Do stock outperform treasury bills
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Do stock outperform treasury bills
Do Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stock outperform treasury bills ng. Journal of Financial EconomicsAbstractThe majority of common stocks tliat have appeared in the Center fot Research in Security Prices (CRSP) database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-pe Do stock outperform treasury bills rforming 4% of listed companies explain the net gain for the entire US stock market since 1926. as other stocks collectively matched Treasury bills. TDo stock outperform treasury bills
hese results highlight the important role of positive skewness in the distribution of individual stock returns, attributable to skewness in monthly reDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stock outperform treasury bills s.JEL categories: GI I. G23Keywords: individual stock returns. return skewness, buy-and-hold returns, wealth creation* w.p. Carey School of Business. Department of Finance. 300 East Lemon St. Suite 501. Tempe. AZ 85287. E-mail, hbrft asu.edu. I thank for valuable comments two anonymous referees. Jen Do stock outperform treasury bills nifer Conrad. Wayne Person. Campbell Harvey. Bruce Grundy, Mike Cooper. Philip Bond. Andreas Stathopoulos. Feng Zhang. Peter Cluistoffersen, Todd MittDo stock outperform treasury bills
on. Ed Rice. Ran Duchin. Jennifer Koski. Ilya Dichev, Luke Stein, Sunil Wahal. George Aragon, Seth Pruitt, Thomas Gilbert. David Schreindorfer. Kumar Do Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stock outperform treasury bills e University. Case Western Reserve University. Chinese University of Hong Kong. Simon Fraser University, Purdue University, University of Kansas. Johns Hopkins University, Chulalongkorn University, the Norwegian School of Economics, and participants at the University of British Columbia Summer Resea Do stock outperform treasury bills rch and Chicago Quantitative Alliance Spring conferences, and Goeim Choi for laudable research assistance.ic copy available at. https.//ssm.com/abstraDo stock outperform treasury bills
ct=29004471. IntroductionThe question posed in the title of this paper may seem nonsensical. The fact that stock markets provide long-tenn returns thaDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stock outperform treasury bills many other countries. Ill fact, the degree to which stock markets outperform IS so large that there is wide spread reference to the "equity premium puzzle."1 2The evidence that stock market returns exceed returns to government obligations 111 the long run is based on broadly diversified stock market Do stock outperform treasury bills portfolios. In this paper. I instead focus attention on returns to individual common stocks. I show that most individual US common stocks provide buyDo stock outperform treasury bills
-and-hold returns that fall short of those earned on one-month US Treasury bills over the same horizons, implying that the positive mean excess returnDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stock outperform treasury bills y stock return database, which contains all common stocks listed on the NYSE. Amex. and Nasdaq exchanges. Of all monthly common stock returns contained in the CRSP database from 1926 to 2016. only 47.8% are larger than the one-month Treasury rate in the same month. In fact, less than half of monthly Do stock outperform treasury bills CRSP common stock returns are positive. When focusing on stocks' hill lifetimes (from the begiiming of the sample in 1926. or fust appearance in CRSPDo stock outperform treasury bills
. through rhe 2016 end of1Mehra and Prescott (1985) first drew attention to the magnitude of the equity premium for the b-oad US stock market. Dozens Do Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stock outperform treasury bills milar, though less comprehensive, flavor. See "The risks of owning individual stocks" at http://blog.alphaarchltect.com/2016/0S/21/the-risks-of-owninE-an-individual-stock/ and "The capitalism distribution" at http://www.the wporrolio.com/wp-content/uploads/2008/12/thecapitalismdistribution.pdf.1Elec Do stock outperform treasury bills tronic copy available at. https ://ssm.com/abstract=2900447the sample, or delisting from CRSP), just 42.6% of common stocks, slightly less than threeDo stock outperform treasury bills
out of seven. have a buy-and-hold return (inclusive of reinvested dividends) that exceeds the return to holding one-month Treasury bills over the matcDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stock outperform treasury bills e nearest 5%) observed for individual common stocks over their tirll lifetimes is a loss of 100%.Individual common stocks tend to have rather short lives. The median time that a stock is listed OI1 die CRSP database between 1926 and 2016 is scven-and-a-half years. I o assess whether individual stock Do stock outperform treasury bills s generate positive renirns over the till! 90 years of available ("RSP data. 1 conduct bootstrap simulations, hl particular. 1 assess the likelihood tDo stock outperform treasury bills
hat a strategy that holds one stock selected at random during each month from 1926 to 2016 would have generated an accumulated 90-year return (ignorinDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stock outperform treasury bills e returns than large, as originally shown by Banz. 1980) It might have been anticipated that individual stocks would tend to outperform the value-weighted market. In fact, repeating the random selection process many times. 1 find that the single-stock strategy underperformed the value-weighted marke Do stock outperform treasury bills t over the full 90 years in 9G°O of the simulations. The single-stock strategy undcrpcrlbimed the onc-iuonth licasmy bill over the 1926 to 2016 periodDo stock outperform treasury bills
in 73% of the simulations.The fact that the overall slock market generates long-term returns large enough to be referred to as a puzzle, while the maDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stock outperform treasury bills tively skewed. Simply put, large positive retiuns to a few stocks offset the modest or negative returns to more typical stocks, rhe positive skewness ni long horizon returns IS attributable both to skewness in2It. https://ssm.com/abstracU2900447the distribution of monthly individual stock returns an Do stock outperform treasury bills d to the fact that the compounding of random returns induces skewness.This paper IS not the first to study skewness 111 stock returns. Since at leastDo stock outperform treasury bills
Snnkowitz and Beedies (1978) it has been recognized that individual stock returns are positively skewed, and that skewness declines as portfolios are Do Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stock outperform treasury bills ile the models of Barbens and Huang (2008) and Bnuuienneier. Golher. and Parker (2007) imply a negative return premium for firm-specific skewness Evidence broadly consistent with these models is provided by Han ey and Siddique (2000): Mitton and Vorkink (2007); Conrad. Dittmar and Ghysels (2013): an Do stock outperform treasury bills d Amaya et al. (2016). However, the existing literature focuses on skewness 111 short horizon returns and has not emphasized either the magnitude or tDo stock outperform treasury bills
he consequences of skewness in longer horizon returns.Perhaps the most striking illustration of the degree to which long-term return performance is coDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stock outperform treasury bills ccumulation of market value in excess of the value that would have been obtained if the invested capital had earned one-nionth Treasury bill interest rates. I calculate that the approximately 25.300 companies that issued stocks appearing in the CRSP common stock database since 1926 are collectively Do stock outperform treasury bills responsible for lifetime shareholder wealth creation of nearly S35 trillion, measured as of December 2016. However, just five firms (Exxon Mobile. AppDo stock outperform treasury bills
le. Microsoft. General Electric, and International Business Machines) account for 10% of the total w ealth creation. The 90 top-performing companies, Do Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stock outperform treasury bills 2 top-performing companies, slightly more than 4% of the total, account for all of the net wealth3Electronic copy available at. https://ssm.com/abstract=2900447creation. That IS. the remaining 96% of companies whose common stock has appeared m the CRSP data collectively generate lifetime dollar gain Do stock outperform treasury bills s that matched gains on one-monrh Treasury bills.At first glance, the finding that most stocks generate negative lifetime excess (relative to TreasuryDo stock outperform treasury bills
bills) returns is difficult to reconcile with models that presume investors to be risk averse, since those models imply a positive anticipated mean eGọi ngay
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