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Burton G. Malkiel's
Scholarly Papers
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4,015 |
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823 |
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1.
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John Y. Campbell Harvard University - Department of Economics Martin Lettau Haas School of Business Burton G. G. Malkiel Princeton University - Bendheim Center for Finance Yexiao Xu University of Texas at Dallas - School of Management
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25 Feb 00
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Last Revised:
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30 Apr 08
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1,612 (2,151)
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333
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Abstract:
This paper uses a disaggregated approach to study the volatility of common stocks at the market, industry, and firm levels. Over the period 1962-97 there has been a noticeable increase in firm-level volatility relative to market volatility. Accordingly, correlations among individual stocks and the explanatory power of the market model for a typical stock have declined, while the number of stocks needed to achieve a given level of diversification has increased. All the volatility measures move together countercyclically and help to predict GDP growth. Market volatility tends to lead the other volatility series. Factors that may be responsible for these findings are suggested.
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Yexiao Xu University of Texas at Dallas - School of Management Burton G. G. Malkiel Princeton University - Bendheim Center for Finance
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24 Jan 01
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14 Jun 05
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1,193 (3,683)
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66
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Abstract:
The traditional CAPM approach argues that only market risk should be incorporated into asset prices and command a risk premium. This result may not hold, however, if some investors can not hold the market portfolio. For example, if one group of investors fails to hold the market portfolio for exogenous reasons, the remaining investors will also be unable to hold the market portfolio. Therefore, idiosyncratic risk could also be priced to compensate rational investors for an inability to hold the market portfolio. A variation of the CAPM model is derived to capture this observation as well as to draw testable implications. Under both the Fama and MacBeth (1973) and Fama and French (1992) testing frameworks, we find that idiosyncratic volatility is useful in explaining cross-sectional expected returns. We also discover that returns from constructed portfolios directly co-vary with idiosyncratic risk hedging portfolio returns.
APT, CAPM, Cross-sectional Regression, Imperfect Market Portfolio, Idiosyncratic Risk, Risk Premium
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3.
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Investigating the Behavior of Idiosyncratic Volatility
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Yexiao Xu University of Texas at Dallas - School of Management Burton G. G. Malkiel Princeton University - Bendheim Center for Finance
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20 Sep 01
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06 Feb 02
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477 ( 15,227) |
53
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Yexiao Xu University of Texas at Dallas - School of Management Burton G. G. Malkiel Princeton University - Bendheim Center for Finance
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10 Oct 01
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06 Feb 02
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This paper studies the behavior of idiosyncratic volatility for the post war period. Using aggregate idiosyncratic volatility statistics constructed from the Fama and French (1993) three-factor model, we find that the volatility of individual stocks appears to have increased over time. This trend is not solely attributed to the increasing prominence of the NASDAQ market. We go on to suggest that the idiosyncratic volatility of individual stocks is associated with the degree to which their shares are owned by financial institutions. Finally, we show that idiosyncratic volatility is also positively related to expected earning growth.
Earning growth, Factor model, Idiosyncratic volatility, Institutional ownership
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Yexiao Xu University of Texas at Dallas - School of Management Burton G. G. Malkiel Princeton University - Bendheim Center for Finance
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20 Sep 01
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18 Nov 01
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477
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53
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Abstract:
This paper studies the behavior of idiosyncratic volatility for the post war period. Using aggregate idiosyncratic volatility statistics constructed from the Fama and French (1993) three-factor model, we find that the volatility of individual stocks appears to have increased over time. This trend is not solely attributed to the increasing prominence of the NASDAQ market. We go on to suggest that the idiosyncratic volatility of individual stocks is associated with the degree to which their shares are owned by financial institutions. Finally, we show that idiosyncratic volatility is also positively related to expected earning growth.
Earning growth; Factor model; Idiosyncratic volatility; Institutional ownership
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4.
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Burton G. G. Malkiel Princeton University - Bendheim Center for Finance Yexiao Xu University of Texas at Dallas - School of Management
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21 Mar 05
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21 Mar 05
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469 (15,616)
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It is well-known that the level of closed-end fund discounts appears to predict the corresponding fund's future returns. We further document that such predictability decays slowly. The popular explanations, including the tax effect, investor sentiment risk, and the funds's dividend yield, do not fully account for the observed predictability. At the same time, discounts are very persistent especially on an aggregate level. Using an AR(1) model for discounts, we demonstrate that such predictability is largely due to persistence in discounts. Our calibration exercise can produce most characteristics of an aggregate equity close-end fund index over the ten year period from 1993 to 2001. A cross-sectional study links discount persistence to rational factors such as dividend yield, unrealized capital gains, and turnover. In addition, we document a second independent source for predicting fund returns from large stock portfolio returns. This suggests that the well-known lead lag relationship between large stocks and small stocks also exists between NAV returns and fund returns. Finally, we find no evidence for "excess volatility" on the aggregate level both for conditional and unconditional volatility.
closed-end fund, cross-correlation, discount, excess volatility, investor sentiment, large stocks, persistence, small stocks, turnover
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5.
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Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk
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Versions (2)
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hide multiple versions |
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John Y. Campbell Harvard University - Department of Economics Martin Lettau Haas School of Business Burton G. G. Malkiel Princeton University - Bendheim Center for Finance Yexiao Xu University of Texas at Dallas - School of Management
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Posted:
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11 Jul 00
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Last Revised:
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30 Apr 08
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125 ( 66,265) |
334
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John Y. Campbell Harvard University - Department of Economics Martin Lettau Haas School of Business Burton G. G. Malkiel Princeton University - Bendheim Center for Finance Yexiao Xu University of Texas at Dallas - School of Management
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24 Aug 00
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Last Revised:
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30 Apr 08
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Abstract:
This paper uses a disaggregated approach to study the volatility of common stocks at the market, industry, and firm levels. Over the period 1962-97 there has been a noticeable increase in firm-level volatility relative to market volatility. Accordingly, correlations among individual stocks and the explanatory power of the market model for a typical stock have declined, while the number of stocks needed to achieve a given level of diversification has increased. All the volatility measures move together countercyclically and help to predict GDP growth. Market volatility tends to lead the other volatility series. Factors that may be responsible for these findings are suggested.
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John Y. Campbell Harvard University - Department of Economics Martin Lettau Haas School of Business Burton G. G. Malkiel Princeton University - Bendheim Center for Finance Yexiao Xu University of Texas at Dallas - School of Management
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11 Jul 00
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Last Revised:
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01 Feb 01
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125
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334
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Abstract:
This paper uses a disaggregated approach to study the volatility of common stocks at the market, industry, and firm levels. Over the period 1962-97 there has been a noticeable increase in firm-level volatility relative to market volatility. Accordingly correlations among individual stocks and the explanatory power of the market model for a typical stock have declined, while the number of stocks needed to achieve a given level of diversification has increased. All the volatility measures move together countercyclically and help to predict GDP growth. Market volatility tends to lead the other volatility series. Factors that may be responsible for these findings are suggested.
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6.
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Burton G. G. Malkiel Princeton University - Bendheim Center for Finance
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18 Mar 03
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27 Apr 03
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63 (106,175)
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This paper presents the case for and the evidence in favour of passive investment strategies and examines the major criticisms of the technique. I conclude that the evidence strongly supports passive investment management in all markets - small-capitalisation stocks as well as large-capitalisation equities, US markets as well as international markets, and bonds as well as stocks. Recent attacks on the efficient market hypothesis do not weaken the case for indexing.
Passive Investment Strategies, Efficient Markets
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Burton G. G. Malkiel Princeton University - Bendheim Center for Finance
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28 Jun 04
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17 Apr 08
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27 (149,394)
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One of the best documented propositions in the field of finance is that, on average, investors have received higher rates of return on in- vestment securities for bearing greater risk. This paper looks at the historical evidence regarding risk and return, explains the fundamentals of portfolio and asset pricing theory, and then goes on to take a new look at the relationship between risk and return using some unexplored risk measures that seem to capture quite closely the actual risks being valued in the market. The paper concludes that the best single risk proxy is not the traditional beta calculation but rather the dispersion of analysts` forecasts. Companies for which there is broad consensus with respect to future earnings and dividends seem to be less risky (and hence have lower expected returns) than companies for which there is little agreement among security analysts. It is possible to interpret this result as contradicting modern asset pricing theory, which suggests that total variability per se will not be relevant for valuation. As is shown in the paper, how- ever, this dispersion of forecasts could well result from different companies being particularly susceptible to systematic risk elements and thus the dispersion measure may be the best individual proxy available to capture the variety of systematic risk elements to which securities are subject.
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8.
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Roger H. Gordon University of California, San Diego - Department of Economics Burton G. G. Malkiel Princeton University - Bendheim Center for Finance
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24 Jul 01
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24 Jul 01
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21 (164,320)
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This paper analyzes the effects of the federal tax structure on corporate financial and investment behavior. We first develop a model of corporate behavior given taxes, taking into account both uncertainty and costs of bankruptcy. Simpler models abstracting from bankruptcy costs had clear counter-factual implications. The forecasts from our model proved to be consistent with both the observed cross-sectional variation in debt-equity ratios and the time series pattern of debt-equity ratios (data that were constructed in the paper). We then attempted to measure the efficiency costs created by corporate tax distortions as implied by the model. The forecasted efficiency cost of the distortion favoring debt finance seemed to be quite large, while the tax distortion affecting investment seemed to be less important than others have claimed. The paper concludes with a study of the efficiency implications of vairous prposed corporate tax changes.
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John G. Cragg University of British Columbia - Department of Economics Burton G. G. Malkiel Princeton University - Bendheim Center for Finance
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23 Apr 04
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23 Apr 04
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20 (167,186)
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This is a study using a unique body of expectations data collected over the decade of the 1960s. After describing the data, this paper first looks at the extent of consensus among those financial institutions providing the forecasts and measures the accuracy of the forecasts. We then ask if the forecasts are consistent with the hypothesis that the expectations are "rational". We then turn to the relationship of the forecasts to security valuation. We develop our own variant of the popular capital asset pricing model using a framework suggested by Ross for this arbitrage model. Alternative specifications are developed relating expected returns to risk variables and relating securities prices to expectations and risk variables. We find that the expectations data of the sort we have collected do appear to influence security prices in the manner suggested by the theory. We also find that the expected security returns implied by the expectations data are related to "systematic" risk measures appropriately defined. Nevertheless, we find that, even when a variety of systematic influences are used, other risk measures, possibly related to their own variance of the securities, appear to play some role in security valuation.
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Derek Jun affiliation not provided to SSRN Burton G. G. Malkiel Princeton University - Bendheim Center for Finance
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29 Dec 07
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04 Apr 08
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8 (201,147)
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Considerable recent interest has been shown in a new set of stock-market indices that are weighted by fundamental factors such as sales, earnings, dividends or book values, rather than by capitalization. In this paper, we analyze the performance of Fundamental Indexing (FI). First, we show that the source of FI's recent excellent performance is not from its ability to systematically arbitrage mis-pricing in a noisy market but from increasing the portfolio's exposure to stocks with low price-to-book values and with small capitalizations. We find that FI does not produce a positive alpha when its excess returns are explained by the Fama-French three-factor model of CAPM beta, the value premium and the size premium. Second, we show that it is possible to construct a portfolio of exchange-traded funds with similar factor loadings that can replicate, and sometimes, even outperform FI. However, we caution investors not to expect consistent out performance from portfolios tilted towards value and small-cap stocks. Historical data shows evidence of mean reversion in the performance of such strategies.
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Atanu Saha Compass Lexecon, New York Burton G. G. Malkiel Princeton University - Bendheim Center for Finance Alex Grecu Clemson University - John E. Walker Department of Economics
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11 Feb 09
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11 Feb 09
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0 (0)
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One striking feature of the United States stock market is the tendency of days with very large movements of stock prices to be clustered together. We define an extreme movement in stock prices as one that can be characterized as a three sigma event; that is, a daily movement in the broad stock-market index that is three or more standard deviations away from the average movement. We find that such extreme movements are typically preceded by unusually large stock-price movements in previous trading days. Interestingly, a similar clustering of extreme observations of temperature in New York City can be observed. A particularly robust finding in this paper is that extreme movements in stock prices and temperature are usually preceded by large average daily movements during the preceding three-day period. This suggests that investors might fashion a market timing strategy, switching from stocks to cash in advance of predicted extreme negative stock returns. In fact, we have been able to simulate market timing strategies that are successful in avoiding nearly eighty percent of the negative extreme move days, yielding a significantly lower volatility of returns. We find, however, that a variety of alternative strategies do not improve an investor's long-run average return over the return that would be earned by the buy-and-hold investor who simply stayed fully invested in the stock market.
Volatility clustering; duration analysis; portfolio strategy
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12.
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Burton G. G. Malkiel Princeton University - Bendheim Center for Finance Atanu Saha Micronomics Inc.
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30 Dec 05
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30 Dec 05
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0 (0)
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From a database that is relatively free of bias, this article provides measures of the returns of hedge funds and of the distinctly nonnormal characteristics of the data. The results include risk-adjusted measures of performance and tests of the degree to which hedge funds live up to their claim of market neutrality. The substantial attrition of hedge funds is examined, the determinants of hedge fund demise are analyzed, and results of tests of return persistence are presented. The conclusion is that hedge funds are riskier and provide lower returns than is commonly supposed.
Alternative Investments, Hedge Fund Strategies, Portfolio Management, Hedgefund Strategies
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Burton G. G. Malkiel Princeton University - Bendheim Center for Finance
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24 Nov 04
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11 Jan 05
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0 (0)
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The evidence is overwhelming that active equity management is, in the words of Ellis (1998), a "loser's game." Switching from security to security accomplishes nothing but to increase transactions costs and harm performance. Thus, even if markets are less than fully efficient, indexing is likely to produce higher rates of return than active portfolio management. The most successful modern-day investor, Warren Buffett, sums up the advice in this paper with characteristic wisdom: "Most investors, both institutional and individual, will find that the best way to own common stocks ... is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals."
Index funds, active portfolio management, mutual funds, market efficiency
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Burton G. G. Malkiel Princeton University - Bendheim Center for Finance
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25 May 04
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25 May 04
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0 (0)
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I briefly review the success of past studies purporting to explain equity valuations and predict future equity returns. The Campbell-Shiller mean reversion models are contrasted with an expanded version of the so-called "Federal Reserve" model. At least over the 1970-2003 period, "Federal Reserve-type" models do somewhat better at predicting long-horizon returns than a mean reversion model based on dividend yields and price-earnings multiples. However, timing investment strategies based on any of these prediction models do no better than a buy-and-hold strategy. While some predictability of returns exists, there is no evidence of any systematic inefficiency that would enable investors to earn excess returns.
Equity valuation and stock market predictability
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Burton G. G. Malkiel Princeton University - Bendheim Center for Finance
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10 May 00
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10 May 00
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0 (0)
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Several recent studies suggest that equity mutual fund managers achieve superior returns and that considerable persistence in performance exists. This study utilizes a unique data set including returns from all equity mutual funds existing each year. These data enable us more precisely to examine performance and the extent of survivorship bias. In the aggregate, funds have under performed benchmark portfolios both after management expenses and even gross of expenses. Survivorship bias appears to be more important than other studies have estimated. Moreover, while considerable performance persistence existed during the 1970s, there was no consistency in fund returns during the 1980s.
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16.
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Zsuzsanna Fluck Michigan State University - Department of Finance Burton G. G. Malkiel Princeton University - Bendheim Center for Finance Richard E. Quandt Princeton University
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10 Oct 98
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10 Oct 98
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0 (0)
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This paper investigates whether predictable patterns that previous empirical work in finance have isolated appear to be persistent and exploitable by portfolio managers. On a sample that is free from survivorship bias we construct a test wherein we simulate the purchases and sales an investor would undertake to exploit the predictable patterns, charging the appropriate transaction costs for buying and selling and using only publicly available information at the time of decisionmaking. We restrict investment to large companies only to assure that the full cost of transactions is properly accounted for. We confirmed on our sample that contrarian strategies yield sizable excess returns after adjusting for risk, as measured by beta. Using analysts' estimates of long term growth we construct a test of the Lakonishok, Shleifer and Vishny (1994) hypothesis. We reach the conclusion that, contrary to Lakonishok et al. (1994), the superior performance of contrarian strategies can not be explained by the superior performance of stocks with low estimated growth rates.
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