Segal Graduate School of Business Final Projects

This paper examines the relationship between the level of institutional ownership andrisk-adjusted return on stocks. We find a significant positive relationship between the level ofinstitutional ownership on a stock and its risk-adjusted return. This result holds both in the longrun and in shorter time periods. Our findings suggest that all things being equal, it is possible toobtain risk-adjusted return by going short on the stocks with low institutional ownership andgoing long on those with a high level of institutional ownership.

This paper performs and analyzes hedge fund replication strategies using liquid exchange-traded instruments to build linear multi-factor models (“clones”) that mimic Hedge Funds returns. First, we follow Hasanhodzic and Lo (2006) six-factor model, using Barclay Hedge Indexes monthly returns for the period of January 1997 to August 2017 on seventeen hedge fund strategies. Next, we introduce variations and new propositions to the model in order to obtain closer risk-return characteristics, focusing on one particular hedge fund strategy: Global Macro. Finally, we use these results to base our conclusion and propose applications for this method.Our findings promote the use of shorter month period in rolling-windows approach and monthly rebalancing strategy for a faster reaction and adaptation to market conditions. Also, it suggests the addition of a strategic-specific factor to obtain better expected-return replications. These findings are particularly relevant to institutional investors that need diversification and could benefit from this asset class exposure, but many times are restricted from investing in hedge funds due to their high fee structure, illiquidity, and opaque tactics.

This paper seeks to investigate the linkage and co-movement relationships between the stock markets of US and BRIC, and determine the degree of diversification benefits among them within the sample period from January 2001 to September 2017. The entire sample period is divided into three phases: pre-crisis, during crisis and post-crisis in order to be more comparative. The empirical results show that there is a strong linkage and co-movement relationship between BRIC and US stock markets, especially after 2007 financial crisis. Also, the upward long run conditional correlations demonstrate that the diversification benefits are weakened substantially. However, there is not any evidence showing the existence of co-integration between BRIC and US market for all three phases, except for the stock market of China during the crisis. Moreover, most of the BRIC stock markets are appeared to have no short term causality to US market.

This paper uses Fama-French and Carhart Four-factor Model to compute systematic risk andidiosyncratic risk for firm’s equity risk. It then assesses these two equity risk components tobond credit rating and bond yield. The analysis is conducted by applying a multivariateregression model on a universe of US equity and bond data over the last ten years from 2007 to2016. Our research shows that idiosyncratic risk is an important determinant of both bond ratingand yield. Interestingly, while systematic risk seems not to affect the rating, it seems to be animportant determinant for bond yields. For low credit rating bonds, yields are mainly driven byidiosyncratic risk; but for high rating bonds, systematic risk is just as important (and sometimeseven more important than) as the idiosyncratic risk. Additionally, this relationship varies with theeconomic condition; for example, the systematic risk was not an important factor during thefinancial crisis period of 2007-2010.

This paper examines the variables that affect bank profitability. We construct a sample of US banks from 2003 to 2015, and use return on assets (ROA) and return on equity (ROE) to measure bank profitability. We find that banks with higher profitability are the banks that have: (1) a higher deposits to total asset ratio, (2) a higher diversification ratio, and (3) higher operational efficiency. We also find that better-capitalized banks tend to be more profitable only when we use ROA as the measure of profitability. Furthermore, loans have a positive impact on profitability before the financial crisis, but not during the crisis. Size has a positive impact on profitability when the bank is small.

According to financial theory, idiosyncratic risk is eliminated within a diversified portfolio andtherefore should not be related to expected return. However, in the last decade financial economistshave started to debate and provide evidence that showed that either idiosyncratic risk is positivelyor negatively related to future abnormal return.Our paper follows these recent studies and examines the relationship between idiosyncraticvolatility and abnormal return in the following year. Hence, our measure of idiosyncratic volatilityis an annual measure, and we use it to predict the abnormal return in the following year. We dividecompanies into five tranches of idiosyncratic volatility level each year, and then analyse andcompare their abnormal return in the following year.Our result suggests that stock returns are negatively related to the one-year lagged idiosyncraticvolatilities. Most important, it seems that most of the explanatory power is derived from the highestidiosyncratic volatility level stocks as they yield the most negative abnormal returns in thefollowing year.

Canadian housing market, known for its robustness and stabilization, has continuedbooming for over 10 years even during the housing bubbles burst period. Especially in the past fewyears, real estate GDP has represented approximately half of Canada’s Economic growth, wheremost of the outsized contribution lies in the rising section of shadow banking system.In this paper, we introduce the current situation of shadow banking system, analyse thecorrelation between mortgage balances from shadow banks, chartered banks and Canadian housingprices by building up Vector Auto Regression model, Impulse Response Function, and VariationDecomposition. The empirical results show that the house prices respond to the mortgage balancefrom shadow banks to some extent, and chartered banks also play a role. However, the mortgageoutstanding in shadow banks do not respond to change in house prices in return. In the end, weoffer some corresponding policy suggestions based on the analysis.

This paper investigates the changes in market volatility around the United States presidential elections and inaugurations between the period of 1928 and 2016 during selected event windows: (-10, -1) vs. (+1, +10), (-20, -1) vs. (+1, +20), … (-90, -1) vs. (+1, +90), respectively. To isolate the corresponding impact of different types of political uncertainty, market volatility is examined under three partitions: magnitude of surprise in voting results, incumbency, and change in ruling party. The result indicates that the market volatility is more willing to settle down after an election with new president or a change in ruling party, mainly due to the comparatively higher volatility induced by such political events during the pre-election window. The results have implications for both individual and institutional investors who are exposed towards volatility risk.

Socially responsible investing (SRI) is a growing practice in the investment management industry which seeks to incorporate environmental, social and corporate governance factors into the investment decision-making process. Arguments have been made for and against it, and previous research has sought to answer the question of whether funds of this type outperform their conventional counterparts.This study explores the performances of both types of funds on a before-fee basis and analyzes the impact fees have. We show that in the US from 1997-2017, SRI mutual funds after fees significantly underperform conventional funds after adjusting for market risk. Accounting for four risk factors, however, we find no significant difference in performance. Further, we find no significant difference in fees for the period. Analyzing the two 10-year subperiods of our test period, we find that SRI funds likely improve over the sample period and the performance of conventional funds likely deteriorates on a relative basis.

This paper studies the underlying long-term relationship between economic factors and house prices growth in Canada. Fundamentals used include, monthly real interest rate, mortgage rate, rental vacancy rate, rents and integrated Cost of Housing Capital. Monthly data for a time range of 10 years was used for the fitted regression and standard multi-factor regression model. Analysis that was conducted in this paper serve the purpose of examining the dynamics and correlations between fundamental variables and future growth rate of real estate prices.On top of confirming results from previous studies on the strong responsiveness that house prices have to the movements of general economic conditions and the correlations with economic fundamentals, this paper goes further to compare these indicators with the objectives of finding out their predicting abilities. Results from the model specifically studies the correlation coefficients between growth rate of housing market with several economic fundamentals, such as the price to rent ratio, vacancy rate and the cost of housing capital.