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Darren 🥚 Profile picture
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26 Mar, 6 tweets, 2 min read
We agree that some textbook experiments in biology don't replicate. Did you know that CAPM doesn't replicate, either?
Fren A: CONSPIRACY THEORIST

CAPM doesn't replicate, but did you know that some textbook experiments in bio also don't replicate?
Fren B: CONSPIRACY THEORIST

🤷
Despite widely-discussed problems in finance research (and our experience that the research over-states the replicability and utility of factors), the factor investing literature may actually replicate better than experiments in other fields.

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Darren 🥚 Profile picture
22 Mar
1/ Dividend policy, signaling, and discounts on closed-end funds (Johnson, Lin, Song)

"CEFs that adopt minimum-dividend policies experience reductions in discounts, trade at smaller discounts than other funds, and earn greater subsequent excess returns."

sciencedirect.com/science/articl…
2/ "Minimum-dividend policies are uncommon in bond CEFs, so we analyze equity CEFs.

"135 equity CEFs have data available some time during 1993-2001; 20% have minimum-dividend policies.

"We omit funds in their IPO year and ones that liquidate or open-end in the relevant years."
3/ "Funds with minimum-dividend policies realize greater unrealized capital appreciation and greater NAV returns.

"Discounts range from –29.05% (negative value = premium) to 37.51% with a mean of 10.75%. 82% of the fund-years represent funds trading at a discount to NAV."
Read 11 tweets
Darren 🥚 Profile picture
21 Mar
1/ Excess Volatility and Closed-End Funds (Pontiff)

"The avg CEF's monthly return is 64% more volatile than its assets'. Although largely idiosyncratic, 15% of excess risk is explained by market risk, small-firm risk, and risk that affects other CEFs."

jstor.org/stable/2950859…
2/ Sample of 52 publicly-traded CEFs with more than six months of discount data (1965-85)

"If NAV (stock) returns have a larger effect on changes in premiums than stock (NAV) returns, then NAV returns are more (less) volatile than stock returns."
3/ "The average monthly CEF return variance is greater than the average NAV return variance.

"CEF prices also underreact to NAV returns. If the NAV is the fundamental value, this implies that CEF prices are excessively volatile, despite underreacting to fundamentals."
Read 10 tweets
Darren 🥚 Profile picture
21 Mar
1/ Beware of Chasing Yield: Bond Fund Yield, Flows and Performance (Jiang, Li, Zheng)

"Investors chase bond funds with higher yields, even controlling for past returns. The return spread is less than half of the yield spread and comes from higher risk."

papers.ssrn.com/sol3/papers.cf…
2/ "We select all actively managed fixed-income funds except money market and municipal bond funds.

"The higher distribution yield comes mainly from the SEC yield being net of expenses.

"The distribution yield is fat-tailed; managers have more discretion over distributions."
3/ "Fund yield is a component of total fund returns. The incremental effect of yield on flows shows that mutual fund investors pay extra attention to the yield component of the return.

"Bond funds with higher yields compared with peers in the same groups enjoy higher inflows."
Read 12 tweets
Darren 🥚 Profile picture
20 Mar
...
Proposed tax law changes

Wealth tax
Higher top marginal tax rate
More SS taxes for higher earners
Higher corp tax rate
No more 1031 exchanges
Increase in LT cap gains to 39.6% for those earning $1 million+
MTM treatment for unrealized cap gains
...
accountingtoday.com/opinion/bidens…
From an investor's point of view, high long-term capital gains rates and mark-to-market would seem to encourage higher-turnover trading.

You'd have to be a heck of a trader to make up the difference between the old and new tax rates, but a lot of people would probably try.
This might also encourage traders to adopt high-Sharpe strategies (yes, Sharpe as opposed to Sortino) in order to smooth out their incomes and avoid getting into higher tax brackets.

(So maybe more diversification, carry trading, and *left* tail hedging)
Read 4 tweets
Darren 🥚 Profile picture
20 Mar
1/ The Richest Woman in America: Hetty Green in the Gilded Age (Janet Wallach)

"I have observed that many a tattered garment hides a package of bonds and that gorgeous clothing does not always cover a millionaire." (p. 118)

amazon.com/Richest-Woman-… Image
2/ Note: This work is a nice complement to Charles Slack's book, "Hetty: The Genius and Madness of America's First Female Tycoon."

Slack's book is shorter and a good place to start if you can only choose one of these books.
3/ "New York was celebrating a financial boom. New institutions opened on every corner, filling the canyons of Wall Street with retail banks, commercial banks, insurance companies, and brokerage firms. Investors in mining, real estate, and transportation were flush with funds.
Read 31 tweets
Darren 🥚 Profile picture
18 Mar
1/ Corporate Bond Default Risk: A 150-Year Perspective (Giesecke, Longstaff, Schaefer, Strebulaev)

"Based on an extensive new data set (1866-2008 period), corporate bond market default events are only weakly correlated with business downturns."

papers.ssrn.com/sol3/papers.cf…
2/ "Lagged corporate credit spreads have no predictive power for default rates. Results support the view that the spreads are driven by factors like illiquidity."

The authors focus on cap-weighted default rates, which may cause their results to differ from other authors'.
3/ "The latter part of the 19th Century was a period in which massive investment in a number of exciting new technologies (railroads, electricity, etc.) was financed heavily by debt. These technology booms were then followed by waves of financial crises and bond defaults."
Read 9 tweets

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