The Journal of Finance

Firm Size and Cyclical Variations in Stock Returns

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00246

Gabriel Perez‐Quiros, Allan Timmermann

Recent imperfect capital market theories predict the presence of asymmetries in the variation of small and large firms' risk over the economic cycle. Small firms with little collateral should be more strongly affected by tighter credit market conditions in a recession state than large, better collateralized ones. This paper adopts a flexible econometric model to analyze these mplications empirically. Consistent with theory, small firms display the highest degree of asymmetry in their risk across recession and expansion states, which translates into a higher sensitivity of their expected stock returns with respect to variables that measure credit market conditions.

Predictability of Stock Returns: Robustness and Economic Significance

Published: 09/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04055.x

M. HASHEM PESARAN, ALLAN TIMMERMANN

This article examines the robustness of the evidence on predictability of U.S. stock returns, and addresses the issue of whether this predictability could have been historically exploited by investors to earn profits in excess of a buy‐and‐hold strategy in the market index. We find that the predictive power of various economic factors over stock returns changes through time and tends to vary with the volatility of returns. The degree to which stock returns were predictable seemed quite low during the relatively calm markets in the 1960s, but increased to a level where, net of transaction costs, it could have been exploited by investors in the volatile markets of the 1970s.

Data‐Snooping, Technical Trading Rule Performance, and the Bootstrap

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00163

Ryan Sullivan, Allan Timmermann, Halbert White

In this paper we utilize White's Reality Check bootstrap methodology (White (1999)) to evaluate simple technical trading rules while quantifying the data‐snooping bias and fully adjusting for its effect in the context of the full universe from which the trading rules were drawn. Hence, for the first time, the paper presents a comprehensive test of performance across all technical trading rules examined. We consider the study of Brock, Lakonishok, and LeBaron (1992), expand their universe of 26 trading rules, apply the rules to 100 years of daily data on the Dow Jones Industrial Average, and determine the effects of data‐snooping.

Pockets of Predictability

Published: 04/03/2023   |   DOI: 10.1111/jofi.13229

LELAND E. FARMER, LAWRENCE SCHMIDT, ALLAN TIMMERMANN

For many benchmark predictor variables, short‐horizon return predictability in the U.S. stock market is local in time as short periods with significant predictability (“pockets”) are interspersed with long periods with no return predictability. We document this result empirically using a flexible time‐varying parameter model that estimates predictive coefficients as a nonparametric function of time and explore possible explanations of this finding, including time‐varying risk premia for which we find limited support. Conversely, pockets of return predictability are consistent with a sticky expectations model in which investors slowly update their beliefs about a persistent component in the cash flow process.

Cash Flow News and Stock Price Dynamics

Published: 04/03/2020   |   DOI: 10.1111/jofi.12901

DAVIDE PETTENUZZO, RICCARDO SABBATUCCI, ALLAN TIMMERMANN

We develop a new approach to modeling dynamics in cash flows extracted from daily firm‐level dividend announcements. We decompose daily cash flow news into a persistent component, jumps, and temporary shocks. Empirically, we find that the persistent cash flow component is a highly significant predictor of future growth in dividends and consumption. Using a log‐linearized present value model, we show that news about the persistent dividend growth component predicts stock returns consistent with asset pricing constraints implied by this model. News about the daily dividend growth process also helps explain concurrent return volatility and the probability of jumps in stock returns.

Can Mutual Fund “Stars” Really Pick Stocks? New Evidence from a Bootstrap Analysis

Published: 01/11/2007   |   DOI: 10.1111/j.1540-6261.2006.01015.x

ROBERT KOSOWSKI, ALLAN TIMMERMANN, RUSS WERMERS, HAL WHITE

We apply a new bootstrap statistical technique to examine the performance of the U.S. open‐end, domestic equity mutual fund industry over the 1975 to 2002 period. A bootstrap approach is necessary because the cross section of mutual fund alphas has a complex nonnormal distribution due to heterogeneous risk‐taking by funds as well as nonnormalities in individual fund alpha distributions. Our bootstrap approach uncovers findings that differ from many past studies. Specifically, we find that a sizable minority of managers pick stocks well enough to more than cover their costs. Moreover, the superior alphas of these managers persist.

Decentralized Investment Management: Evidence from the Pension Fund Industry

Published: 01/30/2013   |   DOI: 10.1111/jofi.12024

DAVID BLAKE, ALBERTO G. ROSSI, ALLAN TIMMERMANN, IAN TONKS, RUSS WERMERS

Using a unique data set, we document two secular trends in the shift from centralized to decentralized pension fund management over the past few decades. First, across asset classes, sponsors replace generalist balanced managers with better‐performing specialists. Second, within asset classes, funds replace single managers with multiple competing managers following diverse strategies to reduce scale diseconomies as funds grow larger relative to capital markets. Consistent with a model of decentralized management, sponsors implement risk controls that trade off higher anticipated alphas of multiple specialists against the increased difficulty in coordinating their risk‐taking and the greater uncertainty concerning their true skills.