Financial econometrics - Essay Example

Fund Manager Allocation Fund Manager Allocation Strengths of the Study Highly skilled fund managers can exploit market inefficiency better.The basic idea is that fund families allocate more highly skilled managers to less efficient market segments since skill pays off more in these segments.WeaknessesIn markets that are more efficient allow active management do not pay off; hence, investors should buy index funds rather than actively managed funds.A higher return predictability suggests lower efficiency in the high yield segment than the investment grade market.

AssumptionsSkilled Managers are rewarded more in less efficient marketFund families allocate more highly skilled managers to less efficient market segments.Robustness TestGMAT as alternative skill measureThe Graduate Management Admission Test (GMAT) scores are used instead of SAT scores to capture manager skill in measuring alternative skill.It is worth noting that the alternative skill measures are based on SAT scoreThe same element or understand is used to calculate the three alternative ways to estimate estimate of the man- agers skill including SAT percentile in mathematics, SAT percentile in critical reading, and SAT percentile in critical reading (Fang, Alexander, and Monika, 2014; Pg. 662).Alternative performance metricsTo test the robustness or effectiveness of our results with respect to the factor models we have chosen.

Temporal stabilityThe sample is split into two partsProxies Chosen1. High Yield Segments HY fund managers have attended business schools with slightly higher matriculates SAT scores. Almost half of the managers hold an MBA degree, and about 25% hold a CFA degree but are less experienced. It should be noted that the HY managers yield higher gross returns.2. Investment Grade SegmentsThe proportion of index funds is much higher at 18% in the IG segment than in the HY segment with only 2%. This observation supports the claim that the IG segment is more efficient than the HY segment.

Main Assumptions of the StudyOur basic idea is that fund families allocate more highly skilled managers to less efficient market segments.Skill is rewarded more in the less efficient HY market segment than in the more efficient IG segment.Selection BiasThe Possible selection bias in this study may be the restriction of our sample to managers with an MBA degree.Identification StrategyThe main strategy used to identify the managers as investment grade and high yield is based on skill and focuses on the following:Holders of master’s in Business AdministrationNon holders of Masters in Business AdministrationHolders of Certified Financial AnalystsOther QualificationsExperience in the fieldEndogeneity ProblemThe fund family has to decide how to assign the managers to two funds: operating in the inefficient market segment and operating in the more efficient segment.

To maximize its profit, the fund family allocates managers to funds so that overall fund performance is maximized (Fang, Alexander, and Monika, 2014; Pg. 667). The rationale is that fund performance determines fund growth, given the industries fee structure, fee income, and profit at the fund family level. Since the skill fund family to assign more highly skilled manager to the less efficient market segment, and the less skilled manager to more efficient segment. ReferencesFANG, J., ALEXANDER, K.

& MONIKA, T. (2014). Fund Manager Allocation. Journal of Financial Economics. 111, Pp. 661–674. NY: Elsevier Publishers.