Identifier

etd-02292016-112634

Degree

Doctor of Philosophy (PhD)

Department

Finance

Document Type

Dissertation

Abstract

By definition, cap-weighted indexes place the largest (smallest) weights on the most overvalued (undervalued) securities. Fundamental indexation has recently been proposed as a passive, low-cost strategy that outperforms classical cap-weighted indexes. This dissertation focuses on new alternative weighting schemes based on fundamental indexation and analyzes underlying forces that drive their outperformance. The first essay proposes an alternative weighting strategy based on enterprise-value multiple (EM). Over the period 1972–2013, the EM-weighted index (Details of the weighting scheme can be referred to appendix) has the lowest tracking error and the highest information ratio when compared with six fundamental-weighted indexes based on book-equity (BE), earnings (E), sales (S), dividends (D), cash-flow (CF) and EBITDA. The EM-weighted index generates an information ratio of 0.73, 35% larger than that of the composite of the fundamental indexes. Further results show that it is the combination of the market information and firm’s fundamentals, especially the debt information, that drives the outperformance of the EM-weighted index. The second essay is the first to demonstrate that outperformance of smart beta strategies can come from capturing diversification returns embedded in portfolio rebalancing of the strategies. This is different from the traditional argument that outperformance of smart beta strategies is due to their implicit tiling into different risk factors such as value and size. A 3X3 matrix of different weighting schemes is constructed to investigate this phenomenon, which combines market capitalization, equal, and fundamental weighting schemes into two levels - first it is weighted on an industry level and then weighted on a stock level within its specific industry. Results show that the diversification returns can consistently explain outperformance of alternative weighting schemes in the matrix, and it is not subsumed by factors in different asset pricing models. This suggests that when measuring the performance of smart beta strategies, not only should investors pay attention to the factor tiling of these strategies but also be cautious about diversification returns captured by rebalancing embedded in these strategies.

Date

2012

Document Availability at the Time of Submission

Student has submitted appropriate documentation to restrict access to LSU for 365 days after which the document will be released for worldwide access.

Committee Chair

Gary, Sanger

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