(A) study of investment performance in financial markets

Abstract

This dissertation consists of three essays on investment performance in financial markets: stock, fund, and REIT markets. Each essay introduces effective measures for achieving superior performance. Specifically, I explore the effect of trading volume shock, portfolio diversification, and excess dividends on future performance in each market. From the investment management perspectives, the topics cover security selection, portfolio construction, and alternative investment. The first essay examines the role of extreme daily trading volume shock in explaining the cross-section of expected stock returns. I introduce a maximum volume peak (MVP) measure, defined as the maximum daily trading volume during a month, to capture infrequent large daily volume shocks. I find that the MVP has a significant positive relation with expected stock returns, even after controlling for the standard risk factors and other stock characteristics. Since the MVP premium persists for more than 12 months after portfolio construction, the explanations involving overpricing, especially the visibility hypothesis, cannot account for the results. Examinations of the MVP premium under various conditions around the volume shocks support the disagreement-based explanation of the MVP premium. I conclude that an extreme volume shock implies an information shock and its subsequent premium is due to increased disagreement among investors. The second essay investigates the effect of diversification on future mutual fund performance, by introducing a comprehensive diversification measure, the diversification ratio (DR). I find that high-DR funds have more efficiently diversified portfolios and exhibit significantly higher returns than low-DR funds over 36 months. The cross-sectional regression shows that the predictive power of DR for future performance is robust to controlling for fund characteristics and managerial skills. Most importantly, I find a positive relation between the DR and managerial skill measures, that is, skilled fund managers with superior performance have more concentrated portfolios, while their concentrated bets are less correlated with existing portfolios. Therefore, I suggest that the efficient strategy of deviating from the benchmark market index with concentrated investments is ultimately in line with the efficient construction of a diversified portfolio in terms of achieving superior performance. The third essay analyzes the effect of dividends on future Real Estate Investment Trust (REIT) returns. I find a significant negative relation between dividend yield and future REIT returns, contrary to literature on common stock. By decomposing dividend based on cash availability, I observe that excess-capacity dividend yield, defined as dividend paid in excess of available funds from operations, is associated with poor accounting and price performance and eventually lead to negative future returns on REIT stocks. Finally, I propose an excess yield-adjusted momentum strategy that enhances profit 1.5 times greater than conventional momentum strategy. This improvement comes from avoiding the possibility that REITs with poor performance magnify their returns by excessively increasing dividends over their cash availability. Overall, the results shed light on the unfavorable effect of a dividend on future REIT returns from an investment perspective.