Abstracts of Volume 42, Number 4, November 2007
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Stock-Split Post-Announcement Returns: Underreaction or
Market Friction?
Rodney D. Boehme, Bartley R.
Danielsen
Can Asset Pricing Models Price Idiosyncratic Risk in
U.K. Stock Returns?
Jonathan Fletcher
Price Performance Following Share-Repurchase
Announcements by Closed-End Funds
Aigbe Akhigbe, Doseong Kim, Jeff
Madura
Diversification in Portfolios of Individual Stocks: 100
Stocks Are Not Enough
Dale L. Domian, David A. Louton
and Marie D. Racine
Stock-Split Post-Announcement Returns: Underreaction or
Market Friction?
Rodney D. Boehme, Bartley R.
Danielsen
We explore the relationship between stock splits and
subsequent long-term returns during the period from 1950
to 2000. We find that, contrary to much previous
research, firms do not exhibit positive long-term
post-split returns. Instead, we find that significant
positive returns after the announcement date do not
persist after the actual date of the stock split. We
also observe that abnormal returns are correlated with
the price-delay market friction measure of Hou and
Moskowitz (2005). We conclude that the stock-split
post-announcement “drift” is only of short duration, and
it is attributable to trading frictions rather than
behavioral biases.
Keywords: Stock splits, market
efficiency, behavioral finance, long-run performance
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Can Asset Pricing Models Price Idiosyncratic Risk in U.K.
Stock Returns?
Jonathan Fletcher
I examine how well different linear factor models and
consumption-based asset pricing models price
idiosyncratic risk in U.K. stock returns. Correctly
pricing idiosyncratic risk is a significant challenge
for many of the models I consider. For some
consumption-based models, there is a clear trade-off in
the performance of the models between correctly pricing
systematic risk and idiosyncratic risk. Linear factor
models do a better job in most cases in pricing
systematic risk than consumption-based models but the
reverse is true for idiosyncratic risk.
Keywords: Idiosyncratic risk,
stochastic discount factor
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Price Performance Following Share-Repurchase Announcements by
Closed-End Funds
Aigbe Akhigbe, Doseong Kim, Jeff
Madura
We investigate the price performance of closed-end funds that
announce share-repurchase programs. Closed-end funds
experience positive average stock-price reactions to the
announcements. The long-run buy-and-hold abnormal
returns of repurchasing funds over the subsequent three
years are significantly higher than a non-repurchasing
control sample matched by size, type, investment style
and geographic diversification. Funds with larger
discounts, international funds, equity funds, and funds
that announce larger repurchases or frequently announce
repurchases, experience more positive stock-price
reactions. Except for larger repurchases, the same
characteristics are associated with more positive
long-run buy-and-hold returns.
Keywords: Share repurchase,
closed-end funds, mutual fund performance, long-run
performance
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Diversification in Portfolios of Individual Stocks: 100
Stocks Are Not Enough
Dale L. Domian, David A. Louton
and Marie D. Racine
We examine returns and ending wealth in portfolios selected
from 1,000 large U.S. stocks over a 20-year holding
period. Shortfall risk, the possibility of ending wealth
being below a target, is a useful metric for long
horizon investors and is consistent with the Safety
First criterion. Density functions obtained from
simulations illustrate that shortfall risk reduction
continues as portfolio size is increased, even above 100
stocks. A slightly lower risk can be achieved in small
portfolios by diversifying across industries, but a
greater reduction is obtained by simply increasing the
number of stocks.
Keywords: diversification,
investment horizon, Safety First, shortfall risk,
simulations
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