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Portable Alphas from Pension Mispricing

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Author Info

  • Francesco Franzoni
  • José M. Marin

Abstract

We introduce a new dynamic trading strategy based on the systematic mispricing of U.S. companies sponsoring Defined Benefit pension plans. This portfolio produces an average return of 1.51% monthly between 1989 and 2004, with a Sharpe Ratio of 0.26. The returns of the strategy are not explained by those of primary assets. These returns are not related to those of benchmarks in the alternative investments industry either. Hence, we are in the presence of a "pure alpha" strategy that can be ported into a large variety of portfolios to significantly enhance their performance.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 227.

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Date of creation: Oct 2005
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Handle: RePEc:bge:wpaper:227

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Related research

Keywords: Defined Benefit Plans; Portable Alpha; Enhanced Indexing; Pension Contributions; Pricing Anomaly;

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  1. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  2. William Goetzmann & Jonathan Ingersoll & Matthew I. Spiegel & Ivo Welch, 2002. "Sharpening Sharpe Ratios," NBER Working Papers 9116, National Bureau of Economic Research, Inc.
  3. Daniel Bergstresser & Mihir Desai & Joshua Rauh, 2006. "Earnings Manipulation, Pension Assumptions, and Managerial Investment Decisions," The Quarterly Journal of Economics, MIT Press, vol. 121(1), pages 157-195, 02.
  4. Francesco Franzoni & José M. Marín, 2006. "Pension Plan Funding and Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 61(2), pages 921-956, 04.
  5. William N. Goetzmann & Stephen J. Brown, 1998. "Mutual Fund Styles," Yale School of Management Working Papers ysm40, Yale School of Management.
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Cited by:
  1. Atanasova, Christina & Hrazdil, Karel, 2010. "Why do healthy firms freeze their defined-benefit pension plans?," Global Finance Journal, Elsevier, vol. 21(3), pages 293-303.

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