Essays in Mutual Fund Performance, the Home Equity Bias and the Effects of Financial Frictions on Output and Occupational Choice

Benos, Evangelos

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Description

Title

Essays in Mutual Fund Performance, the Home Equity Bias and the Effects of Financial Frictions on Output and Occupational Choice

Author(s)

Benos, Evangelos

Issue Date

2009

Doctoral Committee Chair(s)

Villamil, Anne P.

Department of Study

Economics

Discipline

Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• Economics, General
• Economics, Finance

Abstract

• In this thesis we explore issues of mutual fund manager performance, we propose a factor that helps explain the home equity bias and theoretically explore the effects of such financial frictions as poor contract enforcement and intermediation costs on occupational choice and output.
• In regard to mutual fund manager performance, we use daily return data from 448 actively managed funds over a recent 9-year period and we look for persistence, over two consecutive quarters, in the ability of funds to select individual stocks and time the market. That is, we decompose overall fund performance into excess returns resulting from stock selection and timing abilities and we separately test for persistence in each ability. We find persistence in the ability to time the market only among well performing funds and in the ability to select stocks only among the very best and worst performers. The existing literature patterns appear only when funds are ranked by their overall performance, which includes stock selection, market timing and fees. With respect to overall performance, there is persistence among most poorly performing and only the top well performing funds. Furthermore, the profitability of a winner-picking strategy depends on the rebalancing frequency and potentially the size of the investment. Small investors cannot profit, whereas large investors can take advantage of the class A share fee structure and realize positive abnormal returns by annually rebalancing their portfolios.
• Next, we address the home equity bias puzzle. We find that societies whose citizens have liberal ideals are less biased toward domestic equity. Data from 30 countries suggests that economic as well as social liberalism is associated with proportionally higher foreign equity holdings. These results hold after controlling for standard rational and behavioral explanations of the home equity bias as well as country and time fixed effects.
• Finally, in a direct extension of previous literature, we prove the existence of a stationary equilibrium in a model with financial frictions and two production sectors that are distinguished by their cost structure. In particular, one sector is faced with fixed costs while the other is faced with proportional ones. The agents are heterogeneous and differ in their abilities and bequest. We further assume that the economy is small and open, that occupational choice is endogenously determined and that two financial frictions can inhibit lending: limited enforcement and intermediation costs. The competitive outcome can be characterized by the bequest distribution and labor factor prices. In equilibrium, higher ability/bequest agents choose to work in the fixed production cost sector, while output and firm size are adversely affected by the financial frictions.

Graduation Semester

2009

Type of Resource

text

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