Master of Arts, Miami University, 2014, Economics

We use various samples of portfolios (Fama-French portfolios formed on size and book-to-market, Fama-French industry portfolios, and exchange traded funds) as test assets to investigate whether the negative relation between lagged idiosyncratic volatility (IVOL) and future average returns initially documented by Ang, Hodrick, Xing, and Zhang (2006) is due to a missing risk factor. Analytically, we show that if IVOL proxies for a missing risk factor, then the negative relation between IVOL and returns persists at a portfolio level since systematic risk is not eliminated through diversification. However, when we take it to the data, we do not find economically and statistically significant evidence of a relation between lagged IVOL and subsequent average returns. Taken together, our results suggest that the IVOL puzzle is not due to a missing risk factor.

Committee: Haimanot Kassa Ph.D. (Advisor); Tyler Henry Ph.D. (Committee Member); George Davis Ph.D. (Committee Member) Subjects: Economics; Finance

PhD, University of Cincinnati, 2007, Business Administration : Finance

The dissertation is divided into two chapters. Chapter I examines the impact of capital gains distribution rules on a closed-end fund (CEF) manager's incentive to collect and trade on information. The central hypothesis is that the treatment of realized capital gains embodied in the U.S. tax code, combined with the form of compensation contract offered CEF mangers, creates an “overhang” effect on CEF managers' incentives to optimally trade the fund portfolio. We model the overhang effect and show that (1) there exists an equilibrium in which CEF managers collect private information in the early stages of the fund (when no lock-in effect exists) but then choose to be uninformed in later stages (when the lock-in effect exists), and (2) rational-expectations pricing of the expected cash flows and risk resulting from the information equilibrium results in CEFs initially trading at a premium and subsequently trading at a discount. In addition, we examine the empirical implications from the model and find, consistent with the model, a significant negative relation between future risk adjusted performance and current unrealized capital gains as well a significant positive relation between NAV premiums and future risk adjusted performance. In addition we show there are two separate effects from unrealized capital gains: (1) the Malkiel (1977) tax effect on CEF investors and (2) the manager incentive-capital gain related effect. Chapter II examines the economic significance of idiosyncratic risk in the context of arbitrage profits as well the robustness of idiosyncratic risk estimates relative to additional known systematic risks. We estimate idiosyncratic risk using both rolling and single time-series EGARCH methods and form high and low idiosyncratic risk portfolios. After controlling for liquidity risk and momentum, we conclude that abnormal returns to idiosyncratic risk arbitrage strategies are not statistically and/or economically significant. Furthermore we find no evi (open full item for complete abstract)

Committee: Steve Slezak (Advisor) Subjects: Economics, Finance

PhD, University of Cincinnati, 2009, Business Administration : Finance

The central theme of this dissertation is the connection between idiosyncratic risk and returns. In the original literature perfect diversification assumptions eliminate the influence that idiosyncratic risk may have on returns; however, current research shows that once these restrictive assumptions are relaxed, a theoretical role for this particular risk reemerges. The current dissertation empirically investigates the role of idiosyncratic risk in explaining returns. Specifically, the work is organized into two main parts: the first investigates the connection between idiosyncratic risk and momentum, and the second examines the cross-sectional relation between returns and idiosyncratic risk. The core idea of the first part of this dissertation is that, counter to common belief, the link between idiosyncratic risk and momentum should not be regarded as evidence of the irrational nature of the momentum phenomenon. If idiosyncratic risk is priced, time variation in its premia may rationally generate time series phenomena like momentum. Various studies reject the notion that momentum profits are compensation for risk by showing that momentum profits are mostly comprised of idiosyncratic components. This dissertation starts with a few remarks on the current stage of the literature, which help make the point that simply documenting the existence of this connection can say nothing about the nature of the underlying process generating momentum (especially since recent theoretical papers show that idiosyncratic components of returns – in particular idiosyncratic risk – may affect risk premia). Using EGARCH-M, the first essay estimates idiosyncratic risk and idiosyncratic risk premia at the individual security level and shows that idiosyncratic risk premia are responsible for between 70 and 90 percent of momentum profits. Although securities in the loser portfolio have higher levels of idiosyncratic risk than those in the winner portfolio, the idiosyncratic risk premia in th (open full item for complete abstract)

Committee: Michael Ferguson PhD (Committee Co-Chair); Steve Slezak PhD (Committee Co-Chair); Yan Yu PhD (Committee Member) Subjects: Finance