Approximate factor structures: interpretations and implications for empirical tests

Article Abstract:

New insights on approximate factor structures and their implications for empirical tests are provided, with it shown that any economy satisfying an approximate factor structure can be transformed in a way that does not change the characteristics of investor portfolios into an economy satisfying an exact factor structure. It is also shown that principal components analysis is just one of several possible methods that can be used to form groups of well-diversified portfolios with no idiosyncratic risk in large samples. Regressing security returns on any group of the portfolios allow correct factor loadings to be obtained, and the interpretations of previous research results allow additional insights into the testability of the Arbitrage Pricing Theory. It is further shown that securities cannot be repackaged to hide factors as has been suggested earlier without the variance of some of the repackaged securities nearing infinity in large economies.

Methods, Models, Analysis, Stock-exchange, Stock exchanges, Mathematical models, Arbitrage, Financial research

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The going-public decision and the development of financial markets

Article Abstract:

This paper explores the linkages between stock price efficiency, the choice between private and public financing, and the development of capital markets in emerging economies. Generally, the advantage of public financing is high if costly information is diverse and cheap to acquire, and if investors receive valuable information without cost. The value of public firms generally depends on public market size, which implies that there can be a positive externality associated with going public, so that an inferior equilibrium can exist where too few firms go public. The model is consistent with empirical observations on financial market development. (Reprinted by permission of the publisher.)

Developing countries, Capital market, Capital markets, Securities, Financial markets, Going public (Securities), Initial public offerings

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The persistence of mutual fund performance

Article Abstract:

This paper analyzes how mutual fund performance relates to past performance. These tests are based on a multiple portfolio benchmark that was formed on the basis of securities characteristics. We find evidence that differences in performance between funds persist over time and that persistence is consistent with the ability of fund managers to earn abnormal returns. (Reprinted by permission of the publisher.)

Management investment, open-end, Evaluation, Portfolio management, Mutual funds

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