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Portable alphas from pension mispricing

Author Info

  • José M. Marín
  • Francesco Franzoni

Abstract

We introduce a new dynamic trading strategy based on the systematic misspricing 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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File URL: http://www.econ.upf.edu/docs/papers/downloads/894.pdf
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 894.

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Date of creation: Oct 2005
Date of revision:
Handle: RePEc:upf:upfgen:894
Contact details of provider: Web page: http://www.econ.upf.edu/

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

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Find related papers by JEL classification:
  • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
  • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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  1. Brown, Stephen J. & Goetzmann, William N., 1997. "Mutual fund styles," Journal of Financial Economics, Elsevier, vol. 43(3), pages 373-399, March.
  2. 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.
  3. William N. Goetzmann & Jonathan E. Ingersoll Jr. & Matthew I. Spiegel & Ivo Welch, 2002. "Sharpening Sharpe Ratios," Yale School of Management Working Papers ysm273, Yale School of Management.
  4. Daniel Bergstresser & Mihir Desai & Joshua Rauh, 2006. "Earnings Manipulation, Pension Assumptions, and Managerial Investment Decisions," The Quarterly Journal of Economics, Oxford University Press, vol. 121(1), pages 157-195.
  5. Francesco Franzoni & José M. Marín, 2005. "Pension plan funding and stock market efficiency," Economics Working Papers 871, Department of Economics and Business, Universitat Pompeu Fabra.
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Cited by:

  1. Nakajima, Kan & Sasaki, Takafumi, 2010. "Unfunded pension liabilities and stock returns," Pacific-Basin Finance Journal, Elsevier, vol. 18(1), pages 47-63, January.
  2. Julia Coronado & Olivia S. Mitchell & Steven A. Sharpe & S. Blake Nesbitt, 2008. "Footnotes Aren't Enough: The Impact of Pension Accounting on Stock Values," NBER Working Papers 13726, National Bureau of Economic Research, Inc.
  3. Franzoni, Francesco, 2009. "Underinvestment vs. overinvestment: Evidence from price reactions to pension contributions," Journal of Financial Economics, Elsevier, vol. 92(3), pages 491-518, June.
  4. 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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