Do Vanguard ETF Investors Make Good Decisions? – Testing the Bogle Hypothesis
By Meng Xie
John Bogle, the founder of Vanguard, is a notable opponent of frequent ETF trading. We test his
hypothesis that Vanguard investors are not trading ETFs intelligently. A comparison of dollarweighted
and time-weighted returns is the typical method used for assessing investor timing. We
instead employ Sharpe’s style analysis techniques to compare the returns of a portfolio of ETFs
to a basket of standard Vanguard funds that mimics the ETF portfolio’s pattern of returns. We
find that the ETF portfolio underperforms the standard Vanguard funds, providing empirical
evidence supporting Bogle’s view that ETFs are misused.
Advisor: Edward Tower | JEL Codes: G11 | Tagged: Exchange-traded funds, Investment, Mutual funds, Vanguard
Auctions as an Alternative to Book Building in the IPO Process: An Examination of Underpricing for Large Firms in France
By John Mekjian
A relevant factor in determining the quality of an initial public offering (IPO) mechanism is the level and variability of underpricing that occurs. The percentage difference between the IPO price and the closing price after one day of trading is a common way to define the “underpricing” of the stock. Although companies may value a small amount of positive underpricing, they certainly want this to be controlled. Both extreme positive and extreme negative underpricing are undesirable for a company. Building off of a paper that found a lower mean and variability of underpricing for firms that use the auction IPO mechanism as opposed to the book building IPO mechanism, this paper argues that auctions are not disadvantaged when only large firms are considered. Although this paper finds that the book building mechanism controls underpricing better than the auction mechanism, the advantage disappears when considering only large firms. This analysis is relevant because, aside from two companies, only small companies have used the auction IPO mechanism in the United States. Due to the lack of auction IPOs in the United States, this paper uses French data in its analysis. By showing that large firms using the auction mechanism are not disadvantaged when compared to large firms using the book building mechanism, this paper attempts to encourage large firms in the United States to consider using the auction method for their IPOs.
Advisor: James Roberts, Marjorie McElroy | JEL Codes: G12, G14, G20, G30 | Tagged: Auction, IPO, Underpricing
A Further Exploration of Reverse Takeovers as an Alternative to Initial Public Offerings
By Matt LoSardo and Zhunliang Zhu
In theory a reverse takeover (RTO) should be a viable alternative to initial public offerings (IPO) for private companies looking to access the public capital markets. Since the IPO process can be very timely and include significant costs, both direct and indirect, we analyze reverse takeovers as an alternative method. Recent papers have posed some similar questions, evaluating underpricing and market-timing, which we look to confirm. However, our paper seeks to build on these analyses, with a particular focus on long-term returns for RTO stocks. Overall we find that reverse takeovers can be successfully used instead of IPOs and should be sustainable long-term investments.
Advisor: Edward Tower, Marjorie McElroy | JEL Codes: G12, G24, G32, G34 | Tagged: Finance, Initial Public Offering, Reverse Takeover
Taming the Dragon: The Modernization of the Chinese Equity Markets and its Effects on IPO Underpricing
By William Benesh
The extreme underpricing of Chinese Initial Public Offerings in the early days of the Chinese equity markets was reduced by several reforms instituted by the Chinese government from around 2000 to 2002. These reforms reduced 1-day returns on IPOs from 295% to 72%. The reforms reduced IPO underpricing by decreasing the inequality between IPO supply and demand. These reforms, while announced between 2000 and 2002, likely took until around 2004 to take full effect. In addition to inequality between supply and demand, other factors such as information asymmetry and government/quality signaling contributed to underpricing both before and after the reforms.
Advisors: Francesco Bianchi, Kent Kimbrough | JEL Codes: G14, G15, G28, G30 | Tagged: China, Initial Public Offerings, Regulation, Stock Markets, Underpricing
Beta Estimation Using High Frequency Data
By Angela Ryu
Using high frequency stock price data in estimating nancial measures often causes serious distortion. It is due to the existence of the market microstructure noise, the lag of the observed price to the underlying value due to market friction. The adverse eect of the noise can be avoided by choosing an appropriate sampling frequency. In this study, using mean square error as the measure of accuracy in beta estimation, the optimal pair of sampling frequency and the trailing window was empirically found to be as short as 1 minute and 1 week, respectively. This surprising result may be due to the low market noise resulting from its high liquidity and the econometric properties of the errors-in-variables model. Moreover, the realized beta obtained from the optimal pair outperformed the constant beta from the CAPM when overnight returns were excluded. The comparison further strengthens the argument that the underlying beta is time-varying.
Advisor: George Tauchen | JEL Codes: C51, C58, G17 | Tagged: Beta estimation, Beta Trailing Window, High-Frequency Data, Market Microstructure Noise, Optimal Sampling Interval, Realized Beta
Book-building versus Auctions: An investigation into which IPO pricing and selling method more effectively promotes the aims of an IPO issuer
by Amrith Krushnakumaar
Abstract
In recent years, book-building has emerged as a method of choice among investment banks in the U.S and around the world for pricing and selling initial public offerings (IPOs). Proponents of the book-building method argue that discriminatory share allocations, the pooling of IPOs and other standard book-building practices price new shares more accurately, thus enabling the issuer to maximize proceeds received from the IPO, and minimize fluctuations in share price immediately after the IPOs. However, in view of the average first-day price increases common among IPOs marketed by the book-building method, and the potential for investment banks to abuse their power when allocating shares, skeptics claim that book-building is inadequate in helping the issuer meet its aims. Amid calls by regulators and critics to reform the existing book-building method, W.R Hambrecht, an investment bank, introduced the auction method of pricing and selling IPOs for the first time in the United States in 1999. This paper aims to determine which method might be more effective in promoting an issuer’s aims by employing a matched methodology to fairly compare more recent book-building and auction IPOs in the U.S.
Professor Edward Tower, Faculty Advisor
Professor Allen H. Huang, Faculty Advisor
JEL Codes: D21, D22, E44, G1,
A Case Study on the Informational Role of Futures Markets: Can Weather Futures Forecast Electricity Consumption?
by Ying Chiat Ho
Abstract
This paper provides a case study on the informational role of futures prices by investigating the ability of Cooling Degree Day (CDD) futures prices to forecast electricity consumption for New York State. I develop a cross-sectional model relating electricity consumption with the cumulative CDDs in a month for New York City and utilize the 30-day ahead settlement prices of the New York CDD futures contracts within the model to forecast electricity consumption. The forecasts derived explain up to 94.68% of the variation in actual electricity consumption, suggesting that the CDD futures prices contain useful forward-looking information about electricity consumption.
Professor Edward Tower, Faculty Advisor
JEL Codes: G13,
The Value of Unsolicited Buy Recommendations to Investors: Can Investors Trade Profitably Based on E-mail Spam?
by Angela Nicole Aldrich
Abstract
This paper explores the possibility of trading profitably based on information contained in email spam messages advertising certain stock trades. Through careful analysis of a basket of sixteen stocks that were recommended to my advisor and myself via unsolicited email spam, I conclude that the most effective way for investors to trade these stocks is to short-sell immediately upon initial receipt of a recommendation to buy.
Professor Bjorn Eraker, Faculty Advisor
JEL Codes: E2, G11,
Could the Kaminsky-Reinhart Model Have Predicted the 2002 Uruguayan Currency and Banking Crises?
by Steven R. Vickers
Abstract
Because currency and banking crises cause substantial and prolonged disruptions
to an economy, economists have long sought ways to predict these events in advance.
One recent theory advanced is the “leading indicators” approach of Kaminsky (1998) and
Kaminsky and Reinhart (1999). Kaminsky (1998) presents four separate composite
indicators, and Kaminsky and Reinhart (1999) refines the model. This paper provides one
test of this theory by analyzing the currency and banking crises that arose in July 2002 in
Uruguay. This study tests the efficacy of these indicators by analyzing the behavior of
the indicators in the months directly preceding the Uruguayan crises. In general, three
indicators performed reasonably well, while one had exceptional predictive power.
Professor Stephanie Schmitt-Grohé, Faculty Advisor
JEL Codes: E47, G01, G15,
