Do Funds Make More When They Trade More?
Pages: 1483-1528 | Published: 5/2017 | DOI: 10.1111/jofi.12509 | Cited by: 169
ĽUBOŠ PÁSTOR, ROBERT F. STAMBAUGH, LUCIAN A. TAYLOR
We model fund turnover in the presence of time‐varying profit opportunities. Our model predicts a positive relation between an active fund's turnover and its subsequent benchmark‐adjusted return. We find such a relation for equity mutual funds. This time‐series relation between turnover and performance is stronger than the cross‐sectional relation, as the model predicts. Also as predicted, the turnover‐performance relation is stronger for funds trading less‐liquid stocks and funds likely to possess greater skill. Turnover is correlated across funds. The common component of turnover is positively correlated with proxies for stock mispricing. Turnover of similar funds helps predict a fund's performance.
Pages: 1567-1610 | Published: 6/2017 | DOI: 10.1111/jofi.12507 | Cited by: 75
BIGE KAHRAMAN, HEATHER E. TOOKES
Does trader leverage drive equity market liquidity? We use the unique features of the margin trading system in India to identify a causal relationship between traders’ ability to borrow and a stock's market liquidity. To quantify the impact of trader leverage, we employ a regression discontinuity design that exploits threshold rules that determine a stock's margin trading eligibility. We find that liquidity is higher when stocks become eligible for margin trading and that this liquidity enhancement is driven by margin traders’ contrarian strategies. Consistent with downward liquidity spirals due to deleveraging, we also find that this effect reverses during crises.
Pages: 1611-1644 | Published: 5/2017 | DOI: 10.1111/jofi.12513 | Cited by: 390
ALAN MOREIRA, TYLER MUIR
Managed portfolios that take less risk when volatility is high produce large alphas, increase Sharpe ratios, and produce large utility gains for mean‐variance investors. We document this for the market, value, momentum, profitability, return on equity, investment, and betting‐against‐beta factors, as well as the currency carry trade. Volatility timing increases Sharpe ratios because changes in volatility are not offset by proportional changes in expected returns. Our strategy is contrary to conventional wisdom because it takes relatively less risk in recessions. This rules out typical risk‐based explanations and is a challenge to structural models of time‐varying expected returns.
Advance Refundings of Municipal Bonds
Pages: 1645-1682 | Published: 5/2017 | DOI: 10.1111/jofi.12506 | Cited by: 37
ANDREW ANG, RICHARD C. GREEN, FRANCIS A. LONGSTAFF, YUHANG XING
The advance refunding of debt is a widespread practice in municipal finance. In an advance refunding, municipalities retire callable bonds early and refund them with bonds with lower coupon rates. We find that 85% of all advance refundings occur at a net present value loss, and that the aggregate losses over the past 20 years exceed $15 billion. We explore why municipalities advance refund their debt at loss. Financially constrained municipalities may face pressure to advance refund since it allows them to reduce short‐term cash outflows. We find strong evidence that financial constraints are a major driver of advance refunding activity.
Municipal Bond Liquidity and Default Risk
Pages: 1683-1722 | Published: 6/2017 | DOI: 10.1111/jofi.12511 | Cited by: 210
MICHAEL SCHWERT
This paper examines the pricing of municipal bonds. I use three distinct, complementary approaches to decompose municipal bond spreads into default and liquidity components, and find that default risk accounts for 74% to 84% of the average spread after adjusting for tax‐exempt status. The first approach estimates the liquidity component using transaction data, the second measures the default component with credit default swap data, and the third is a quasi‐natural experiment that estimates changes in default risk around pre‐refunding events. The price of default risk is high given the rare incidence of municipal default and implies a high risk premium.
Pages: 1723-1784 | Published: 6/2017 | DOI: 10.1111/jofi.12512 | Cited by: 115
JOÃO GRANJA, GREGOR MATVOS, AMIT SERU
Report of the Editor of the Journal of Finance for the Year 2016
Pages: 1859-1874 | Published: 8/2017 | DOI: 10.1111/jofi.12531 | Cited by: 0
STEFAN NAGEL
Minutes of the 2017 Annual Membership Meeting
Pages: 1875-1876 | Published: 8/2017 | DOI: 10.1111/jofi.12532 | Cited by: 0
Report of the Executive Secretary and Treasurer
Pages: 1877-1878 | Published: 8/2017 | DOI: 10.1111/jofi.12533 | Cited by: 0