New Economics Papers
on Financial Markets
Issue of 2011‒10‒01
three papers chosen by

  1. Assessing the Performance of Funds of Hedge Funds By Benoît Dewaele; Hugues Pirotte; N. Tuchschmid; E. Wallerstein
  2. Stock Market Volatility and Learning By Klaus Adam; Albert Marcet; Juan Pablo Nicolini
  3. The evolving importance of banks and securities markets By Demirguc-Kunt, Asli; Feyen, Erik; Levine, Ross

  1. By: Benoît Dewaele; Hugues Pirotte; N. Tuchschmid; E. Wallerstein
    Abstract: This paper studies the performance of a sample of funds of hedge funds (FoHFs) from January 1994 to August 2009. We apply the false discoveries (FD) technique of Barras, Scaillet and Wermers (2010) to separate the FoHFs into skilled, zero-alpha and unskilled. We measure the alpha of the FoHFs using two models – (1) a 16-factor model with a combination of factors from Fung and Hsieh (2004) and Capocci, Corhay and Hübner (2005) and (2) a 13-factor model of hedge fund indices from Dow Jones Credit Suisse. Applying the FD procedure to the first model, we find that, after fees, the majority of FoHFs do not channel alpha from single-manager hedge funds. Applying the FD procedure to the second model, we find that only a very small fraction of FoHFs deliver after-fees alpha per se, i.e. on top of the alpha of the hedge fund indices. A series of robustness checks confirms the results of the FD procedure. We also compare the performance of our sample of FoHFs to artificial FoHFs constructed by randomly picking hedge funds. The lack of significant differences in the average performance of the real and artificial FoHFs confirms the results obtained by the FD procedure.
    Keywords: Hedge funds; funds of funds; selection bias; abnormal returns; zero-alpha; skilled and unskilled performance; false discoveries
    JEL: G11 G15 C14
    Date: 2011–09
  2. By: Klaus Adam; Albert Marcet; Juan Pablo Nicolini
    Abstract: We study a standard consumption based asset pricing model with rationally investing agents but allow agents' prior beliefs about price and dividend behavior to deviate slightly from rational expectations priors. Learning about stock price behavior then causes the model to become quantitatively consistent with a range of basic asset prizing 'puzzles': stock returns display momentum and mean reversion, asset prices become volatile, the price-dividend ratio displays persistence, long-horizon returns become predictable and a risk premium emerges. Comparing the moments of the model with those in the data using confidence bands from the method of simulated moments, we show that our findings are robust to different assumptions on the system of beliefs and other model features. We depart from previous studies of asset prices under learning in that agents form expectations about future stock prices using past price observations.
    Keywords: asset pricing, learning, near-rational price forecasts
    JEL: G12 D84
    Date: 2011–09
  3. By: Demirguc-Kunt, Asli; Feyen, Erik; Levine, Ross
    Abstract: This paper examines the evolving importance of banks and securities markets during the process of economic development. As economies develop, they increase their demand for the services provided by securities markets relative to those provided by banks, such that securities markets become increasingly important for future economic development. Some exploratory evidence further suggests that deviations of a country’s actual financial structure -- the mixture of banks and markets operating in an economy -- from the estimated optimal structure are associated with lower levels of economic activity.
    Keywords: Debt Markets,Economic Theory&Research,Banks&Banking Reform,Markets and Market Access,Access to Finance
    Date: 2011–09–01

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