Working Paper Series, Department of Finance, Copenhagen Business School
No 2000-3:
Volatility-Adjusted Performance An Alternative Approach to Interpret Long-Run Returns
Jan Jakobsen and Torben Voetmann
Abstract: 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.
Keywords: Wealth relatives; buy-and-hold returns; equity offerings; (follow links to similar papers)
JEL-Codes: G14; G32; (follow links to similar papers)
38 pages, December 1, 1999
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