Burton G. Malkiel's research while affiliated with Princeton University and other places
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Publications (87)
Recently, an influential academic study and many lawsuits have claimed that the VIX index has been manipulated since 2008. In this paper, we construct a regression model with explanatory variables that are exogenous to the index and examine the model prediction errors. We find that the movements in the daily levels of the VIX index are explained by...
Buy-write and put-write strategies have been shown to match market returns with lower volatility, resulting in higher risk-adjusted performance. The strategies benefit from the fact that the implied volatility of options is generally higher than actual realized volatility. In this article, we show that this premium is higher at elevated levels of i...
There is a popular new investment strategy in portfolio management called smart beta. With a catchy title and a promise of improved portfolio performance, the strategy has already attracted hundreds of billions of dollars and is growing by leaps and bounds. Unfortunately, according to the author smart beta portfolios do not consistently outperform...
From 1980 to 2006, the financial services sector of the US economy grew from 4.9 percent to 8.3 percent of GDP. A substantial share of that increase was comprised of increases in the fees paid for asset management. This paper examines the significant increase in asset management fees charged to both individual and institutional investors. One could...
We extend the analytical framework of traditional DCF models to allow for the possibility of a time-varying cessation risk for cash flows. We first set out a parsimonious functional form for timedependent survival probability of cash flows and then derive a closed-form solution for cessation risk-adjusted discount rates within a DCF model. Applicat...
The severe world-wide recession of 2008-09 has focused attention on the role of asset-price bubbles in exacerbating economic instability in capitalist economies. The boom in house prices in the United States from 2000 through 2006 is a case in point. According to the Case-Shiller 20-city index, the inflation-adjusted price of a median-sized house i...
A long literature in empirical finance has isolated both a "value" and a small-capitalization effect in asset pricing. This study confirms the existence of these "style" effects both in new types of equity indexes and in the stocks of Chinese companies traded in international markets. We then present a new nonparametric method of portfolio construc...
A striking feature of the United States stock market is the tendency of days with very large movements of stock prices to be clustered together. We define an extreme movement in stock prices as one that can be characterized as a three sigma event; that is, a daily movement in the broad stock-market index that is three or more standard deviations aw...
This paper is a draft of chapter 13 of The Blackwell Companion to Mutual Funds, tentatively scheduled for publication in October 2009. The final version will include revisions. The book is edited by John A. Haslem, and includes contributions by
"Considerable recent interest has been shown in a new set of stock-market indices that are weighted by fundamental factors such as sales, earnings, dividends or book values, rather than by capitalization. In this paper, we analyze the performance of Fundamental Indexing™ ("FI"). First, we show that the source of FI's recent excellent performance is...
This paper uses quantile regressions to document the increase in tail sensi-tivities between hedge funds in times of crisis. We identify seven factors that explain this tail dependence and show that o-oading the risk associated with them signi…cantly reduces spillover e¤ects. However, we also show that it is costly for hedge funds to o-oad tail ris...
In his William S. Vickrey address to the International Atlantic Economic association in 2005, Franklin Allen examined the question of how China has managed to grow rapidly in the absence of many of the factors usually considered essential to economic expansion in Western economies. China had no tradition of the rule of law, corruption was rampant,...
It is well known that the voluntary reporting of hedge funds may cause biases in estimates of their investment returns. But wide disagreements exist in explaining why hedge funds stop reporting to the datagathering services. Academic studies have suggested that poor or failing funds stop reporting while industry analysts suggest that better perform...
It is well-known that the level of closed-end fund discounts appears to predict the corresponding fund's future returns. We further document that such predictability decays slowly. The popular explanations, including the tax effect, investor sentiment risk, and the funds's dividend yield, do not fully account for the observed predictability. At the...
In recent years financial economists have increasingly questioned the efficient market hypothesis. But surely if market prices were often irrational and if market returns were as predictable as some critics have claimed, then professionally managed investment funds should easily be able to outdistance a passive index fund. This paper shows that pro...
Since the beginning of the economic reforms two decades ago, the economy in China has enjoyed a real growth rate of 9.6 percent per year. We believe that China is only in the early stages of its rapid-growth period. China is likely to enjoy rapid growth for decades to come at rates well above those of any other large country in the world.
I briefly review the success of past studies purporting to explain equity valuations and predict future equity returns. The Campbell-Shiller mean reversion models are contrasted with an expanded version of the so-called Federal Reserve model. At least from 1970 to 2003, Federal Reserve-type models did somewhat better at predicting long-horizon retu...
Academic studies suggest stock market prices are to a considerable extent predictable. Investors tend to earn higher returns when the market sells at relatively low price-earnings multiples and high dividend yields. Value stocks supposedly outperform growth stocks, and smaller companies produce higher returns than larger firms. Moreover, buying los...
Academic studies suggest stock market prices are to a considerable extent predictable. Investors tend to earn higher returns when the market sells at relatively low price-earnings multiples and high dividend yields. Value stocks supposedly outperform growth stocks, and smaller companies produce higher returns than larger firms. Moreover, buying los...
Constructing a data base that is relatively free of bias, this paper provides measures of the returns of hedge fund s as well as the distinctly non-normal characteristics of the data. We provide risk-adjusted measures of performance as well as tests of the degree to which hedge funds live up to their claim of market neutrality. We also examine the...
This paper presents the case for and the evidence in favour of passive investment strategies and examines the major criticisms of the technique. I conclude that the evidence strongly supports passive investment management in all markets - small-capitalisation stocks as well as large-capitalisation equities, US markets as well as international marke...
Revolutions often spawn counterrevolutions and the efficient market hypothesis in finance is no exception. The intellectual dominance of the efficient-market revolution has more been challenged by economists who stress psychological and behaviorial elements of stock-price determination and by econometricians who argue that stock returns are, to a c...
This article studies the behavior of idiosyncratic volatility for the postWorld War II period. Using aggregate idiosyncratic volatility statistics constructed from the Fama and French (1993) three-factor model, we find that the volatility of individual stocks appears to have increased over time. This trend is not solely attributed to the increasing...
this paper is Merton (1987). Starting from a single factor structure of returns, he assumes that investors can only invest in securities where they have exact information about the expected returns, beta loadings, and volatilities. This assumption seems to be too restrictive in today's investment environment. We therefore, use assumptions from the...
The authors examine the hypothesis that the popularity of indexing to the S&P 500 had a self-fulfilling effect of inflating the prices of the stocks in the index during the 1990s. They conclude instead that the success of indexing results from the general efficiency of U.S. stock markets, and that the gap between the performance of index funds and...
This paper uses a disaggregated approach to study the volatility of common stocks at the market, industry, and firm levels. Over the period from 1962 to 1997 there has been a noticeable increase in firm-level volatility relative to market volatility. Accordingly, correlations among individual stocks and the explanatory power of the market model for...
This paper uses a disaggregated approach to study the behavior of stock market volatility. While volatility for the market as a whole has been remarkably stable over time, the volatility of individual stocks appears to have increased. We come to this conclusion both from direct testing, motivated by findings from the ARCH literature, and indirect e...
Traditional asset pricing models, such as the celebrated capital asset pricing model, argue that only systematic risk should be priced in the market; specific or idiosyncratic risk does not deserve a risk premium. Recent empirical findings have raised serious challenges to this belief. It appears that beta - a measure of systematic risk - has littl...
This paper investigates whether predictable patterns that previous empirical work in finance have isolated appear to be persistent and exploitable by portfolio managers. On a sample that is free from survivorship bias we construct a test wherein we simulate the purchases and sales an investor would undertake to exploit the predictable patterns, cha...
Several recent studies suggest that equity mutual fund managers achieve superior returns and that considerable persistence in performance exists. This study utilizes a unique data set including returns from all equity mutual funds existing each year. These data enables the author to more precisely examine performance and the extent of survivorship...
For decades the Capital Asset Pricing Model (CAPM) has been held as an article of faith among financial economists. The model, usually attributed to 1990 Nobel Laureate William Sharpe (1964), was also developed by Fischer Black (1972), John Lintner (1965), Jan Mossin (1966), and Jack Treyor (1965). CAPM attempted to quantify the relationship betwee...
A detailed analysis is presented of The Wall Street Journal contests pitting the US traded equity recommendations of four expert portfolio managers and strategists against the random selections of four darts. While the gross return data appear to indicate that the experts' selections achieve excess returns, we find no evidence to suggest that the e...
The article attempts to assess the ability of the insurance industry to discharge its liabilities and to settle in full the claims against it without resorting to any of the limited safety nets that exist. The article examines several indicators of the health of the industry including: (1) industry profitability, (2) the risk level of assets held,...
A stock market is said to be efficient if it accurately reflects all relevant information in determining security prices. Critics have asserted that share prices are far too volatile to be explained by changes in objective economic events-the October 1987 crash being a case in point. Although the evidence is not unambiguous, reports of the death of...
A capital market is said to be efficient if it fully and correctly reflects all relevant information in determining security prices. Formally, the market is said to be efficient with respect to some information set, ϕ, if security prices would be unaffected by revealing that information to all participants. Moreover, efficiency with respect to an i...
A capital market is said to be efficient if it fully and correctly reflects all relevant information in determining security prices. Formally, the market is said to be efficient with respect to some information set, ϕ, if security prices would be unaffected by revealing that information to all participants. Moreover, efficiency with respect to an i...
John G. Cragg and Burton G. Malkiel collected detailed forecasts of professional investors concerning the growth of 175 companies and use this information to examine the impact of such forecasts on the market evaluations of the companies and to test and extend traditional models of how stock market values are determined.
One of the best documented propositions in the field of finance is that, on average, investors have received higher rates of return on in- vestment securities for bearing greater risk. This paper looks at the historical evidence regarding risk and return, explains the fundamentals of portfolio and asset pricing theory, and then goes on to take a ne...
Horse racing data permit interesting tests of attitudes toward risk. The present paper studies a new sample of racetrack results from Atlantic City, New Jersey. The questions examined are: (1) Are the market odds the best data for predicting the order of finish? (2) Do horses go off at odds that reflect their true probability of winning? (3) Is the...
This paper analyzes the effects of the federal tax structure on corporate financial and investment behavior. We first develop a model of corporate behavior given taxes, taking into account both uncertainty and costs of bankruptcy. Simpler models abstracting from bankruptcy costs had clear counterfactual implications. The forecasts from our model pr...
This is a study using a unique body of expectations data collected over the decade of the 1960s. After describing the data, this paper first looks at the extent of consensus among those financial institutions providing the forecasts and measures the accuracy of the forecasts. We then ask if the forecasts are consistent with the hypothesis that tile...
This article identifies four problems with the present federal statistical system for economics: (1) lack of comparability of data series; (2) fragmentation and poor data quality; (3) nonoptimal funding patterns; and (4) susceptibility of the system to politicization. Full centralization of the system appears to be both impractical and undesirable...
Standard real business cycle models must rely on total factor productivity (TFP) shocks to explain the observed comovement of consumption, investment, and hours worked. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption can generate comovement in the absence of TFP shocks. Intertemporal...
Using cross-section data collected from a panel of institutional investors in 1969, 1970, 1972, this paper focuses on how knowledgeable individuals formulate forecasts of future rates of price inflation. We estimate return-to-normality and error-learning forecasting models and inquire whether such equations can be interpreted simply as reduced form...
This book offers three things to university trustees: (1) a review of scholarly work in capital market theory, (2) a manual for those who must manage managers, and (3) a clear statement of broad injunctions of prudences that scholars and practitioners have long put into jargon. The first section covers policy and strategic issues, including: the tr...
This paper reports on a cross-sectional valuation study of public utility equities during the year-end periods from 1961 through 1967. The ratios of market prices to earnings are related to such factors as anticipated earnings growth, dividend payout, and various proxy variables designed to measure the risk or quality of the earnings stream. The di...
Whenever an experimental scientist achieves a substantial empirical breakthrough, his colleagues' first impulse is to try the experiment for themselves. Scientists are skeptical men who know that errors of observation and questionable experimental technique are facts of life. If a law verified by one observer is truly valid, it should operate for a...
I. The problem, 547. — II. Cost of capital: whose opportunity cost? 548. — III. A few formal relationships, 549. — IV. A diagrammatic
approach to cost of capital, 552. — V. Transactions costs and taxes in practice, 555. — VI. A few comments on the opportunity
loci, 559. — VII. Characteristics of an optimal financial structure, 561. — VIII. The real...
I. Introduction, 48. — II. A preliminary model for the valuation of convertible bonds, 49. — III. Statistical implementation
of the model, 51. — IV. Altering the assumptions, 54. — V. Summary comment, 59.
I. Portfolio theory and the availability doctrine, 113. — II. Portfolio optimization under deposit variability, 120. — III.
Some extensions of the argument, 125. — IV. Conclusions, 128. — Appendix, 130.
Introduction, 197. — The mathematics of bond prices, 199. — Expectations and the term structure of rates, 206. — Altering
some of the assumptions, 214. Concluding remarks, 218.
The traditional CAPM approach argues that only market risk should be incor-porated into asset prices and command a risk premium. This result may not hold, however, if some investors can not hold the market portfolio. For example, if one group of investors fails to hold the market portfolio for exogenous reasons, the remaining investors will also be...
The typical discounted cash flow model used to value assets openly projects cash flows for an initial set of years and then typically assumes that the cash flows will grow at a constant rate into the indefinite future. In this paper, we discuss the implications for valuation and the discount rate when one assumes that cash flows have a non-zero pro...
Citations
... We observe an uptrend in idiosyncratic volatility (see also Campbell et al. (2022)) while the systematic risk explains a large part of the cross-sectional total variance in bear markets but is not driven by a single factor. We also investigate whether standard observed factors span the estimated latent factors using rank tests in order to suit our fixed T setting. ...
Reference: Latent Factor Analysis in Short Panels
... In other words, the EMH postulates that asset prices should be based on all available information. A growing literature has critically examined the EMH (Malkiel 2003) and some recent research has shown that early signs of unpredictable news may be obtained from social media in order to forecast changes in many economic and financial indicators (Schumaker and Chen 2009). If it is true that the news affects stock market prices, the social mood also plays an equally important role. ...
... The taxation of nominal capital gains at disposition creates a potential lock-in effect in real estate and other asset markets (Feldstein et al., 1980;Klein, 1999;Malkiel & Kane, 1963). Rather than disposing of an asset with a lower expected before-tax return and reinvesting the proceeds in a more productive (higher return asset), investors with accrued capital gains may choose to continue to hold the less productive asset to avoid realizing taxable gains. ...
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... Ammann and Verhofen (2006) examined fund performance in regimes based on returns, volatilities, and correlations and suggested that investors alter their portfolio style over time depending on the prevailing regime to generate attractive returns. Malkiel and Saha (2020) examined funds based on factors of lowest expense ratio, lowest turnover, and Sharpe ratio and found no difference between the absolute returns from the Large-Cap or Mid-Cap returns. Joop and Verbeek (2009) suggested fund performance suffered from systematic biases due to miscalculation of factor premiums. ...
... The historical VXAZN data used in this paper is freely available at [13]. To check for stationarity in time of the VXAZN data, following the method in [29], [30], VOLUME ,5 This article has been accepted for publication in IEEE Open Journal of Signal Processing. This is the author's version which has not been fully edited and content may change prior to final publication. ...
... Today, portfolio managers who wish to employ options can review these authors' separate comments and descriptions with considerable benefit. Missing fron both '!u!,t!, !'*!'3:l: ll *' yf!_ig,t q!:y_t,fir:ti?! *i1! 1. Footnotes appear at the end of article Ronald Sliaka is Vice Presidott of Morgan Guaranty Trust Company of Nant York. ...
... 25 For some critical appraisal, see e.g. Ball (2009), Malkiel (2012. ...
... Unit root tests and variance ratio tests are widely used in literature to test for stock market efficiency in the econometric and financial literature. The notion of efficiency is typically interpreted as that stock prices would move unpredictably (Malkiel, 2003(Malkiel, , 2004(Malkiel, , 2005. The logic behind this random walk idea is that if the flow of information is unimpeded and information is immediately reflected in stock prices, tomorrow's price changes will reflect only tomorrow's news and will be independent of price changes today. ...
... The capital market is considered effectual if it fully and suitably replicates all the necessary information in defining the prices of securities. Formally, a market is considered effectual regarding any information if disclosing this information to all participants does not affect the prices of securities (Malkiel, 1989;Malkiel, 2005;Yen & Lee, 2008). ...
... Smart indexing employ several weighting schemes (Amenc et al. 2012) and their superior performance has also been documented to come (at least partially) from risk factor exposures, see e.g. Jun and Malkiel (2007), Amenc et al. (2009), andMalkiel (2014). Such (actively-traded) funds could end up having long and short investment holdings that differ substantially from the benchmark holdings; however, the orientation of the portfolio is not a forethought, but rather an indirect consequence of the alternative weighting scheme. ...
