In this paper we show that not taking into account the fact that fund managers “deviate” from their stated categories biases upward their alphas. When evaluating fund managers most studies compare managers against the S&P 500 regardless of the sectors managers actually invest in. This procedure does not take into account that an important proportion of US stock managers invest in medium and small companies. This neglect biases performance results. In the international stock arena, not only do studies use the incorrect benchmark but they also neglect to take into account the fact that managers deviate from their stated sector. In this paper we not only employ the correct category the managers invest in but we also take into account the fact that managers systematically drift away from their stated category. This drift occurs for approximately half the funds examined and causes the estimated alpha of managers to be on average 45 basis points higher than it should be if we were to undertake the multiple regression that fund drift demands. In addition to using the right benchmarks, adjusting for “drift” in this paper we chose to use as “benchmarks” the ETF’s in each category so as to compare managers not against theoretical constructs, but against an actual investable vehicle in the corresponding category.
This article presents an analysis of financial integration for emerging financial markets. The results indicate that for the sample of countries examined, Argentina, Chile, Mexico and Thailand's stock markets are financially integrated. Conclusions are reached by first identifying endogeonous breaks in multiple stock return series and then constructing confidence intervals around these break dates. Further support is provided that identified breaks are due to integration by performing statistical analyses on the return series pre and post break. In general, the stocks in integrated countries become more correlated with world and industry indexes. Mean returns for these stocks decrease and become more aligned with the mean returns of their respective industry indexes. In cases where we do not find supporting evidence for financial integration, the break dates correspond to currency crises or other events that caused a shift in the return series (JEL G15, G12).
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.