Do stocks outperform treasury bills
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Do stocks outperform treasury bills
Do Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stocks outperform treasury bills ng, Journal of Financial EconomicsAbstractThe majority of common stocks that have appealed in the Center for Research in Security Prices (CRSP) database since 1926 have lifetime buy-and-hold returns less than one-mouth Treasuries. When stated in terms of lifetime dollar wealth creation, the best-per Do stocks outperform treasury bills forming 4% of listed companies explain the net gain for the entire US stock market since 1926. as other stocks collectively matched Treasury bills. ThDo stocks outperform treasury bills
ese results highlight the important role of positive skewness in the distribution of individual stock returns, attributable to skewness in monthly retDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stocks outperform treasury bills JEL categories: Gil. 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, hbrnasu.edu. I thank for valuable comments two anonymous referees, Jennifer Do stocks outperform treasury bills Conrad. Wayne Person. Campbell Harvey. Bnice Grundy. Mike Cooper. Philip Bond. Andreas Stathopoulos. Feng Zhang. Peter Christoffersen, Todd Mitton. EDo stocks outperform treasury bills
d Rice. Ran Duchin. Jennifer Koski. Ilya Dichev, Luke Stein. Sunil Wahal. George Aragon. Seth Pruitt. Thomas Gilbert, David Schreindorfer. Kumar VenkaDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stocks outperform treasury bills versity. 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 Research a Do stocks outperform treasury bills nd Chicago Quantitative Alliance Spring conferences, and Goeun Choi for laudable research assistance.1. IntroductionThe question posed in the title ofDo stocks outperform treasury bills
this paper may seem nonsensical. The fact that stock markets provide long-term returns that exceed the returns to low risk investments, such as goverDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stocks outperform treasury bills arkets 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 portfolios. In this paper, I instead focus attention on re Do stocks outperform treasury bills turns to individual common stocks. I show that most individual US common stocks provide buy-and-hold returns that fall short of those earned on one-moDo stocks outperform treasury bills
nth US Treasury bills over the same horizons, implying that the positive mean excess returns observed for broad equity portfolios are attributable to Do Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stocks outperform treasury bills listed on the NYSE. Amex. and Nasdaq exchanges. Of all monthly common stock returns contained 111 the CRSP database from 1926 to 2016. only 47.8% are larger than the one-mouth Treasury rate in the same month. In fact, less than half of monthly CRSP common stock returns are positive. When focusing on Do stocks outperform treasury bills stocks' fill! lifetimes (from the begiiming of the sample in 1926. or first appearance in CRSP. tlu ougli the 2016 end of1Mehra and Prescott (198S) fDo stocks outperform treasury bills
irst drew attention to the magnitude of the equity premium for the broad US stock market. Dozens of papers have since sought to explain the premium.2SDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stocks outperform treasury bills sks 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://vzvAv.the vvport~olio.com/wp-content/uploads/2008/12/thecapitalismdistribution.pdf.1the sample, or delisting from CRSP). just 42.6% of Do stocks outperform treasury bills common stocks, slightly less than three out of seven, have a buy-and-hold return (inclusive of reinvested dividends) that exceeds the return to holdinDo stocks outperform treasury bills
g one-mouth Treasury bills over the matched horizon. More than half of CRSP common slocks delis er negative lifetime returns. lhe single most frequentDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stocks outperform treasury bills mmon stocks tend to have rather short lives. The median time that a stock is listed OH the CRSP database between 1926 and 2016 is seven-arrd-a-lralf years. I o assess whether individual stocks generate positive returns over the full 90 years of available ("RSP data. 1 conduct bootstrap simulations, Do stocks outperform treasury bills hl particular. 1 assess the likelihood that a strategy that holds one stock selected at random during each month from 1926 to 2016 would have generateDo stocks outperform treasury bills
d an accumulated 90-year return (ignoring any transaction costs) that exceeds various benchmarks. In light of the well-documented small-firm effect (wDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stocks outperform treasury bills would tend to outperform the value-weighted market. In fact, repeating the random selection process many times. 1 find that the single-stock strategy under pct formed the value-weighted market over the full 90 years in 96% of the simulations. The single-stock sUalcgy underperformed the onc-month Irc Do stocks outperform treasury bills asury bill over the 1926 to 2016 period in 73% of the simulations.The fact that the overall slock market generates long-term returns large enough to bDo stocks outperform treasury bills
e referred to as a puzzle, while the majority of individual stocks fail to even march Treasury bills, can be attributed to the fact that the distributDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stocks outperform treasury bills typical stocks. The positive skewness in long horizon returns is attributable both to skewness nr2the distribution of monthly individual stock returns and to the fact that the compounding of random returns induces skewness.Tins paper IS not the first to study skewness 111 stock returns. Since at le Do stocks outperform treasury bills ast Sirnkowitz and Beedies (1978) it has been recognized that individual stock returns are positively skewed, and that skewness declines as portfoliosDo stocks outperform treasury bills
are diversified. The model of Krauss and Litzenberger (1976) implies a negative I eturn premium for the coskewness of stock returns with market returDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stocks outperform treasury bills ss Evidence broadly consistent with these models is provided by Harvey and Siddique (2000): Mitton and Vorkink (2007); Conrad. Dittmar and Ghysels (2013); and Amaya et al. (2016). However, the existing literature focuses on skewness in short horizon returns and has not emphasized either the magnitud Do stocks outperform treasury bills e or the consequences of skewness in longer horizon returns.Perhaps the most striking illustration of the degree to which long-term return performanceDo stocks outperform treasury bills
is concentrated in relatively few stocks aiises when measuring aggiegate wealth creation 111 the US public stock markets. I define wealth creation asDo Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stocks outperform treasury bills erest rates. I calculate that the approximately 25.300 companies that issued stocks appearing in the CRSP common stock database since 1926 are collectively responsible for lifetime shareholder wealth creation of nearly S35 trillion, measured as of December 2016. However, just five firms (Exxon Mobil Do stocks outperform treasury bills e. Apple. Microsoft. General Electric, and International Business Machines) account for 10% of the total wealth creation. The 90 topperforming companiDo stocks outperform treasury bills
es, slightly more than one-third of 1% of the companies that have listed common stock, collectively account for over half of the wealth creation. The Do Stocks Outperform Treasury bills?Hendrik Bessembinder*Department of Finance, w.p. Carey School of Business, Arizona State University43221Forthcomin Do stocks outperform treasury bills es whose common stock has appeared m the CRSP data collectively generate lifetime dollar gains that matched gains on one-month Treasury bills.At first glance, the finding that most stocks generate negative lifetime excess (relative to Treasury bills) returns is difficult to reconcile with models tha Do stocks outperform treasury bills t presume investors to be risk averse, since those models imply a positive anticipated mean excess return. Note, however, that implications of standarDo stocks outperform treasury bills
d asset pricing models are with regard to stocks' mean excess return, while the fact that the majority of common stock returns are less than TreasuryGọi ngay
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