nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒04‒16
three papers chosen by

  1. Reinterpreting the mutual fund theorem: the risk portfolio as a tactical overlay By Tenani, Paulo Sérgio
  2. Volatility risk premia and future commodities returns By José Renato Haas Ornelas; Roberto Baltieri Mauad
  3. The Long-Term Performance of IPO’s, Revisited By Hoechle, Daniel; Karthaus, Larissa; Schmid, Markus

  1. By: Tenani, Paulo Sérgio
    Abstract: The Mutual Fund Theorem is an elegant way of describing how investors with different attitudes towards risk should construct their portfolios. It is, however, often misinterpreted. This paper revisits the topic by defining the Risk Portfolio as a self-financed tactical overlay portfolio in which all the overweight and underweight positions cancel each other out. In this sense no net resources are ever allocated to the Risk Portfolio and all the investment is allocated to the Minimum Variance Portfolio. Under these circumstances the Mutual Fund Theorem implies that the ratio of Bonds to Stocks in the Total Portfolio would depend on investor´s risk aversion; as it is actually observed in practice. The paper also argues that the Asset Allocation puzzle, as traditionally stated in the literature, only arises because of a misconception about the “the facto” definition of the Risk Portfolio.
    Date: 2017–01–24
  2. By: José Renato Haas Ornelas; Roberto Baltieri Mauad
    Abstract: This paper extends the empirical literature on Volatility Risk Premium (VRP) and future returns by analyzing the predictive ability of Commodities Currencies VRP and commodities VRP. The empirical evidence throughout this paper provides support for a positive relationship of Commodities Currencies VRP and future commodities returns, but only for the period after the 2008 Global Financial Crisis. This predictability survives to the inclusion of control variables like the Equity VRP and past currency returns. Furthermore, we find a negative relationship between Gold VRP and future commodities and currency returns. This result corroborates the view of Gold as a safe haven asset.
    Keywords: commodities predictability, volatility risk premium, safe haven
    Date: 2017–03
  3. By: Hoechle, Daniel; Karthaus, Larissa; Schmid, Markus
    Abstract: The literature on IPO long-term performance generally focuses on three- to five-year post-issue time horizons. Research published in the 2000s shows that the apparent underperformance of IPOs docu-mented in the 1990s disappears when the different risk exposures between IPO and mature firms are accounted for by using a Carhart (1997) factor model. In this paper, we show that a sample of 7,487 U.S. IPOs between 1975 and 2014 continues to significantly underperform mature firms in terms of Carhart-alphas over two years, with underperformance peaking one year after going public. We apply a regression-based portfolio sorts approach (RPS), which allows to decompose the Carhart-alpha into firm-specific characteristics, to explain one-year IPO underperformance using a multitude of market and firm characteristics in a statistically robust setting. In fact, our RPS-model that augments the Carhart factors by a set of firm characteristics related to investments, internationality, liquidity, and leverage can explain IPO underperformance. We find similar results when using the Fama-French three-factor model or an augmented version of the Carhart model. We challenge our RPS-model by applying it to the most severely underperforming sub-samples in terms of firm size, time period, venture capital involvement, and IPO underpricing, and find it to explain IPO underperformance across all sub-samples.
    Keywords: IPO Underperformance, Long-Term Performance Evaluation, Time Horizon, Firm Characteristics
    JEL: G14 G24 G32
    Date: 2017–03

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