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Analysis of the non-linear effect of net equity in the pricing of stock investment funds

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  • Paulo Rogerio Faustino Matos

    (Federal University of Ceará)

  • Fabrício Carneiro Linhares

    (Federal University of Ceará)

  • Gustavo Zech Sylvestre

    (Federal University of Ceará)

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    Abstract

    This paper uses the Capital Asset Pricing Model (CAPM), in its canonic version and with nonlinear extensions, aiming at pricing a panel of 75 stock investment funds in Brazil, throughout the last 11 years. The result suggests that the linear version of said framework is not capable of pricing or forecasting actual returns of funds which have high net equity (NE) and outperformance, with respect to the index of the São Paulo Stock Exchange (Ibovespa), corroborating previous evidence. The non-linear version with thresholds based on the NE seems to deal better with the issue of significant Jensen's alphas, although it is statistically indicated only for a few funds with high NE, but low outperformance. This is evidence that, even though size influences the management and, possibly, the performance of a fund, the pricing modeling of such effect should be made linearly.

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    Bibliographic Info

    Article provided by Fucape Business School in its journal Brazilian Business Review.

    Volume (Year): 9 (2012)
    Issue (Month): 4 (October)
    Pages: 1-26

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    Handle: RePEc:bbz:fcpbbr:v:9:y:2012:i:4:p:1-26

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    Postal: Fucape Business School Brazilian Business Review Av. Fernando Ferrari, 1358, Boa Vista CEP 29075-505 Vitória-ES
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    Related research

    Keywords: Threshold capital asset pricing model (TCAPM); Stock investment funds in Brazil; net equity.;

    References

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    1. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    2. Bruce E. Hansen, 1996. "Sample Splitting and Threshold Estimation," Boston College Working Papers in Economics 319., Boston College Department of Economics, revised 12 May 1998.
    3. Gourieroux, Christian & Monfort, Alain, 1992. "Qualitative threshold ARCH models," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 159-199.
    4. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    5. Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, vol. 4(2), pages 129-176, March.
    6. Eugene F. Fama & Kenneth R. French, 2010. "Luck versus Skill in the Cross-Section of Mutual Fund Returns," Journal of Finance, American Finance Association, vol. 65(5), pages 1915-1947, October.
    7. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    8. Shmuel Kandel & Robert F. Stambaugh, 1994. "Portfolio Inefficiency and the Cross-Section of Expected Returns," NBER Working Papers 4702, National Bureau of Economic Research, Inc.
    9. Paulo Rogerio Faustino Matos & José Alan Teixeira da Rocha, 2009. "Stocks and Mutual Funds: Common Risk Factors?," Brazilian Business Review, Fucape Business School, vol. 6(1), pages 21-41, January.
    10. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
    11. Araújo, E. & Fajardo, J. & Tavani, L., 2004. "CAPM Usando uma Carteira Sintética do PIB Brasileiro," Finance Lab Working Papers flwp_63, Finance Lab, Insper Instituto de Ensino e Pesquisa.
    12. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
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