Volatility-Adjusted Performance An Alternative Approach to Interpret Long-Run Returns

Jan Jakobsen and Torben Voetmann
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Jan Jakobsen: Department of Finance, Copenhagen Business School, Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark

No 2000-3, Working Papers from Copenhagen Business School, Department of Finance

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 (search for similar items in EconPapers)
JEL-codes: G14 G32 (search for similar items in EconPapers)
Pages: 38 pages
Date: 1999-12-01
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