An Examination of The Turn-of-the-Month-Effect Friday, 12 February, 2016

A new related paper has been added to:

#41 - Turn of the Month in Equity Indexes

Authors: Giovanis

Title: The Turn-of-the-Month-Effect: Evidence from Periodic Generalized Autoregressive Conditional Heteroskedasticity (PGARCH) Model

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2584213

Abstract:

The current study examines the turn of the month effect on stock returns in 20 countries. This will allow us to explore whether the seasonal patterns usually found in global data; America, Australia, Europe and Asia. Ordinary Least Squares (OLS) is problematic as it leads to unreliable estimations; because of the autocorrelation and Autoregressive Conditional Heteroskedasticity (ARCH) effects existence. For this reason Generalized GARCH models are estimated. Two approaches are followed. The first is the symmetric Generalized ARCH (1,1) model. However, previous studies found that volatility tends to increase more when the stock market index decreases than when the stock market index increases by the same amount. In addition there is higher seasonality in volatility rather on average returns. For this reason the Periodic-GARCH (1,1) is estimated. The findings support the persistence of the specific calendar effect in 19 out of 20 countries examined.

Notable quotations from the academic research paper:

"

The purpose of this paper is to investigate the turn of the month effect in stock market indices around the globe and to test its pattern, which can be used for the optimum asset allocation with result the maximization of profits. Because each stock market behaves differently and presents different turn of the month effect patterns, the trading strategy should be formed in this way where the buy and sell signals and actions will be varied in each stock market index. Haugen and Jorion (1996) suggested that calendar effects should not be long lasting, as market participants can learn from past experience. Hence, if the turn of the month effect exists, trading based on exploiting this calendar anomaly pattern of returns should yield extraordinary profits – at least for a short time. Yet such trading strategies affect the market in that further profits should not be possible: the calendar effect should break down.

However, the results show that the turn of the month effect is persistent in 19 out of 20 stock market indices during the whole period examined. Moreover, sub-sample periods have been explored too supporting the same concluding remarks. In addition, when the post financial crisis period sample 2010-2013 is excluded from the analysis, the turn of the month effect is present in all stock market indices."


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Replicating Private Equity Thursday, 4 February, 2016

Author: Stafford

Title: Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2720479

Abstract:

Private equity funds tend to select relatively small firms with low EBITDA multiples. Publicly traded equities with these characteristics have high risk-adjusted returns after controlling for common factors typically associated with value stocks. Hold-to-maturity accounting of portfolio net asset value eliminates the majority of measured risk. A passive portfolio of small, low EBITDA multiple stocks with modest amounts of leverage and hold-to-maturity accounting of net asset value produces an unconditional return distribution that is highly consistent with that of the pre-fee aggregate private equity index. The passive replicating strategy represents an economically large improvement in risk- and liquidity-adjusted returns over direct allocations to private equity funds, which charge average fees of 6% per year.

Notable quotations from the academic research paper:

"To study the asset selection by private equity funds, author assembles a dataset of public-to-private transactions sponsored by financial buyers, similar to the approach used by Axelson, Jenkinson, Strömberg, and Weisbach (2013). A selection model finds that private equity investors consistently tend to target relatively small firms with low operating cash flow multiples. Additionally, the selected firms tend to be value firms. Interestingly, a firm’s market beta is not a reliable predictor of whether a firm is selected for a going-private transaction. In fact, the average pre-transaction market beta for the public-to-private firms is 1.

Return smoothing is an acute concern for the private investments being considered here, particularly when comparing to the accurately measured risks of replicating portfolios comprised of relatively liquid publicly traded investments. A growing literature challenges the accuracy of the return reporting process for hedge funds, documenting both conditional and unconditional return smoothing, as well as manager discretion in marking portfolio NAVs

In light of the evidence on the importance of return smoothing in altering the measured risk properties of hedge fund returns, special attention is focused on whether the strikingly attractive risk properties of the aggregate PE index could be due to the return reporting process. To investigate how the reporting process can alter inferences about risks, two different accounting schemes are used to report portfolio net asset values from which periodic returns are calculated. The first is the traditional market-value based rule where all holdings are reported at their closing price. Portfolios comprised of stocks with market betas averaging 1, with portfolio leverage of 2x, have measured portfolio betas near 2 under the market-value based accounting rule. The second accounting scheme is based on a hold-to-maturity rule, whereby securities that are intended to be held for long periods of time are measured at cost until they are sold. Over periods where security valuations are increasing on average, this accounting scheme appears to provide a conservative estimate of portfolio value and therefore will perhaps understate leverage. However, an additional feature of this accounting scheme is that it significantly distorts portfolio risk measures by recognizing the profits and losses on the underlying holdings only at the time of sale. Consequently, portfolios with highly statistically significant measured betas near 2 under the market-value reporting rule have measured beta that are statistically indistinguishable from zero under the hold-to-maturity reporting rule. This suggests that the long holding periods of private equity portfolios, combined with conservativism in measuring asset values can effectively eliminate a majority of the measured risk.

Overall, the results push against the view that private equity adds value relative to passive portfolios of similarly selected public equites. The mean returns can be matched in a variety of ways in passive portfolios with firms sharing the characteristics of those selected for private equity portfolios. The critical difference appears to be in the marking of the portfolios and the resulting estimates of portfolio risk.

A strategy that simply selects low EBITDA multiple firms and rebalances to equal-weights each month will match the mean reported private equity return before fees. This portfolio is tilted towards small firms relative to a value-weighted portfolio and consists only of value firms, two characteristics that are both related to subsequent returns and to the empirical selection criterion that appears to be used when publicly traded firms are targeted by private equity investors. Interestingly, this portfolio does not make use of leverage to match the mean private equity return.

A popular belief about private equity is summarized in the following anonymous quote: “there are some things you simply cannot do as a public firm that you can do as a private firm.” This is likely to be true. Firms are likely to benefit from the active operating and financial management provided by private equity investors. At the same time, it appears that private equity investors overpay for the opportunity to provide these services.

The private equity structure – here viewed to be the combination of a value stock selection criterion, long holding periods, conservative net asset value accounting, and active management at the portfolio companies, including increased leverage – can mostly be reproduced with a passive portfolio strategy."


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Quantpedia introduces Quantconferences portal Tuesday, 2 February, 2016

We have launched a new portal Quantconferences.com - a brand new directory for quantitative finance and algorithmic trading conferences.

It contains links to majority of quant finance events in one place. Portal offers opportunity to search a detailed list of events:
http://quantconferences.com/ScreenByEvent

or screen our database for keynote speakers to see which conferences they will attend:
http://quantconferences.com/ScreenBySpeaker
http://quantconferences.com/ScreenBySpeaker/Detail/3346 (Emanuel Derman as an example)

You are most welcome to visit our new project. Let us know if you are missing any event in our list and we will add it there.

The QUANTPEDIA & QUANTCONFERENCES Team