The Journal of Finance

Testing the Predictive Power of Dividend Yields

Published: 06/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04732.x

WILLIAM N. GOETZMANN, PHILIPPE JORION

This paper reexamines the ability of dividend yields to predict long‐horizon stock returns. We use the bootstrap methodology, as well as simulations, to examine the distribution of test statistics under the null hypothesis of no forecasting ability. These experiments are constructed so as to maintain the dynamics of regressions with lagged dependent variables over long horizons. We find that the empirically observed statistics are well within the 95% bounds of their simulated distributions. Overall there is no strong statistical evidence indicating that dividend yields can be used to forecast stock 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.

Global Stock Markets in the Twentieth Century

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00133

Philippe Jorion, William N. Goetzmann

Long‐term estimates of expected return on equities are typically derived from U.S. data only. There are reasons to suspect that these estimates are subject to survivorship, as the United States is arguably the most successful capitalist system in the world. We collect a database of capital appreciation indexes for 39 markets going back to the 1920s. For 1921 to 1996, U.S. equities had the highest real return of all countries, at 4.3 percent, versus a median of 0.8 percent for other countries. The high equity premium obtained for U.S. equities appears to be the exception rather than the rule.

Efficiency and the Bear: Short Sales and Markets Around the World

Published: 05/08/2007   |   DOI: 10.1111/j.1540-6261.2007.01230.x

ARTURO BRIS, WILLIAM N. GOETZMANN, NING ZHU

We analyze cross‐sectional and time‐series information from 46 equity markets around the world to consider whether short sales restrictions affect the efficiency of the market and the distributional characteristics of returns to individual stocks and market indices. We find some evidence that prices incorporate negative information faster in countries where short sales are allowed and practiced. A common conjecture by regulators is that short sales restrictions can reduce the relative severity of a market panic. We find strong evidence that in markets where short selling is either prohibited or not practiced, market returns display significantly less negative skewness.

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.

Tiebreaker: Certification and Multiple Credit Ratings

Published: 01/17/2012   |   DOI: 10.1111/j.1540-6261.2011.01709.x

DION BONGAERTS, K. J. MARTIJN CREMERS, WILLIAM N. GOETZMANN

This paper explores the economic role credit rating agencies play in the corporate bond market. We consider three existing theories about multiple ratings: information production, rating shopping, and regulatory certification. Using differences in rating composition, default prediction, and credit spread changes, our evidence only supports regulatory certification. Marginal, additional credit ratings are more likely to occur because of, and seem to matter primarily for, regulatory purposes. They do not seem to provide significant additional information related to credit quality.

Estimating Private Equity Returns from Limited Partner Cash Flows

Published: 05/10/2018   |   DOI: 10.1111/jofi.12688

ANDREW ANG, BINGXU CHEN, WILLIAM N. GOETZMANN, LUDOVIC PHALIPPOU

We introduce a methodology to estimate the historical time series of returns to investment in private equity funds. The approach requires only an unbalanced panel of cash contributions and distributions accruing to limited partners and is robust to sparse data. We decompose private equity returns from 1994 to 2015 into a component due to traded factors and a time‐varying private equity premium not spanned by publicly traded factors. We find cyclicality in private equity returns that differs according to fund type and is consistent with the conjecture that capital market segmentation contributes to private equity returns.

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.

High‐Water Marks and Hedge Fund Management Contracts

Published: 07/15/2003   |   DOI: 10.1111/1540-6261.00581

William N. Goetzmann, Jonathan E. Ingersoll, Stephen A. Ross

Incentive fees for money managers are frequently accompanied by high‐water mark provisions that condition the payment of the performance fee upon exceeding the previously achieved maximum share value. In this paper, we show that hedge fund performance fees are valuable to money managers, and conversely, represent a claim on a significant proportion of investor wealth. The high‐water mark provisions in these contracts limit the value of the performance fees. We provide a closed‐form solution to the cost of the high‐water mark contract under certain conditions. Our results provide a framework for valuation of a hedge fund management company.

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.