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Working Paper
Bayesian Nonparametric Learning of How Skill Is Distributed across the Mutual Fund Industry
In this paper, we use Bayesian nonparametric learning to estimate the skill of actively managed mutual funds and also to estimate the population distribution for this skill. A nonparametric hierarchical prior, where the hyperprior distribution is unknown and modeled with a Dirichlet process prior, is used for the skill parameter, with its posterior predictive distribution being an estimate of the population distribution. Our nonparametric approach is equivalent to an infinitely ordered mixture of normals where we resolve the uncertainty in the mixture order by partitioning the funds into ...
Journal Article
Mutual funds: temporary problem or permanent morass?
The improprieties in the mutual fund industry that surfaced in the fall of 2003 prompted the passage and drafting of legislation and regulations that cover nearly every facet of mutual fund pricing and operations. While this regulatory flurry is clearly intended to protect shareholders? interests, the question remains: How will these scandals and regulatory changes ultimately affect mutual fund investors? ; When considering the problems inherent in mutual fund management and the best ways to address them, it is important, the author stresses, to understand current business practices in the ...
Journal Article
One proxy at a time : pursuing social change through shareholder proposals
Traditional economic wisdom holds that a corporation?s sole goal should be to maximize shareholder wealth. But some investors believe that firms should also act as agents for social change. Activist investors use their shareholder rights to place socially responsible resolutions on corporate proxy statements to be voted on by all shareholders. ; This article examines the controversy behind corporate social responsibility (CSR) and identifies and categorizes activist investors, their objectives, and the firms they target. Using data from the Investor Responsibility Research Center (IRRC) on ...
From Academia to the Federal Reserve
For Paula Tkac, associate director of research at the Atlanta Fed, breaking the rules is about looking outside the box and seeing how things can be done differently.
Working Paper
Star power: the effect of Morningstar ratings on mutual fund flows
Morningstar, Inc., has been hailed in both academic and practitioner circles as having the most influential rating system in the mutual fund industry. We investigate Morningstar's influence by estimating the value of a star in terms of the asset flow it generates for the typical fund. We use event-study methods on a sample of 3,388 domestic equity mutual funds from November 1996 to October 1999 to isolate the 'Morningstar effect' from other influences on fund flow. ; We separately study initial rating events, whereby a fund is rated for the first time on its 36-month anniversary, and rating ...
Working Paper
The determinants of the flow of funds of managed portfolios: mutual funds versus pension funds
Due to differences in financial sophistication and agency relationships, we posit that investors use different criteria to select portfolio managers in the retail mutual fund and fiduciary pension fund industry segments. We provide evidence on investors' manager selection criteria by estimating the relation between manager asset flow and performance. We find that pension fund clients use quantitatively sophisticated measures like Jensen's alpha, tracking error, and outperformance of a market benchmark. Pension clients also punish poorly performing managers by withdrawing assets under ...
Journal Article
The performance of open-end international mutual funds
The 1990s witnessed tremendous growth in the assets of international mutual funds. This growth is likely to continue as more investors seek the diversification benefits of foreign assets, which have relatively low correlations with domestic stock portfolios. Investors may also be attracted to international funds in the popular belief that such funds can earn abnormally high returns because of the relative inefficiency of these markets. But there is little evidence that this notion is valid. ; This article sets the stage for investigating whether exploitable foreign market inefficiencies exist ...
Working Paper
The financial crisis of 2008 in fixed income markets
We explore how a relatively small amount of heterogeneous securities created turmoil in financial markets in much of the world in 2007 and 2008. The drivers of the financial turmoil and the financial crisis of 2008 were heterogeneous securities that were hard to value. These securities created concerns about counterparty risk and ultimately created substantial uncertainty. The problems spread in ways that were hard to see in advance. The run on prime money market funds in September 2008 and the effects on commercial paper were an important aspect of the crisis itself and are discussed in some ...
Journal Article
The past, present, and future of futures
The exchanges on which futures contracts are traded have come a long way from their 19th-century origins and now play a major role in the global financial system.
Journal Article
Preface - credit derivatives: where's the risk?
This interview, conducted shortly after the Atlanta Fed's 2007 Financial Markets Conference, discusses credit derivatives and their importance to the market and outlines key themes of the conference.