Predictability of the Swiss Stock Market with Respect to Style

184 Pages·2010·0.534 MB·English

by  Patrick Scheurle (auth.)

Patrick Scheurle
Predictability of the Swiss Stock Market
with Respect to Style
GABLER RESEARCH
Patrick Scheurle

Predictability of the
Swiss Stock Market
with Respect to Style
RESEARCH
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Dissertation Universität St. Gallen, 2010
1st Edition 2010
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Preface V
Preface
A prerequisite for a doctoral thesis is an initial idea that merits examination. My
studies at the University of St.Gallen allowed me to develop such an idea. In
particular, I am grateful to having met Professor Klaus Spremann who inspired me and
who helped me to link my passion for finance to academic challenges. It was and still
is a great experience to work with him. Hence, first and foremost, my deepest gratitude
goes to Professor Klaus Spremann. I also thank Professor Andreas Grüner for co-
supervising this study and adding to it with his thoughtful comments and suggestions.
My time as a research associate at the Swiss Institute of Banking and Finance was
enriched by my colleagues. I thank Alexander Bönner, Roman Frick, Lin Gao, Markus
Harlacher, Sebastian Lang, Roman Meyer, and Marina Piantoni for a positive and
stimulating working environment. Likewise I thank Professor Pascal Gantenbein for
valuable conversations on finance and beyond. Moreover, I thank all participants of
our internal research seminars for their constructive feedback. I am also thankful to
Nadine Balmer, Olga Beregova, Thomas Hug, Nepomuk Feser, Béatrice Peier and
Marc Wink for lively discussions on many topics. A special thank goes to Stephan
Hostettler who provided me with useful and generous support. On this note I thank
Matthias Bachmann, Roger Bundi, Daniel Gasser, and Andreas Waser for their long
lasting friendship which helped keeping the mental balance while working on this
dissertation.
Finally, I thank my godfather Hans-Jörg Widmer, my grandfather Max Höliner, my
father Eugen, my mother Maya, and my brother Thomas for their unlimited
encouragement and support. Their contribution to the success of this thesis is
invaluable.
Zurich, November 2009 Patrick Scheurle
Overview of Contents VII
Overview of Contents
1. Introduction ........................................................................................................... 1
1.1. Motivation ................................................................................................. 1
1.2. Research Idea ............................................................................................ 2
1.3. Outline ...................................................................................................... 5
2. Literature Review .................................................................................................. 6
2.1. Structure of Literature Review ................................................................. 6
2.2. Factor-Mimicking Portfolios and Macroeconomics ................................. 7
2.3. Literature on Return Predictability ......................................................... 10
3. Return Predictability and the Real Economy ................................................... 19
3.1. Efficient Market Hypothesis ................................................................... 19
3.2. Random Walk ......................................................................................... 20
3.3. Predictability and Cyclical Risks ............................................................ 23
3.4. Style Investing ........................................................................................ 28
4. Study Design and Data ........................................................................................ 33
4.1. Research Methodology ........................................................................... 33
4.2. Data ......................................................................................................... 34
4.3. Construction of Fama-French Portfolios ................................................ 35
4.4. Descriptive Statistics .............................................................................. 37
5. Empirical Part I – Testing for Predictability .................................................... 47
5.1. Hypothesis I ............................................................................................ 47
5.2. Autocorrelation Coefficients and Variance Ratios ................................. 47
5.3. Results ..................................................................................................... 57
5.4. Summary of Empirical Part I .................................................................. 77
6. Forecasting Models .............................................................................................. 79
6.1. Implied and Estimated Cross-Autocorrelation ....................................... 79
6.2. Basic Forecasting Models ....................................................................... 88
6.3. Robustness and Possible Refinements .................................................... 92
7. Empirical Part II – Investment Strategies ........................................................ 96
7.1. Hypothesis II ........................................................................................... 96
VIII Overview of Contents
7.2. Overview ................................................................................................. 96
7.3. Calibration Windows and Investment Process ....................................... 97
7.4. Performance Measurement ................................................................... 100
7.5. Style Rotation Strategies – 4 Style Portfolios ...................................... 103
7.6. Style Rotation Strategies – 6 Style Portfolios ...................................... 121
7.7. Summary of Empirical Part II .............................................................. 137
8. Conclusion .......................................................................................................... 139
8.1. Summary of Findings ........................................................................... 139
8.2. Implications for Practice ....................................................................... 143
8.3. Research Outlook .................................................................................. 144
Contents IX
Contents
Preface ........................................................................................................................... V
Overview of Contents ............................................................................................... VII
Contents ....................................................................................................................... IX
Executive Summary ................................................................................................. XIII
Executive Summary (German) ............................................................................... XIV
List of Figures ............................................................................................................ XV
List of Tables .......................................................................................................... XVII
Notations and Abbreviations .................................................................................. XXI
1. Introduction ........................................................................................................... 1
1.1. Motivation ................................................................................................. 1
1.2. Research Idea ............................................................................................ 2
1.3. Outline ...................................................................................................... 5
2. Literature Review .................................................................................................. 6
2.1. Structure of Literature Review ................................................................. 6
2.2. Factor-Mimicking Portfolios and Macroeconomics ................................. 7
2.3. Literature on Return Predictability ......................................................... 10
2.3.1. Macroeconomic Variables ...................................................................... 10
2.3.2. Valuation Ratios ..................................................................................... 11
2.3.3. Accounting Data ..................................................................................... 13
2.3.4. Calendar Anomalies ................................................................................ 14
2.3.5. Serial Correlation and Momentum ......................................................... 15
3. Return Predictability and the Real Economy ................................................... 19
3.1. Efficient Market Hypothesis ................................................................... 19
3.2. Random Walk ......................................................................................... 20
3.3. Predictability and Cyclical Risks ............................................................ 23
3.3.1. Does the Efficient Market Hypothesis Hold? ......................................... 23
3.3.2. Time-Varying Risk Premia ..................................................................... 24
3.3.3. Investors and Return Predictability ........................................................ 27
3.4. Style Investing ........................................................................................ 28
X Contents
3.4.1. Approaches for the Allocation of Funds ................................................. 28
3.4.2. Reasons for Emerging and Vanishing Styles ......................................... 29
3.4.3. Reasons for Following Style Investing ................................................... 30
3.4.4. Risks and Reward of Style-Based Investment Strategies ....................... 30
4. Study Design and Data ........................................................................................ 33
4.1. Research Methodology ........................................................................... 33
4.2. Data ......................................................................................................... 34
4.3. Construction of Fama-French Portfolios ................................................ 35
4.4. Descriptive Statistics .............................................................................. 37
5. Empirical Part I – Testing for Predictability .................................................... 47
5.1. Hypothesis I ............................................................................................ 47
5.2. Autocorrelation Coefficients and Variance Ratios ................................. 47
5.3. Results ..................................................................................................... 57
5.3.1. Autocorrelation Coefficients .................................................................. 57
5.3.2. Variance Ratios ....................................................................................... 72
5.4. Summary of Empirical Part I .................................................................. 77
6. Forecasting Models .............................................................................................. 79
6.1. Implied and Estimated Cross-Autocorrelation ....................................... 79
6.2. Basic Forecasting Models ....................................................................... 88
6.3. Robustness and Possible Refinements .................................................... 92
7. Empirical Part II – Investment Strategies ........................................................ 96
7.1. Hypothesis II ........................................................................................... 96
7.2. Overview ................................................................................................. 96
7.3. Calibration Windows and Investment Process ....................................... 97
7.4. Performance Measurement ................................................................... 100
7.5. Style Rotation Strategies – 4 Style Portfolios ...................................... 103
7.5.1. Fixed Predictor Portfolios ..................................................................... 103
7.5.2. Changing Predictor Portfolios .............................................................. 113
7.6. Style Rotation Strategies – 6 Style Portfolios ...................................... 121
7.6.1. Fixed Predictor Portfolios ..................................................................... 121
7.6.2. Changing Predictor Portfolios .............................................................. 130
7.7. Summary of Empirical Part II .............................................................. 137
Contents XI
8. Conclusion .......................................................................................................... 139
8.1. Summary of Findings ........................................................................... 139
8.2. Implications for Practice ....................................................................... 143
8.3. Research Outlook .................................................................................. 144
Appendix .................................................................................................................... 145
A1. Variance Ratios (q=4) ........................................................................... 145
A2. Style Rotation Strategies (1a to 3b) vs. SMALL .................................. 147
A3. Style Rotation Strategies (4a to 6b) vs. SMALL .................................. 148
A4. Style Rotation Strategies (1a_6 to 3b_6) vs. SH .................................. 149
A5. Style Rotation Strategies (4a_6 to 6b_6) vs. SH .................................. 150
References .................................................................................................................. 151