The Financial Review

Nianyun Cai, Xiaoquan Jiang

Recent literature emphasizes the relation of stock volatility to corporate bond yields. We demonstrate that during 1996-2005 corporate bond excess return volatility is directly related to contemporaneous corporate bond excess returns. In fact, the decompositions of aggregate bond volatility have a higher contemporaneous correlation with bond yields in comparison to idiosyncratic stock risk. Additionally, bond volatility and idiosyncratic risk are significant predictors of corporate three-month and six-month ahead bond excess returns. We also find that corporate bond volatility contains both slow moving and time-varying components.

Keywords: Corporate bond return, volatility, decomposition, dynamic relation

Travis Sapp and Xuemin (Sterling) Yan

We examine gross fund returns based on the number of securities held and find no evidence that focused funds outperform diversified funds. After deducting expenses, focused funds significantly underperform. Controlling for various fund characteristics, fund performance is positively related to the fund’s number of holdings both before and after expenses. We find evidence linking focused fund underperformance to agency and liquidity problems. Finally, the attrition rate of focused funds is higher than that of diversified funds. These results do not support the view that managers holding focused portfolios have superior stock-picking skills or that focused funds provide value to investors.

Keywords: Mutual fund performance, focused fund, security concentration, best ideas

Sirapat Polwitoon, Oranee Tawatnuntachai

We analyze U.S.-based emerging market bond funds over a ten-year (1996–2005) complete cycle of ups and downs in the dominant emerging bond markets. Emerging market bond funds outperform comparable domestic and global bond funds. The results are robust across both conditional and unconditional models.
The funds also provide international diversification benefits to U.S. and international bond and equity portfolios. The funds exhibit persistence in performance and seasonality. Active funds, large funds and funds with high minimum purchases perform better on a total return basis but not on a risk-adjusted basis.

Keywords: Emerging markets, bond mutual funds,  international diversification,  international mutual funds, performance persistence

Scott B. Smart and Chad J. Zutter

We analyze a sample of dual and single class IPOs to investigate whether empirical estimates of underpricing determinants are consistent across alternative measures of firm size and alternative techniques intended to account for underwriter price stabilization efforts. We find that results from long-standing methods for estimating underpricing relations are generally robust to one’s choice of size proxy and are consistent with estimates obtained from censored regressions of first-day returns and from least squares regressions of longer horizon initial returns. We also confirm an existing finding in the literature that dual class IPOs endure less underpricing than do single class firms.

Keywords: Dual class, initial public offerings (IPOs), price stabilization,  censored distribution, mixed distributions

Alexander Kurov

This paper shows that traders in index futures markets are positive feedback traders – they buy when prices increase and sell when prices decline. Positive feedback trading appears to be more active in periods of high investor sentiment. This finding is consistent with the notion that feedback trading is driven by expectations of noise traders. Consistent with the noise trading hypothesis, order flow in index futures markets is less informative when investors are optimistic. Transitory volatility measured at high frequencies also appears to decline in periods of bullish sentiment, suggesting that sentiment-driven trading increases market liquidity.

Keywords: feedback trading, investor sentiment, informational efficiency, market microstructure, futures markets

Christine Panasian, Andrew K. Prevost, Harjeet S. Bhabra

We investigate the determinants and consequences of compliance with the Dey Committee recommendations encouraging greater board independence in Canada. Companies that acted on this recommendation appear to have done so to improve their performance and not for cosmetic purposes. Poorly performing firms that modified their boards experienced a greater increase in performance compared to those that did not. Overall, it appears that the primary function of the Dey Report was to refocus firms’ attention on the quality of board monitoring, particularly those with poor relative performance.

Keywords: Corporate Governance,  Board Composition