Persistence in alphas without persistence in skill
with Sina Ehsani
January 2025
The persistence of mutual fund alphas is often viewed as evidence that some funds possess skill and that this skill persists. This interpretation is unwarranted when security factor lines are too flat. A sort on estimated alphas is a sort against betas: high-alpha funds are predominantly low-beta funds and vice versa. Thus, a strategy of investing in high-alpha funds benefits not from skill, but from a betting-against-multiple-betas effect. In-sample tests intended to separate luck from skill are similarly biased. We demonstrate this bias through simulations and show that applying a correction factor eliminates much of the apparent skill in mutual fund data.
Time-series efficient factors
with Sina Ehsani
February 2025
Factors in popular asset pricing models are unconditionally minimum-variance inefficient. We turn factors "time-series efficient" by implementing momentum- and volatility-management programs. These factors achieve 64% higher Sharpe ratios than the original factors, span them, and significantly improve the pricing of the factor zoo. Momentum strategies' profits relate to factor inefficiency. Whereas the standard five-factor model does nothing to the momentum factor, the efficient version subsumes it. The time-series efficiency program may add value by disentangling risk factors' priced and unpriced components.
The earnings announcement return cycle
with Conson Zhang
January 2019
Stocks earn significantly negative abnormal returns before earnings announcements and positive after them. This “earnings announcement return cycle” (EARC) is unrelated to the earnings announcement premium, and it is a feature of stocks
widely covered by analysts. Analysts' forecasts follow the same pattern as returns: analysts' forecasts become more optimistic after an earnings announcement and more pessimistic as the next one draws near. We attribute one-half of the earnings announcement return cycle to this optimism cycle. The EARC may stem from mispricing: both the return and optimism patterns are stronger among high-uncertainty and difficult-to-arbitrage stocks, and the EARC strategy is more profitable on days when it would accommodate larger amounts of arbitrage capital.
Award: Alpha Letters / CQA Prize Winner at CQA Spring 2019
Investor protections and stock market participation: An evaluation of financial advisor oversight
with Brian Melzer and Alessandro Previtero
April 2022
We examine a regulatory change in Canada that increased the oversight of financial advisors in five of its ten provinces. This increased oversight of mutual fund dealers reduced households' use of financial advice and their mutual fund holdings. In lieu of mutual funds, households increased their cash holdings. The results are consistent with a decline in delegated investing caused by a negative shock to the supply of advice. The estimates suggest that having a financial advisor is important in facilitating stock market participation. Investments and advisory channels not affected by the regulation - direct equity and bond holdings and advisors affiliated with banks - show no effects, reducing concerns about confounding economic and financial market changes.