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- ItemThe asset pricing effects of UK market liquidity shocks: evidence from tick data(Elsevier, 2014-03) Foran, Jason; Hutchinson, Mark C.; O'Sullivan, Niall; Irish Research Council for Humanities and Social Sciences; University College CorkUsing tick data covering a 12 year period including much of the recent financial crisis we provide an unprecedented examination of the relationship between liquidity and stock returns in the UK market. Previous research on liquidity using high frequency data omits the recent financial crisis and is focused on the US, which has a different market structure to the UK. We first construct several microstructure liquidity measures for FTSE All Share stocks, demonstrating that tick data reveal patterns in intra-day liquidity not observable with lower frequency daily data. Our asymptotic principal component analysis captures commonality in liquidity across stocks to construct systematic market liquidity factors. We find that cross-sectional differences in returns exist across portfolios sorted by liquidity risk. These are strongly robust to market, size and value risk. The inclusion of a momentum factor partially explains some of the liquidity premia but they remain statistically significant. However, during the crisis period a long liquidity risk strategy experiences significantly negative alphas.
- ItemThe conditional pricing of systematic and idiosyncratic risk in the UK equity market(Elsevier, 2014-10) Cotter, John; O'Sullivan, Niall; Rossi, Francesco; Science Foundation IrelandWe test whether firm idiosyncratic risk is priced in a large cross-section of U.K. stocks. A distinguishing feature of our paper is that our tests allow for a conditional relationship between systematic risk (beta) and returns, i.e., conditional on whether the excess market return is positive or negative. We find strong evidence in support of a conditional beta/return relationship which in turn reveals conditionality in the pricing of idiosyncratic risk. We find that idiosyncratic volatility is significantly negatively priced in stock returns in down-markets. Although perhaps initially counter-intuitive, we describe the theoretical support for such a finding in the literature. Our results also reveal some role for liquidity, size and momentum risk but not value risk in explaining the cross-section of returns.
- ItemFamily status and mutual fund performance(Palgrave Macmillan, 2014-06) Clare, Andrew; O'Sullivan, Niall; Sherman, MeadhbhUsing a large and long sample of US and European mutual funds, we examine the impact that membership of a fund family has on performance. We test for strategic and competitive behaviours among family funds and whether this affects performance persistence and risk-taking. While we do not find evidence of stronger performance persistence among family funds versus non-family funds, we do find some significant differences in the future performance of portfolios of family and non-family funds formed on the basis of past performance. We find strong evidence that a fund/'s mid-year ranking within its family and within its sector affects its risk-taking over the remainder of the year. However, most interestingly, we find evidence to suggest differences in the ways in which the US and European fund management industries operate, although future microstructure research would be required to identify the industry practices and cultures that may be the source of these differences.
- ItemLiquidity commonality and pricing in UK equities(Elsevier B.V., 2015-01) Foran, Jason; Hutchinson, Mark C.; O'Sullivan, NiallWe investigate the pricing of systematic liquidity risk in UK equities using a large sample of daily data. Employing four alternative measures of liquidity we first find strong evidence of commonality in liquidity across stocks. We apply asymptotic principal component analysis (PCA) on the sample of stocks to extract market or systematic liquidity factors. Previous research on systematic liquidity risk, estimated using PCA, is focused on the US, which has very different market structures to the UK. Our pricing results indicate that systematic liquidity risk is positively priced in the cross-section of stocks, specifically for the quoted spread liquidity measure. These findings around the pricing of systematic liquidity risk are not affected by the level of individual stock liquidity as a risk characteristic. However, counter-intuitively, we find that the latter is negatively priced in the cross-section of stocks, confirming earlier research.
- ItemLiquidity risk and the performance of UK mutual funds(Elsevier, 2014-10) Foran, Jason; O'Sullivan, Niall; Irish Research Council; University College CorkWe examine the role of liquidity risk, both as a stock characteristic as well as systematic liquidity risk, in UK mutual fund performance for the first time. Using four alternative measures of stock liquidity we extract principal components across stocks in order to construct systematic or market liquidity factors. We find that on average UK mutual funds are tilted towards liquid stocks (except for small stock funds as might be expected) but that, counter-intuitively, liquidity as a stock characteristic is positively priced in the cross-section of fund performance. We find that systematic liquidity risk is positively priced in the cross-section of fund performance. Overall, our results reveal a strong role for stock liquidity level and systematic liquidity risk in fund performance evaluation models.
- ItemMutual fund performance and families(Palgrave Macmillan, 2014-06) Clare, Andrew; O'Sullivan, Niall; Sherman, MeadhbhUsing a large and long sample of US and European mutual funds we examine the impact that the membership of a fund family has on performance. We test for strategic and competitive behaviour among family funds and whether this affects performance persistence and risk taking behaviour. We find no conclusive evidence of stronger performance persistence among family funds versus non-family funds, although we do find some significant differences in the future performance of portfolios of family and non-family funds formed on the basis of past performance. However, we do provide strong evidence to suggest that a fund s mid-year ranking within its family affects its risk over the remainder of the year and, most interestingly, that family mid-year rankings have a different impact in the US mutual fund industry than it does in its European equivalent. Among US funds, the results point to intra-family competition where mid-year losers increase risk by more than mid-year winners in an attempt to catch up. The opposite is found to be true for European family funds. Our results therefore highlight significant differences in the ways in which the US and European fund management industries operate.
- ItemThe profitability of momentum trading strategies in the Irish equity market(Blackhall Publishing, 2010-07) O'Sullivan, Fionnghuala; O'Sullivan, NiallWe examine the profitability of momentum-based trading strategies in the Irish equity market between 1988 and 2007. We investigate a range of trading strategies over alternative backward-looking ranking periods and forward-looking holding horizons as well as for alternative size momentum portfolios. We find that returns to momentum-based strategies are highly non-normally distributed, giving rise to concern about the validity of inferences based on standard statistical tests of their abnormal performance. We therefore apply a bootstrap procedure to construct nonparametric p-values for the portfolio performance measures. Overall, we find little evidence that momentum-based trading strategies would have yielded an abnormal risk-adjusted return over the period. The Irish equity market appears to be quite efficient in this respect.
- ItemA review of behavioural and management effects in mutual fund performance(Elsevier B.V., 2016) Cuthbertson, Keith; Nitzsche, Dirk; O'Sullivan, NiallThis paper surveys and critically evaluates the literature on the role of management effects and fund characteristics in mutual fund performance. First, a brief overview of performance measures is provided. Second, empirical findings on the predictive power of fund characteristics in explaining future returns are discussed. Third, the paper reviews the literature on fund manager behavioural biases and the impact these have on risk taking and returns. Finally, the impact of organizational structure, governance and strategy on both fund risk taking and future performance is examined. While a number of surveys on mutual fund performance are available, these have not focused on the role of manager behavioural biases, manager characteristics and fund management strategic behavior on fund performance and risk taking. This review is an attempt to fill this gap. Empirical results indicate that finding successful funds ex-ante is extremely difficult, if not impossible. In contrast, there is strong evidence that poor performance persists for many of the prior “loser fractile” portfolios of funds. A number of manager behavioural biases are prevalent in the mutual fund industry and they generally detract from returns.