Volatility-Adjusted Performance An Alternative Approach to Interpret Long-Run Returns
This paper investigates long-run returns by utilizing log-normal distribution properties of cross-sectional buy-and-hold returns. We decompose expected cross-sectional buy-and- hold returns into transformed mean components and volatility components. This decomposition shows that the volatility component contributes positively to the right-skewed buy-and-hold returns due to Jensen's inequality. Given the log-normal distri-bution properties are fulfilled, the method can be applied to any type of long-horizon event study of security performance. We apply the method to IPO stocks and SEO stocks listed on the Copenhagen Stock Exchange. Using traditional standard tech-niques, we find that IPO stocks and SEO stocks under perform relative to the market after five years by 27.3 percent and 21.4 percent, respectively. However, the volatility-adjusted performance measure shows that the IPO stocks and SEO stocks under per-form relative to the market after five years by 43.7 percent and 38.1 percent, respec-tively.
|Date of creation:||01 Dec 1999|
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