The Journal of Finance

DISCUSSION

Published: 07/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03683.x

STEPHEN J. BROWN

The Number of Factors in Security Returns

Published: 12/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb02652.x

STEPHEN J. BROWN

Both factor analysis of security returns and the analysis of eigenvalues seem to indicate that a market factor explains the major part of security returns. We find that such evidence is consistent with an economy where there are in fact k “equally important” priced factors; eigenvalue analysis in the context of such an economy will lead an investigator to the false inference that the one important “factor” is the return on an equally weighted market index.

DISCUSSION

Published: 07/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb04604.x

STEPHEN J. BROWN

A New Approach to Testing Asset Pricing Models: The Bilinear Paradigm

Published: 06/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02498.x

STEPHEN J. BROWN, MARK I. WEINSTEIN

We propose a new approach to estimating and testing asset pricing models in the context of a bilinear paradigm introduced by Kruskal [18]. This approach is both simple and at the same time quite general. As an illustration we apply it to the special case of the arbitrage pricing model where the number of factors is pre‐specified. The data appear to be generally in conflict with a five or seven factor representation of the model used by Roll and Ross [30]. When we consider the number of replications of our test and the large number of observations on which it is performed, the frequency with which we reject the three factor APM does not lead us to conclude that this model is unrepresentative of security returns. Further, the rejection of the five and seven factor versions is to be expected if the three factor version is correct. The paradigm gives insight into the appropriate specification of the model and suggests that there may be a small number of economy wide factors that affect security returns.

Performance Persistence

Published: 06/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04800.x

STEPHEN J. BROWN, WILLIAM N. GOETZMANN

We explore performance persistence in mutual funds using absolute and relative benchmarks. Our sample, largely free of survivorship bias, indicates that relative risk‐adjusted performance of mutual funds persists; however, persistence is mostly due to funds that lag the S&P 500. A probit analysis indicates that poor performance increases the probability of disappearance. A year‐by‐year decomposition of the persistence effect demonstrates that the relative performance pattern depends upon the time period observed, and it is correlated across managers. Consequently, it is due to a common strategy that is not captured by standard stylistic categories or risk adjustment procedures.

Anomalies in Security Returns and the Specification of the Market Model

Published: 07/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03673.x

STEPHEN J. BROWN, CHRISTOPHER B. BARRY

We examine the hypothesis originally advanced by Roll [12] that observed anomalies in excess returns can be explained by misspecification of the market model used to estimate systematic risk. We find substantial misspecifications in the model systematically related to size and period of listing of the securities in question. There is some evidence that these misspecifications are associated with systemic biases in measured betas used to construct excess returns.

Estimation Risk and Simple Rules for Optimal Portfolio Selection

Published: 09/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02284.x

SON‐NAN CHEN, STEPHEN J. BROWN

The Empirical Implications of the Cox, Ingersoll, Ross Theory of the Term Structure of Interest Rates

Published: 07/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb04523.x

STEPHEN J. BROWN, PHILIP H. DYBVIG

The one‐factor version of the Cox, Ingersoll, and Ross model of the term structure is estimated using monthly quotes on U.S. Treasury issues trading from 1952 through 1983. Using data from a single yield curve, it is possible to estimate implied short and long term zero coupon rates and the implied variance of changes in short rates. Analysis of residuals points to a probable neglected tax effect.

The Dow Theory: William Peter Hamilton's Track Record Reconsidered

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00054

Stephen J. Brown, William N. Goetzmann, Alok Kumar

Alfred Cowles' test of the Dow Theory apparently provides strong evidence against the ability of Wall Street's most famous chartist to forecast the stock market. Cowles (1934) analyzes editorials published by the chief exponent of the Dow Theory, William Peter Hamilton. We review Cowles' evidence and find that it supports the contrary conclusion. Hamilton's timing strategies actually yield high Sharpe ratios and positive alphas for the period 1902 to 1929. Neural net modeling to replicate Hamilton's market calls provides interesting insight into the Dow Theory and allows us to examine the properties of the theory itself out of sample.

Careers and Survival: Competition and Risk in the Hedge Fund and CTA Industry

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00392

Stephen J. Brown, William N. Goetzmann, James Park

Investors in hedge funds and commodity trading advisors (CTAs) are concerned with risk as well as return. We investigate the volatility of hedge funds and CTAs in light of managerial career concerns. We find an association between past performance and risk levels consistent with previous findings for mutual fund managers. Variance shifts depend upon relative rather than absolute fund performance. The importance of relative rankings points to the importance of reputation costs in the investment industry. Our analysis of factors contributing to fund disappearance shows that survival depends on absolute and relative performance, excess volatility, and on fund age.

Mandatory Disclosure and Operational Risk: Evidence from Hedge Fund Registration

Published: 11/11/2008   |   DOI: 10.1111/j.1540-6261.2008.01413.x

STEPHEN BROWN, WILLIAM GOETZMANN, BING LIANG, CHRISTOPHER SCHWARZ

Mandatory disclosure is a regulatory tool intended to allow market participants to assess operational risk. We examine the value of disclosure through the controversial SEC requirement, since overturned, which required major hedge funds to register as investment advisors and file Form ADV disclosures. Leverage and ownership structures suggest that lenders and equity investors were already aware of operational risk. However, operational risk does not mediate flow‐performance relationships. Investors either lack this information or regard it as immaterial. These findings suggest that regulators should account for the endogenous production of information and the marginal benefit of disclosure to different investment clienteles.

Sensation Seeking and Hedge Funds

Published: 09/17/2018   |   DOI: 10.1111/jofi.12723

STEPHEN BROWN, YAN LU, SUGATA RAY, MELVYN TEO

We show that, motivated by sensation seeking, hedge fund managers who own powerful sports cars take on more investment risk but do not deliver higher returns, resulting in lower Sharpe ratios, information ratios, and alphas. Moreover, sensation‐seeking managers trade more frequently, actively, and unconventionally, and prefer lottery‐like stocks. We show further that some investors are themselves susceptible to sensation seeking and that sensation‐seeking investors fuel the demand for sensation‐seeking managers. While investors perceive sensation seekers to be less competent, they do not fully appreciate the superior investment skills of sensation‐avoiding fund managers.

Survival

Published: 07/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04039.x

STEPHEN J. BROWN, WILLIAM N. GOETZMANN, STEPHEN A. ROSS

Empirical analysis of rates of return in finance implicitly condition on the security surviving into the sample. We investigate the implications of such conditioning on the time series of rates of return. In general this conditioning induces a spurious relationship between observed return and total risk for those securities that survive to be included in the sample. This result has immediate implications for the equity premium puzzle. We show how these results apply to other outstanding problems of empirical finance. Long‐term autocorrelation studies focus on the statistical relation between successive holding period returns, where the holding period is of possibly extensive duration. If the equity market survives, then we find that average return in the beginning is higher than average return near the end of the time period. For this reason, statistical measures of long‐term dependence are typically biased towards the rejection of a random walk. The result also has implications for event studies. There is a strong association between the magnitude of an earnings announcement and the postannouncement performance of the equity. This might be explained in part as an artefact of the stock price performance of firms in financial distress that survive an earnings announcement. The final example considers stock split studies. In this analysis we implicitly exclude securities whose price on announcement is less than the prior average stock price. We apply our results to this case, and find that the condition that the security forms part of our positive stock split sample suffices to explain the upward trend in event‐related cumulated excess return in the preannouncement period.