Essays on empirical asset pricing

Thesis: Ph. D., Massachusetts Institute of Technology, Sloan School of Management, 2018.
Cataloged from PDF version of thesis.
Includes bibliographical references.
This dissertation consists of three chapters. Chapter 1 shows that, for active mutual funds, historical in-sample alpha is a poor predictor of out-of-sample alpha. However, by focusing on a subset of skilled managers who are able to generate positive alpha via profitable bets on firm specific risks (stock-picking), I show that a new first-order stochastic dominance (FSD) condition can be employed as an additional search criterion to identify such skilled stock-pickers. I implement an FSD filter to select funds by bootstrapping the return distribution in a given period associated with a random stock-picking strategy that has a given factor exposure and degree of diversification. Simulations show that the identification of funds as skilled by the FSD filter performs well in finite samples, in the face of heteroscedasticity and benchmark mis-specification. With the new FSD filter, I identify a group of active funds that are able to outperform the Carhart benchmark by 2.04% (t=2.78) per year before fees (0.78% (t=1.07) per year after fees) out of sample. Moreover, in this sample of funds, in-sample alpha is significantly predictive of out-of-sample alpha: the top quintile of stock-picking mutual funds deliver an out-of-sample alpha of 3.55% (t=3.24) per year before fees (2.24% (t=2.05) per year after fees). These outperforming funds tend to be more aggressive stock-pickers (hold more concentrated portfolios), charge higher fees, and attract more fund flows. By exploring mutual fund managers' Herding tendency and Trading Intensity, Chapter 2 develops a systematic approach to identify mutual fund managers with the Warren Buffett style, i.e. managers who are fundamental, long-term, value investors. Using data during 1995-2015, I further show that the group of such managers outperformed the Carhart four-factor benchmark by 3.06% (t = 3.58) per year before fees (1.94% (t = 2.35) per year after fees). Moreover, these managers have both statistically and economically high expo
by Yixin Chen.
1. Individual Stock-picking Skills in Active Mutual Funds -- 2. Mutual Fund Managers from the Buffett School -- 3. A Global Risk Factor Is Needed to Price Global Assets.
Ph. D.