For Immediate Release
Contact:
Sheridan Titman
512/232-2787
[email protected]
New Method of Projecting Stock Performance Earns Researchers National Acclaim
Austin, TX, January 8, 1998--A research paper that suggests there is no relationship between a stock's risk, as typically measured, and its expected rate of return earned the prestigious Smith-Breeden Prize for 1997. Sheridan Titman, professor of finance at the University of Texas at Austin, and Kent Daniel from Northwestern University conducted the controversial study that was published in the March 1997 Journal of Finance.
The study's findings oppose a long-standing tenet of both financial theory and market practice that expected returns are higher when risk is higher. "Historically, research has found that stocks with certain characteristics perform better than others," says Titman. "Researchers have asked questions about why these stocks perform so well and have often concluded that good performance is a reward for risk, measured by how the stocks contribute to the volatility of typical portfolios that individuals and institutions hold." The Titman/Daniel research indicates that the specific characteristics of a stock, rather than its level of risk, determine how well it will perform.
In a follow-up article published in the July 1997 Journal of Finance, Titman and Daniel, along with Russ Wermers from the University of Colorado and Mark Grinblatt from UCLA, apply their ideas to the evaluation of mutual funds, opening the door for widespread application of their strategy. Several money managers have already begun to take advantage of refinements in the strategies outlined in the Titman/Daniel paper and other related research.
"The Smith-Breeden Prize is a strong confirmation of the high quality of research conducted at the Texas Business School," says George Gau, chair of UT's Department of Finance. "Equally important to the School is the fact that Titman and Daniel's work will have a profound impact on industry practice."
The Smith-Breeden Prize is a $10,000 award conferred by the editors of the Journal of Finance for the best paper published in the Journal of Finance, which is the leading academic finance journal. Last year, an article by two other UT Austin finance professors, Keith Brown and Laura Starks, was selected for a Distinguished Paper award in the Smith-Breeden competition.
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