership by analyzing the performance of these companies for six years post-IPO. Results suggest that PE ownership post-IPO positively impacts long-term stock performance of companies. Duration and degree of PE ownership post-IPO are also important determinants of long-run performance likely due to the positive signal that continued PE ownership sends to outside investors about the quality of the company, the information asymmetry that exists between public and private markets and that PE firms are experienced managers that add value to companies.

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Advisors: Professor David Robinson, Professor Michelle Connolly | JEL Codes: G11, G14, G24

Wrangling the Herd: A Cross-Cultural and Cross-Industry Approach to Herding Market Behavior

By Tyler Fenton and Jarred Kotzin

The traditional efficient market hypothesis serves as the foundation of modern economic theory, governing the investigation of financial markets. While this premise assumes all investors are rational and all information is immediately incorporated into markets, this paper explores herding behavior – a central tenet of behavioral finance that explains the apparent inefficiencies of financial markets. Utilizing return data from the past 10 years from eight exchanges around the world, segmented into 10 industry classes as well as a broad market index, we compare levels of herd behavior using return dispersion proxies. We find significant evidence of herding in nearly all exchanges and all industries included in the study and the degree of this herd behavior varies across industries in different countries. Overall, we find support for the behavioral finance principle of herding and conclude that certain cultural or non cultural factors affect this activity differently in various countries and industries.

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Advisors: Professor Connel Fullenkamp | JEL Codes: G4, G14, G15

Is Smart Money Smart? The Costs of Hedge Funds Trading Market Anomalies

By Matthew J. Farrell

Do hedge funds earn statistically significant premia on common factor trading strategies after trading costs are accounted for? Furthermore, what is the gap between what a hedge fund would earn and the paper portfolios that they hold? I answer this question by using the latest cutting-edge methodology to estimate trading costs for major financial market anomalies. This methodology uses the familiar asset-pricing Fama-MacBeth procedure to compare the on-paper compensation to factor exposures with those earned by hedge funds. I find that the typical hedge fund does not earn profits to value or momentum, and and low returns to size.

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Advisor: Professor Brian Weller | JEL Codes: G12; G14; G23;

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

Multiples Valuation and Abnormal Returns

By Joon Sang Yoon

I investigate whether three commonly used valuation multiples—the Price-to-Earnings Ratio, the EV-to-EBITDA multiple, and the EV-to-Sales multiple—can be used to identify mispriced securities. I find that multiples are successful in identifying mispricing in both the equal and value weighted portfolios relative to the One-Factor CAPM. I further find, after controlling for size and value effects, that the bulk of the abnormal returns are concentrated in smaller firms. Moreover, the Sales multiple seems to outperform the other two multiples in the equal weighted design. In the value weighted design, however, the P/E ratio outperforms the others.

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Advisor: Per Olsson | JEL Codes: G12, G14, M4 | Tagged: Equity Valuation, Long-run Abnormal Returns, Market Efficiency, Multiples Valuation

The Impact of Macroeconomic Surprises on Mergers & Acquisitions for Real Estate Investment Trusts

By John Reid

This paper examines the impact of various macroeconomics and real estate specific surprises on M&A transactions involving Real Estate Investment Trust. The 2008 financial crisis drastically affected merger & acquisitions activity, especially within the real estate market. The number of M&A transactions involving Real Estate Investment Trusts were very volatile during this period of economic turmoil and it appeared that several economic factors contributed to changing patterns in M&A activity. Our study uses time series data to draw a connection between REIT-related M&A activity and quantifiable factors. From or results we find there to be a relationship between the macroeconomic environment and REIT-related M&A activity.

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JEL Codes: G10, G14, G34 | Tagged: Macroeconomic Surprises, Mergers & Acquisitions, Real Estate Investment Trust

Examination of Time-Variant Asset Correlations Using High- Frequency Data

By Mingwei Lei

Drawing motivation from the 2007-2009 global financial crises, this paper looks to further examine the potential time-variant nature of asset correlations. Specifically, high frequency price data and its accompanying tools are utilized to examine the relationship between asset correlations and market volatility. Through further analyses of this relationship using linear regressions, this paper presents some significant results that provide striking evidence for the time-variability of asset correlations. These findings have crucial implications for portfolio managers as well as risk management professionals alike, especially in the contest of diversification.

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Advisor: George Tauchen | JEL Codes: G, G1, G10, G11, G14 | Tagged: Asset correlations, Diversification, Financial Crisis, High-Frequency Data, Market Volatility, Time-Variant Correlations, Time-Variant Volatility

Questions?

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