This paper takes a new look at the tradeoff between risk and return in the stock market. We find a significant positive relation between average stock variance and the return on the market. There is, therefore, a tradeoff between risk and return in the stock market, except that risk is measured as total risk, including idiosyncratic risk, rather than only systematic risk. Further, we find that the variance of the market by itself has no forecasting power for the market return. These relations persist after we control for macroeconomic variables known to forecast the stock market. We show that idiosyncratic risk explains most of the variation of average stock risk through time and it is idiosyncratic risk that drives the forecastability of the stock market.

wish to thank ny colleagues at the University of Chicago and

Anomalies are empirical results that seem to be inconsistent with maintained theories of asset-pricing behavior. They indicate either market inefficiency (profit opportunities) or inadequacies in the underlying asset-pricing model. The evidence in this paper shows that the size effect, the value effect, the weekend effect, and the dividend yield effect seem to have weakened or disappeared after the papers that highlighted them were published. At about the same time, practitioners began investment vehicles that implemented the strategies implied by some of these academic papers. The small-firm turn-of-the-year effect became weaker in the years after it was first documented in the academic literature, although there is some evidence that it still exists. Interestingly, however, it does not seem to exist in the portfolio returns of practitioners who focus on small-capitalization firms. All of these findings raise the possibility that anomalies are more apparent than real. The notoriety associated with the findings of unusual evidence tempts authors to further investigate puzzling anomalies and later to try to explain them. But even if the anomalies existed in the sample

Institute, René Stulz and an anonymous referee for helpful comments and suggestions. Financial and other support from the Rodney L. White Center for Financial Research and the Wharton Financial Institutions Center is gratefully acknowledged. The views expressed are those of the authors alone, and do not necessarily reflect the views of Goldman Sachs Asset Management, or Wharton or UT for that matter. Leaning for the Tape: Evidence of Gaming Behavior In Equity Mutual Funds We show that quarter-end prices of equity funds are inflated, presenting a large profit opportunity to potential sellers and an equivalent hazard to buyers and remaining shareholders. The magnitude of price inflation ranges from 50 basis points per year for large-cap funds to well over 200 basis points for small-cap funds. Evidence suggests that fund managers cause the inflation with last-minute purchases of stocks already held, deliberately moving performance to one period from the next. We find that the cross section of inflation matches the cross section of incentives from the flow/performance relation, that a surge of trading in the quarter’s last minutes coincides with a surge in equity prices, and that the inflation is greatest for the stocks held by the funds with

Using monthly returns for over 27,000 stocks from 49 countries over a three-decade pe-riod, we show that a multifactor model that includes factor-mimicking portfolios based on momentum and cash flow-to-price captures significant time-series variation in global stock returns, and has lower pricing errors and fewer model rejections than the global CAPM or a popular model that uses size and book-to-market factors. We find reliable evidence that the global cash flow-to-price factor is related to a covariance risk model. In contrast, we reject the covariance risk model in favor of a characteristic model for size and book-to-market factors. (JEL F30, G14, G15) The identification of sources of return comovement and, hence, of possible sources of portfolio risk is a primary pursuit of researchers in the field of asset pricing and one of central importance to investment practitioners, especially those involved in global financial markets. The seminal international asset-

A growing literature contends that, since returns are not normal, higher-order co-moments matter to risk-averse investors. Fama and French (1993, 1995) find that non-market risk factors based on size and book-to-market ratio are priced by investors. We test the hypothesis that the Fama-French factors simply proxy for the pricing of higher-order co-moments. Using portfolio returns over various time horizons, we show that adding a set of systematic comoments (but not standard moments) of order 3 through 10 reduces the explanatory power of the Fama-French factors to insignificance in almost every case. * We are grateful for helpful comments and suggestions from Warren Bailey, Javier Estrada,

Tax-Loss Trading and Wash Sales An analysis of trades in the Finnish stock market around the turn of the year 1994-95, 199596, and 1996-97 shows that Finnish investors tend to realize losses more than gains towards the end of December. They also buy back the same stocks they recently sold, with a repurchase rate that depends on the size of the capital loss and how close the sale is to the end of December. The resulting net buying pressure from these "wash sale" repurchases is greater for stocks with small market capitalizations and has a calendar pattern that is similar to that of stock returns. JEL classification: G10 1. Introduction Most researchers in finance suspect that tax-loss selling of stocks occurs at the end of the year, but there is little direct evidence that tax considerations actually motivate end-of-year trading in these securities. Moreover, while research hints that the January effect may be tied to December tax-loss selling, no one has documented whether purchase...

SUMÁRIO Nos anos noventa, uma pluralidade de autoridades de supervisão e de grupos de trabalho de inspiração governamental emitiram recomendações sobre o corporate governance de sociedades cotadas. No presente documento, usando uma base de dados única, analisamos a relação existente entre o grau de cumprimento das recomendações emitidas pela Comissão do Mercado de Valores Mobiliários português e os retornos das sociedades visadas. Utilizando um modelo multifactorial, concluímos que existe uma relação positiva entre o cumprimento de algumas das recomendações da CMVM e os retornos anormais apurados. Em particular, merece realce a evidência de efeito positivo entre a performance e a forma de organização e de funcionamento do órgão executivo da sociedade. Several supervisory authorities and governmental working groups issued recommendations on corporate governance for listed companies during the nineties. In this paper, we used a unique database that allowed us to analyse the relationship between the level of compliance of the recommendations issued by the Portuguese Securities Market Commission and the (abnormal)

Every finance professional employs the concept of market efficiency. The theory, evidence and counterevidence focus on a couple of dozen highly influential articles published during the twentieth century. We summarise the origins of and interlinkages between these contributions to the history of finance.

The fragility of the CAPM has led to a resurgence of research that frequently uses trading strategies based on sorting procedures to uncover relations between firm characteristics (such as “value ” or “glamour”) and equity returns. We examine the propensity of these strategies to generate statistically and economically significant profits due to our familiarity with the data. Under plausible assumptions, data-snooping can account for up to 50 percent of the insample relations between firm characteristics and returns uncovered using single (one-way) sorts. The biases can be much larger if we simultaneously condition returns on two (or more) characteristics.