2012 - Reprints: Finance, Accounting and Insurance
The two-block covariance matrix and the CAPM, International Journal of Portfolio Analysis and Management, 1(1), 32-42, 2012, (inaugural issue)
D. Disatnik and S. Benninga
(Reprint No. 209)
The classical assumptions of the capital asset pricing model do not ensure obtaining a tangency (market) portfolio in which all the risky assets appear with positive proportions. This paper gives an additional set of assumptions that ensure obtaining such a portfolio. Our new set of assumptions mainly deals with the structure of the covariance matrix of the risky assets returns. The structure we suggest for the covariance matrix is of a two-block type. We derive analytically sufficient conditions for a matrix of this type to produce a long-only tangency portfolio (as well as a long-only global minimum variance portfolio).
Portfolio optimization using a block structure for the covariance matrix, Journal of Business Finance and Accounting, 39(5-6), 806-843, 2012
D. Disatnik and S. Katz
(Reprint No. 210)
Implementing in practice the classical mean-variance theory for portfolio selection often results in obtaining portfolios with large short sale positions. Also, recent papers show that, due to estimation errors, existing and rather advanced mean-variance theory-based portfolio strategies do not consistently outperform the naïve 1/N portfolio that invests equally across N risky assets. In this paper, we introduce a portfolio strategy that generates a portfolio, with no short sale positions, that can outperform the 1/N portfolio. The strategy is investing in a global minimum variance portfolio (GMVP) that is constructed using an easy to calculate block structure for the covariance matrix of asset returns. Using this new block structure, the weights of the stocks in the GMVP can be found analytically, and as long as simple and directly computable conditions are met, these weights are positive.
Voluntary disclosures, corporate control, and investment, Journal of Accounting Research, 50(4), 1041-1076, 2012
P. Kumar , N. Langberg and S. Sivaramakrishnan
DOI: 10.1111/j.1475-679X.2012.00454.x
(Reprint No. 212)
We examine the valuation and capital allocation roles of voluntary disclosure when managers have private information regarding the firm’s investment opportunities, but an efficient market for corporate control influences their investment decisions. For managers with long-term stakes in the firm, the equilibrium disclosure region is two-tailed: only extreme good news and extreme bad news is disclosed in equilibrium. Moreover, the market’s stock price and investment responses to bad news disclosures are stronger than the responses to good news disclosures, which is consistent with the empirical evidence. We also find that myopic managers are more likely to withhold bad news in good economic times when markets can independently assess expected investment returns.
Stock repurchases: How firms choose between a self tender offer and an open-market program, Journal of Banking and Finance, 35, 3174-3187, 2011.
J. Oded
(Reprint No. 216)
In practice, open-market stock repurchase programs outnumber self tender offers by approximately 10– 1. This evidence is puzzling given that tender offers are more efficient in disbursing free cash and in signaling undervaluation – the two main motivations suggested in the literature for repurchasing shares. We provide a theoretical model to explore this puzzle. In the model, tender offers disburse free cash quickly but induce information asymmetry and hence require a price premium. Open-market programs disburse free cash slowly, and hence do not require a price premium, but because they are slow, result in partial free cash waste. The model predicts that the likelihood that a tender offer will be chosen over an open-market program increases with the agency costs of free cash and decreases with uncertainty (risk), information asymmetry, ownership concentration, and liquidity. These predictions are generally consistent with the empirical evidence.
The price pressure of aggregate mutual fund flows, Journal of Financial and Quantitative Analysis (JFQA), 46(2), 585-603, 2011.
A. Ben-Rephael, S. Kandel and A. Wohl
DOI: 10.1017/S0022109010000797
(Reprint No. 218)
Using a unique database of aggregate daily flows to equity mutual funds in Israel, we find strong support for the “temporary price pressure hypothesis” regarding mutual fund flows: Mutual fund flows create temporary price pressure that is subsequently corrected. We find that flows are positively autocorrelated, and are correlated with market returns (R2 of 20%). Our main finding is that approximately one-half of the price change is reversed within 10 trading days. This support for the “temporary price pressure hypothesis” complements microstructure research concerning price impact and price noise in stocks by indicating price noise at the aggregate market level.
Measuring investor sentiment with mutual fund flows, Journal of Financial Economics,104(2), 363-382, 2012.
A. Ben-Rephael, S. Kandel and A. Wohl
(Reprint No. 219)
We investigate a proxy for monthly shifts between bond funds and equity funds in the USA: aggregate net exchanges of equity funds. This measure (which is negatively related to changes in VIX) is positively contemporaneously correlated with aggregate stock market excess returns: One standard deviation of net exchanges is related to 1.95% of market excess return. Our main new finding is that 85% (all) of the contemporaneous relation is reversed within four (ten) months. The effect is stronger in smaller stocks and in growth stocks. These findings support the notion of ‘‘noise’’ in aggregate market prices induced by investor sentiment.
