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on Market Microstructure |
| By: | Tim Bollerslev; Tzuo Hao; George Tauchen (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | Motivated by the implications from a stylized self-contained general equilibrium model incorporating the effects of time-varying economic uncertainty, we show that the difference between implied and realized variation, or the variance risk premium, is able to explain a non-trivial fraction of the time series variation in post 1990 aggregate stock market returns, with high (low) premia predicting high (low) future returns. Our empirical results depend crucially on the use of “model-free,” as opposed to Black- Scholes, options implied volatilities, along with accurate realized variation measures constructed from high-frequency intraday, as opposed to daily, data. The magnitude of the predictability is particularly strong at the intermediate quarterly return horizon, where it dominates that afforded by other popular predictor variables, like the P/E ratio, the default spread, and the consumption-wealth ratio (CAY). |
| Keywords: | Equilibrium asset pricing, stochastic volatility, risk neutral expectation, return predictability, option implied volatility, realized volatility, variance risk premium |
| JEL: | C22 C51 C52 G12 G13 G14 |
| Date: | 2008–09–03 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2008-48&r=mst |
| By: | Momtchil Pojarliev; Richard M. Levich |
| Abstract: | We make use of a new database on daily currency fund manager returns over a three-year period, 2005-08. This higher frequency data allows us to estimate both alpha measures of performance and beta style factors on a yearly basis, which in turn allows us to test for persistence. We find no evidence to support alpha persistence; a manager's alpha in one year is not significantly related to his alpha in the prior year. On the other hand, there is substantial evidence for style persistence; funds that rely on carry, trend or value trading or with a long/short bias toward currency volatility are likely to maintain that style in the following year. In addition, we are able to examine the performance of managers that survive through the entire sample period, versus those that drop out. We find significant differences in both the investment styles of living versus deceased funds, as well as their realized alpha performance measures. We conjecture that both style differences and ineffective market timing, rather than market conditions, have impacted performance outcomes and induced some managers to close their funds. |
| JEL: | F31 G11 G15 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14355&r=mst |