Papers by Robert Korajczyk
12. Transaction Costs and Liquidity Risk
Arbitrage Portfolios in Large Panels
Social Science Research Network, 2018
We propose a new methodology for forming arbitrage portfolios that utilizes the information conta... more We propose a new methodology for forming arbitrage portfolios that utilizes the information contained in firm characteristics for both abnormal returns and factor loadings. The methodology gives maximal weight to risk-based interpretations of characteristics' predictive power before any attribution is made to abnormal returns. We apply the methodology to simulated economies and to a large panel of U.S. stock returns. The methodology works well in our simulation and when applied to stocks. Empirically, we find the arbitrage portfolio has (statistically and economically) significant alphas relative to several popular asset pricing models and annualized Sharpe ratios ranging from 1.31 to 1.66.
Price Discovery, Foreign Ownership, and Rule of Law
Social Science Research Network, 2012
ABSTRACT This paper aims to explore two issues. First, we examine the relation between intraday p... more ABSTRACT This paper aims to explore two issues. First, we examine the relation between intraday price dis-covery and proxies for financial openness or investor accessibility for a large cross-section of 23 emerging markets. Our sample covers 1,504 stocks over a period of eight months. We measure price discovery by weighted price contribution. We find that there is a reliable relation between early price discovery and direct foreign ownership in the underlying stocks after controlling for other factors. Greater price discovery is affiliated with a more significant presence of foreign investors in the home markets. Second, we extend the literature on law and finance to studies of market microstructure. We study the relation between the quality of legal environment to the speediness of price discovery. We find that a rule of law measure plays an important role in facilitating rapid price discovery. Our finding establishes a positive link between the quality of legal environment and efficiency of financial markets, where the latter is important for the ultimate goal of economic development.
5. The Macroeconomy and Portfolio Risk
4. Statistical Factor Analysis
10. Portfolio Return Distributions
6. Security Characteristics and Pervasive Risk Factors
Factor Models for Asset Returns
Springer eBooks, Oct 9, 2007
Assessing the Market Timing Performance of Managed Portfolios
... and B2. If the manager has no timing ability, or does not act on market forecasts (mi ='... more ... and B2. If the manager has no timing ability, or does not act on market forecasts (mi ='fi2), then 1 run A ' 91 E 0. In addition, G (the OLS estimate of a) is a consistent estimate El G3 |\J A of security selection ability. A significantly ...
Social Science Research Network, 2007
We estimate latent factor models of liquidity, aggregated across a variety of liquidity measures.... more We estimate latent factor models of liquidity, aggregated across a variety of liquidity measures. Shocks to assets' liquidity have a common component across measures which accounts for most of the explained variation of the individual liquidity measures. We find that across-measure systematic liquidity is a priced factor while winthin-measure systematic liquidity does not exhibit additional pricing information. Controlling for across-measure systematic liquidity risk, there is some evidence that liquidity, as a characteristic of assets, is priced in the cross-section. Our results are robust to the inclusion of other equity characteristics and risk factors, such as market capitalization, book-to-market, and momentum.
Springer eBooks, 2010
The foundation of modern portfolio therory is the mean-variance portfolio selection approach of .... more The foundation of modern portfolio therory is the mean-variance portfolio selection approach of . We discuss the role of factor models in implementing portfolio selection, defining the nature of systematic risk, and estimating the premium for risk bearing.
Short-Horizon Beta or Long-Horizon Alpha?
The Journal of Portfolio Management, Oct 31, 2018
The authors study whether the pricing of systematic factors depends on the investment horizon ove... more The authors study whether the pricing of systematic factors depends on the investment horizon over which risk is measured. Market beta and Fama–French value beta are priced when risk is measured over intermediate horizons, and liquidity beta is priced over short horizons. Alpha on a long–short portfolio formed on short-horizon liquidity beta increases monotonically as an investor’s horizon (for measuring risk) increases, making those assets more attractive to long-horizon investors. Institutional investors align their portfolios to harvest risk premiums that are important to investors with horizons different from their own.
Social Science Research Network, May 1, 1990
This article examines the risk and return characteristics of U.S. mutual funds. We employ an equi... more This article examines the risk and return characteristics of U.S. mutual funds. We employ an equilibrium version of the Arbitrage Pricing Theory (APT) and a principal-components-based statistical technique to identify performance benchmarks. We also consider the Capital Asset Pricing Model (CAPM) as an alternative. We implement a procedure for overcoming the rotational indeterminacy of factor models. This procedure is a hybrid of statistical factor estimation and prespecification of factors. We estimate measures of timing ability for the CAPM and extend it to the APT. We find that this timing test is misspecified due to noninformation-hased changes in mutual fund betas. We develop a modification of the timing measure that, under certain conditions, distinguishes true timing ability from noninformation-based beta changes.
Arbitrage Portfolios
Review of Financial Studies, Sep 7, 2020
We propose a new methodology for forming arbitrage portfolios that utilizes the information conta... more We propose a new methodology for forming arbitrage portfolios that utilizes the information contained in firm characteristics for both abnormal returns and factor loadings. The methodology gives maximal weight to risk-based interpretations of characteristics’ predictive power before any attribution is made to abnormal returns. We apply the methodology to simulated economies and to a large panel of U.S. stock returns. The methodology works well in our simulation and when applied to stocks. Empirically, we find the arbitrage portfolio has (statistically and economically) significant alphas relative to several popular asset pricing models and annualized Sharpe ratios ranging from 1.31 to 1.66.
Management Science, Apr 1, 2002
I n this paper we develop a measure of liquidity, price impact, which quantifies the change in a ... more I n this paper we develop a measure of liquidity, price impact, which quantifies the change in a firm's stock price associated with its observed net trading volume. For a large set of institutional trades we compare out-of-sample, characteristic-based estimates of price impact to actual price impacts. Predictive predetermined firm characteristics, chosen to proxy for the severity of adverse selection in the equity market, the non-information-based costs of making a market in the stock, and the extent of shareholder heterogeneity, include relative size, historical relative trading volume, institutional holdings, and the inverse of the stock price. We find numerous aspects of trade execution which are significantly related to the price impact forecast error in economically plausible ways: For example, the predicted price impact overestimates the actual price impact for very large trades, for trades executed in a more patient manner, and for trades where the institution pays higher commissions. (Liquidity; Price Impact; Transactions Costs
7. Measuring and Hedging Foreign Exchange Risk
2. Unstructured Covariance Matrices
Social Science Research Network, 2012
An extensive literature documents heterogeneity in the delay of stock-price reaction to systemati... more An extensive literature documents heterogeneity in the delay of stock-price reaction to systematic shocks, implying that relevant asset risk depends on investment horizon. We study pricing of common risk factors across investment horizons. We …nd that liquidity risk is priced over short horizons and market risk is priced over intermediate horizons. Value/growth risk is priced over long horizons and as a non-risk-based characteristic at all horizons. Size and momentum are priced as characteristics rather than risk factors at all horizons. The results highlight the importance of investment horizon in determining risk premia.
The Determinants of Equity Illiquidity
Social Science Research Network, 1999
ABSTRACT One under-examined cost of trading is illiquidity. This paper measures equity illiquidit... more ABSTRACT One under-examined cost of trading is illiquidity. This paper measures equity illiquidity as the change in a firm's stock price associated with its observed trading volume. Increasing the magnitude of net turnover during a 5-minute interval by 0.1% of the shares outstanding produces an average incremental price effect of 2.71%. This average, however, masks considerable cross-sectional variation. To explain this variation, we consider a set of predetermined variables that serve as proxies for (a) the severity of adverse selection in the equity market, (b) the level of the non-adverse selection costs of making a market in the stock, and (c) the extent of shareholder heterogeneity. Consistent with these theories, we present evidence that illiquidity varies cross-sectionally as a function of these predetermined variables. We examine the change in liquidity surrounding stock splits. It is commonly argued that stock splits are done precisely to enhance the liquidity of a stock, though the existing empirical support for this claim is mixed. We find that our measure of illiquidity increases by a statistically significant amount following a split, evidence that liquidity has been compromised, rather than improved, by the split.
Characteristic-Based Returns: Alpha or Smart Beta?
Social Science Research Network, Jul 5, 2021
Abstract We propose new methodology to construct arbitrage portfolios by utilizing information co... more Abstract We propose new methodology to construct arbitrage portfolios by utilizing information contained in firm characteristics for both abnormal returns and betas (and, therefore, smart-beta risk premiums). Our methodology gives maximal weight to risk-based interpretations of characteristics' predictive power before any attribution to abnormal returns. The method allows the explanatory power of a characteristic for both alpha and beta to ebb and flow. This feature is particularly important when we expect that profit opportunities may be arbitraged away by investors. We apply the methodology to a large panel of U.S. stock returns from 1965–2018. Empirically, characteristics have time-varying explanatory power for both factor betas and alpha. We find the arbitrage portfolio has (statistically and economically) significant alpha and annualized Sharpe ratios ranging from 1.31 to 1.66.
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Papers by Robert Korajczyk